Government and Legal Issues in Compensation Compensation Management Prepared by: Mr. Zaheed Husein Mohammad Al-Din, Sr. Lecturer, BBS Adapted from: Compensation, Ninth Edition (By: George T. Milkovich, Jerry M. Newman)

Topics for Discussion Government as Part of the Employment Relationship Fair Labor Standards Act of 1938 Prevailing Wage Laws Pay Discrimination: What is It? The Equal Pay Act Title VII of the Civil Rights Act of 1964 Pay Discrimination and Dissimilar Jobs The Earnings Gap Comparable Worth

Government: 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)

Effect of Government Decisions on the Labor Market Demand Government a big employer Indirectly affects labor demand through its purchases Financial policy decisions affect labor demand Supply Legislation Immigration policy and how rigorously it is enforced

Exhibit 17.1: Evolving Nature of United States Federal Pay Regulations See Exhibit 17.1 page 586 for details

Fair Labor Standards Act (1938) Three Major Provisions Minimum wage Hours of work Overtime pay Employee status Exempt Nonexempt Child labor See Exhibit 17.1 page 586 for details

Minimum Wage Legislation is intended to provide an income floor for workers in society’s least productive jobs Federal minimum wage $5.85 an hour July 2007 $6.55 July 2008 $7.25 July 2009 Almost all states have their own minimum wage to cover jobs omitted from federal legislation If state and federal legislation cover same job, the higher rate prevails

Effects of Minimum Wage Rate Increases on Wage Structure Direct and indirect effects Direct effect – refers to increase in wages for jobs at bottom of wage curve that have been below minimum wage Indirect effect – refers to changes in remainder of the wage curve to maintain appropriate differentials for jobs that deserve higher pay

Effects of Minimum Wage Rate Increases on Wage Structure (cont.) Analysis indicates indirect effect is usually greater than direct effect Companies spend more money on increasing pay of high-level jobs than they spend on raising pay of low-level jobs to new minimum

Drawbacks of Minimum Wage Legislation As a public policy to reduce poverty, minimum wage legislation has become “an increasingly weak mechanism Failure to target the working poor Increasing the minimum wage has adverse employment effects Alternative approach “living wage” Provides a minimum wage tailored to living costs in an area

Hours of Work Overtime provision of the FLSA requires payment at one-and-a-half times the standard for working more than 40 hours per week Exemptions To be exempt, executives must Primarily undertake management duties Supervise two or more employees Have control (or influence) over hiring, firing, and promotion Exercise discretionary powers Devote at least 80 percent of their work hours to such activities

Hours of Work (cont.) To be an exempt professional, employees must Do work requiring knowledge generally acquired by prolonged, specialized study, or engage in original and creative activity in a recognized artistic field. Consistently exercise discretion or judgment Do work that is primarily intellectual and nonroutine Devote at least 80 percent of their work hours to such activities To be exempt under the administrative exemption, an employee must satisfy a “duties” test “salary basis” test

Hours of Work (cont.) What Time Is Covered? What Income Is Covered? OSHA legislation specifies the number of breaks that must be provided in an eight-hour workday Portal-to-Portal Act provides that time spent on activities before beginning the “principal activity” is generally not compensable “On-call employees” “beeper pay” What Income Is Covered? Compensatory Time Off

Child Labor Provisions FLSA restricts 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

Prevailing Wage Laws Prevailing-wage laws prevent contractors from using their size to drive down wages Contractors must determine the “going rate” Normally the “union rate” for labor becomes the going rate That rate then becomes the mandated minimum wage on the government-financed project

Prevailing Wage Laws (cont.) A number of laws contain prevailing-wage provisions Davis-Bacon Act Walsh-Healey Public Contracts Act Service Contract Act National Foundation for the Arts and Humanities Act Equal Pay Act Civil Rights Act

Pay Discrimination: What Is It? Law recognizes two types of discrimination Access discrimination – denies particular jobs, promotions, or training opportunities to qualified women or minorities Valuation discrimination – looks at pay women and men receive for the jobs they perform Equal pay for equal work. It is discriminatory to pay minorities or women less than males when performing equal work

Equal Pay Act (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

Equal Pay Act (1963) (cont.) Differences in pay between men and women doing equal work are legal if based on an affirmative defense Seniority Merit or quality of performance Quality or quantity of production Some factor other than sex

Equal Pay Act (1963) (cont.) Definitions Equal Skill Equal work standard required only that jobs be substantially equal, not identical Actual work performed must be used to decide whether jobs are substantially equal Skill Experience, training, education, and ability as measured by the performance requirements of a particular job

Equal Pay Act (1963) (cont.) Effort Responsibility Working conditions Mental or physical—the degree of effort (not type of effort) actually expended in the performance of a job Responsibility The degree of accountability required in the performance of a job Working conditions The physical surroundings and hazards of a job, including dimensions such as inside versus outside work, heat, cold, and poor ventilation

Equal Pay Act (1963) (cont.) Factors other than sex shift differentials temporary assignments bona fide training programs differences based on ability, training, or experience other reasons of “business necessity “Reverse” Discrimination

Title VII of the Civil Rights Act (1964) Prohibits discrimination on the basis of sex, race, color, religion, or national origin Defines two theories of discrimination behavior Disparate treatment Disparate impact

Theories of Discrimination Disparate treatment Disparate or unequal treatment applies different standards to different employees Disparate impact Practices that have a differential effect on members of protected groups are illegal, unless the differences are work-related

Pay Discrimination and Dissimilar Jobs Gunther v. County of Washington Supreme Court determined pay differences for dissimilar jobs may reflect discrimination Proof of discrimination Use of market data Spaulding v. University of Washington Jobs of “comparable worth” AFSCME v. State of Washington

Exhibit 17.5: Sources of Earnings Gaps

Sources of the Earnings Gaps Work/occupation differences Work-related behavior Labor market conditions Firm/industry differences Union differences Discrimination

What Is Comparable Worth? If jobs require comparable skill, effort, and responsibility, the pay must be comparable, no matter how dissimilar the job content may be.

Comparable Worth Steps to establishing a comparable worth plan: 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 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

End of Topic