McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Government and Legal Issues in Compensation Chapter 17

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Discuss the government’s role in the employment relationship and its interests in compensation decisions. 2. Identify the major provisions of the Fair Labor Standards Act and describe how this Act affects the regulation of pay. 3. Identify the key components of the Equal Pay Act of 1963 and explain how they affect wage discrimination. 4. Discuss how the two theories of discrimination under Title VII of the Civil Rights Act of 1964 (as amended) affect pay issues. 5. Explain the difficulties and issues in determining pay discrimination for dissimilar jobs. 6. Discuss the social implications of the earnings gap between men and women and among racial groups. Learning Objectives After discussing Chapter 17, students should be able to:

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Legislation establishes a minimum wage, governs overtime pay, protects employees from discrimination, regulates benefits, and determines how compensation is taxed. Overview of Federal Regulations

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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)

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 17.1: 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)

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Fair Credit Reporting Act (1970)  Pregnancy Discrimination Act (1978)  Americans with Disabilities Act (1990)  Civil Rights Act (1991)  Family and Medical Leave Act (1993)  Health Insurance Portability and Accountability Act (HIPPA) (1996)  Small Business Job Protection Act (1996)  Mental Health Act (1997) Exhibit 17.1: Evolving Nature of United States Federal Pay Laws

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Fair Labor Standards Act (1938)  Minimum wage  Hours of work  Overtime pay  Employee status  Exempt  Nonexempt  Child labor Three Major Provisions

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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 same job, the higher rate prevails

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Minimum Wage Under FLSA  1938$0.25 per hour  1978$2.65 per hour  1979$2.90 per hour  1981$3.35 per hour  1990$3.80 per hour  1991$4.25 per hour  1997$5.15 per hour  1938$0.25 per hour  1978$2.65 per hour  1979$2.90 per hour  1981$3.35 per hour  1990$3.80 per hour  1991$4.25 per hour  1997$5.15 per hour

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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  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

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Employee Status Under FLSA  When classified as an employee, an organization must  Withhold federal/state/local income taxes  Match Social Security/Medicare withholding  Include person in company benefit programs  Pay for unemployment insurance and workers’ compensation  Allow up to 12 weeks of unpaid leave for family emergencies (after one year of service)  Provide any other state or federally mandated benefits

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Contractor Status Under FLSA  To be classified as a contractor, a person must  Have 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

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exempt and Non-Exempt Status Under FLSA  Non-exempt employees are included in FLSA regulations and have full protection of law  Exempt employees are excluded from FLSA minimum wage and overtime provisions  Four classifications of exempt employees  Executives  Professionals  Administrative employees  Outside salespeople

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Non-exempt workers must be paid 1.5 times their regular rate of pay for hours worked in excess of 40 in any workweek  Regular rate of pay includes base pay plus  Non-discretionary bonuses  Shift premiums  Production bonuses  Commissions  Overtime is paid on time worked, not time compensated  A workweek is any fixed, recurring period of 168 consecutive hours 2004 FLSA Basic Overtime Provisions

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Compensatory Time Under FLSA  Compensatory time off may sometimes be offered instead of cash overtime  Rate is the same as for cash  Public employees can accumulate compensatory time  In private sector, practice of allowing compensatory time must be part of an established plan

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved FLSA Compliance: Enforcement.  Wage and Hour Division of U.S. Department of Labor enforces FLSA minimum wage and overtime provisions  Equal Employment Opportunity Commission (EEOC) enforces equal pay provisions

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved When State Laws Differ  Pay frequency, minimum wage, severance or vacation pay, or unclaimed wages may be governed by individual states  Rule of thumb - Whenever state and federal laws differ, follow regulation that most benefits employees

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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  It is discriminatory to pay minorities or women less than males when performing equal work - working side-by-side, in the same plant, doing the same work, producing the same results

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Types of Antidiscrimination Acts  Equal Pay Act (1963)  Civil Rights Act (1964)  Age Discrimination in Employment Act (1967)  Wage Garnishment Act (1968)  Americans with Disabilities Act (1990)

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved  Types of compensation practices which may be discriminatory  Extra pay plans  Leave policies  Maternity leave  Pension policies Discriminatory Compensation Practices

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved A plaintiff would have a prima facie case if he/she received a lower wage than members of opposite sex for performing work that requires substantially the same skills, effort, and responsibilities under similar working conditions - all performed at the same location. What Is Discrimination Under EPA?

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Provisions of Equal Pay Act  Equal work is defined in terms of  Skill, effort, responsibility, and working conditions all performed at the same location  Differences in pay are legal if differences are based on any one of four criteria  Seniority, merit or quality of performance, quality or quantity of production, or some factor other than sex  Not permitted are defenses such as  Union rules or the wage is prevailing pay for 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 base wage for job

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Title VII of the Civil Rights Act (1964)  Prohibits discrimination in all terms and conditions of employment on the basis of race, religion, ethnic group, sex, or national origin.  Defines two theories of discrimination behavior  Disparate treatment  Disparate impact  Civil Rights Act of 1991 reinforced these two standards of discrimination

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Theories of Discrimination  Disparate treatment  Occurs when an employee who is a member of a protected group is intentionally paid less  Disparate impact  Occurs when an apparently neutral compensation practice results in unintentional wage discrimination for a protected group

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Differences in Pay Differences in Pay Differences in employees Differences in employees Differences in unions Differences in unions Differences in labor market conditions Differences in labor market conditions Discrimination Differences in work Differences in employee work behaviors Differences in firms Differences in firms Exhibit 17.6: Possible Determinants of Pay Differences

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved 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.

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Comparable Worth  Establishing a comparable worth plan 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