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Part Managing the System

VI

Chapter 17 Government and Legal Issues in

Compensation
Chapter 18 Budgets and Administration

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STRATEGIC STRATEGIC
TECHNIQUES
POLICIES OBJECTIVES

Work Descriptions Evaluation/ INTERNAL

ALIGNMENT Analysis Certification STRUCTURE

EFFICIENCY
• Performance
COMPETITIVENESS Market Surveys Policy PAY • Quality
Definitions Lines STRUCTURE
• Customers
• Stockholders
Seniority Performance Merit INCENTIVE
• Costs
CONTRIBUTORS Based Based Guidelines PROGRAMS
FAIRNESS
COMPLIANCE
ADMINISTRATION Planning Budgeting Communication EVALUATION

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Chapter
17

Government and Legal Issues

in Compensation

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Learning Objectives
After studying Chapter 17, students should be able to:
1. Discuss the government’s role in compensation.
2. Discuss how trying to achieve the objective of
compliance with laws and regulations could conflict
with other objectives in the pay model.
3. Explain the provisions and importance of relevant
wage laws.
4. Discuss the type of proof required in discrimination
cases.
5. Discuss the concept of comparable worth and its
relationship to the objectives of compliance and
fairness.
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Government As Part Of The

Employment Relationship
! Government is a key stakeholder in compensation
decision making.
! Governments’ usual interests are whether:
! Procedures for determining pay are fair (pay
discrimination)
! Safety nets for the unemployed and disadvantaged are
sufficient (minimum wage, unemployment insurance)
! Employees are protected from exploitation (overtime
pay, child labor)

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The Evolving Nature of United States

Federal Pay Laws
! Davis Bacon Act (1931)
! Copeland Act (1934)
! Walsh-Healey Act (1936)
! Fair Labor Standards Act (FLSA) (1938)
! Equal Pay Act (1963)
! Title VII of Civil Rights Act (1964)
! Service Contract Act (1965)
! Age Discrimination Act (1967)
! Wage Garnishment Law (1968)
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 17 - 7

U.S. Federal Pay Laws (continued)

! Fair Credit Reporting Act (1970)
! Pregnancy Discrimination Act (1978)
! Americans with Disabilities Act (1990)
! Civil Rights Act (1991)
! Family and Medical Leave Act (FMLA) (1993)
! Health Insurance Portability and Accountability
Act (HIPPA) (1996)
! Small Business Job Protection Act (1996)
! Mental Health Act (1997)
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 17 - 8

Minimum Wages and Overtime

! The federal government sets standards relative to

how much and how employees are paid in:
!Davis-Bacon Act (1931)
!Copeland “Anti-Kickback” Act (1934)
!Walsh-Healey Act (1936)
!Fair Labor Standards Act (1938)
!Service Contract Act (1965)

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Fair Labor Standards Act (1938)

! The Fair Labor Standards Act (FLSA) regulates:
!minimum wage
!employee status
!overtime pay
!child labor
!record keeping
!other administrative requirements

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Minimum Wage:
! Minimum wage legislation is intended to provide
an income floor for workers in society’s least
productive jobs.
! Federal minimum wage is $5.15 an hour (set in 1997)

! Almost all states have their own minimum wage

to cover jobs omitted from federal legislation.
! If state and federal legislation cover the same job,
the higher one prevails.

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Effects of Minimum Wage Rate Increases

on the Wage Structure:
! There are direct and indirect effects.
! Direct Effect – of a minimum wage increase refers to
the increase in wages for jobs at the bottom of the
wage curve that have been below the minimum wage.
! Indirect Effect – of a minimum wage increase refers
to the changes in the remainder of the wage curve to
maintain appropriate differentials for jobs that deserve
higher pay.

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Effects of Minimum Wage Rate Increases

on the Wage Structure: (continued)

! Analysis indicates that the indirect effect is

usually greater than the direct effect.

! Companies spend more money on increasing the

pay of high-level jobs than they spend on raising
the pay of low-level jobs to the new minimum.

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Employee Status Under FLSA

! When someone is classified as an employee, the
organization must:
! Withhold federal/state/local income taxes
! Match Social Security/Medicare withholding
! Include the person in the company benefit programs
! Pay for unemployment insurance and workers’
compensation
! Allow up to 12 weeks of unpaid leave for family
emergencies
! Provide any other state or federally mandated benefits

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Contractor Status Under FLSA

! To be classified as a contractor, a person must:
! Have the ability to set own hours and determine
sequence of work
! Work off-site
! Work by the project rather than have a continuous
relationship with the employer
! Be paid by the job
! Have an opportunity for profit and loss
! Furnish own tools and training
! Be self-employed or work with a leasing company
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 17 - 15

Exempt and Non-Exempt Status

Under FLSA
! Non-exempt employees are included in FLSA
regulations and have full protection of the law.

! Exempt employees are excluded from FLSA

minimum wage or overtime provisions.

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!There are four classifications of exempt

employees:
!Executives

!Administrative Employees

!Outside Salespeople

!Professionals

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FLSA Basic Overtime Provisions

! All non-exempt workers must be paid one and

one-half times their regular rate of pay for hours
worked in excess of 40 in any workweek.

! Regular rate of pay includes basic pay plus non-

discretionary bonuses, shift premiums, production
bonuses, and commissions.

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Overtime (continued)
! Overtime is paid on time worked, not time
compensated.
! A workweek is any fixed, recurring period of 168
consecutive hours
2001

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 17 - 19

Compensatory Time Under FLSA

! Compensatory time off may sometimes be

offered instead of cash overtime.
! The rate is the same as for cash.
! Public employees can accumulate compensatory
time.
! In the private sector, the practice of allowing
compensatory time must be part of an established
plan.

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 17 - 20

Child Labor Provisions

! The FLSA restricts the hours and conditions of

employment for minors.

!Persons under 18 cannot work in hazardous jobs

!Persons under 16 cannot be employed in jobs

involving interstate commerce

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 17 - 21

FLSA Compliance: Enforcement.

! The Wage and Hour Division of the U.S.

Department of Labor enforces FLSA minimum
wage and overtime provisions.

! The Equal Employment Opportunity Commission

(EEOC) enforces equal pay provisions.

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When State Laws Differ

! Pay frequency, minimum wage, severance or

vacation pay, or unclaimed wages may be
governed by the individual states.

! The rule of thumb is: Whenever state and federal

laws differ, follow the regulation that most
benefits the employee.

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Antidiscrimination acts include

the following:
! Equal Pay Act (1963)
! Civil Rights Act (1964)
! Age Discrimination in Employment Act (1967)
! Wage Garnishment Act (1968)
! Americans with Disabilities Act (1990)

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 17 - 24

Pay Discrimination: What Is It?

! The law recognizes two types of discrimination:

! Access Discrimination – denies particular jobs,
promotions, or training opportunities to qualified
women or minorities.
! Valuation Discrimination – looks at the pay women
and men receive for the jobs they perform.
"Itis discriminatory to pay minorities or women less
than males when performing equal work.
"That is, working side-by-side, in the same plant, doing
the same work, producing the same results.

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 17 - 25

Equal Pay Act (1963)

! The Equal Pay Act (EPA) of 1963 prohibits wage

discrimination on the basis of gender when:
!Employees perform work in the same
establishment, or
!Employees perform jobs requiring equal skill,
effort, and responsibility under similar working
conditions

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 17 - 26

Equal work (under EPA)

! Equal work is defined by:

!equal skill
!equal effort
!equal responsibility, and
!equal working conditions
! All performed at the same location

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 17 - 27

What is discriminatory under EPA?

! A plaintiff would have a prima facie case if

he/she received a lower wage than members of
the opposite sex for performing the work that
requires substantially the same skills, effort, and
responsibilities under similar working conditions,
all performed at the same location.

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 17 - 28

Exceptions under EPA:

! Differences in pay between men and women

doing equal work are legal if these differences are
based on any one of four criteria:
!Seniority
!Merit or quality of performance
!Quality or quantity of production
!Some factor other than sex

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For an employer to support a claim of

unequal work, the following must be met:
! The effort/skill/responsibility must be substantially
greater in one of the jobs compared.

! The tasks involving the extra effort/skill/responsibility

must consume a significant amount of time for all
employees whose additional wages are in question.

! The extra effort/skill/responsibility must have a value

commensurate with the questioned pay differential (as
determined by the employer’s own evaluation.

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 17 - 30

Not permitted under EPA:

! Are defenses such as:

! union rules, or that
! the wage is the prevailing pay for the market

! Time of day does not constitute dissimilar

working conditions.
! However, if a differential for working at night is paid,
it must be separated from the base wage for the job.

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 17 - 31

Civil Rights Act (1964)

! Title VII of the Civil Rights Act of 1964 prohibits
discrimination in all terms and conditions of
employment on the basis of race, religion, ethnic
group, sex, or national origin.
! It defines two theories of discrimination behavior:
! disparate treatment, and
! disparate impact

! The Civil Rights Act of 1991 reinforced these

two standards of discrimination

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 17 - 32

Disparate treatment:

! Occurs when an employee who is a member of a

protected group is intentionally paid less.

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 17 - 33

Disparate impact:

!Occurs when an apparently neutral

compensation practice results in
unintentional wage discrimination for a
protected group.

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 17 - 34

Compensation practices which may

be discriminatory:

!extra pay plans

!leave policies
!maternity leave
!pension policies

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 17 - 35

Pay Discrimination and Dissimilar Jobs

! The U.S. Supreme Court, in Gunther v. County

of Washington, determined that pay differences
for dissimilar jobs may reflect discrimination

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 17 - 36

Comparable Worth
! Establishing a comparable worth plan typically
involves the following four basic steps:
! Adopt a single job evaluation plan for all jobs within a
unit.
! All jobs with equal job evaluation results should be
paid the same.
! Identify general representation (percentage male and
female employees) in each job group.
! The wage-to-job evaluation point ratio should be
based on the wages paid for male-dominated jobs
since they are presumed to be free of pay
discrimination.
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 17 - 37

Possible Determinants of Pay Differences

Differences
Differences Differences
Differences
in
in in
in
Organizations
Organizations employees
employees

Differences
Differences in
in Differences
Differences Differences
Differences
Employee
Employee Work
Work inPay
in Pay in
in
Behaviors
Behaviors Unions
Unions

Differences
Differences Differences
Differences in
in
in
in Discrimination
Discrimination Labor
Labor Market
Market
Work
Work Conditions
Conditions
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 17 - 38

Summary
! Governments around the world play varying roles in the
workplace.
! Legislation in any society reflects people’s expectations about
the role of government.
! Beyond direct regulation, government affects compensation
through policies and purchases that affect supply and demand
for labor.
! In the United States, legislation reflects the changing
nature of work and the workforce.
! 1930s legislation was concerned with the social safety net
! 1960s legislation turned to the issue of civil rights

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 17 - 39

Summary (continued)
! Pay discrimination laws require special attention for
several reasons.
! First, these laws regulate the design and administration of pay
systems.
! Second, the definition of pay discrimination, and thus the
approaches used to defend pay practices, are in a state of flux.
! Many of the provisions of these laws simply require sound
practices that should have been employed in the first place.
! Sound practices are those with three basic features:
! They are work related.
! They are related to the mission of the enterprise.
! They include an appeals process for employees who disagree
with the results.
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 17 - 40

Review Questions
1. What is the nature of government’s role in
compensation?
2. Explain why changes in minimum wage can affect
higher-paid employees as well.
3. What is the difference between access discrimination
and valuation discrimination?
4. Consider contemporary practices such as skill /
competency-based plans, broad banding, market
pricing, and pay-for-performance plans. Discuss how
they may affect the pay discrimination debate.

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 17 - 41

Review Questions (continued)

5. What factors help account for the pay gap?
6. What kinds of proactive activities can an employer
undertake to enhance the regulatory environment?
7. Could the pay objective of regulatory compliance ever
conflict with other objectives? Could it conflict with
the employer’s notion of consistency or
competitiveness? An employee’s notion of fairness? If
so, how would you deal with such situations?

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