COMPENSATION

MANAGEMENT
Brief Notes for Students
HRSB 353

Chapter 17: Government

and Legal Issues in
Compensation
LEARNING OBJECTIVES
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.
 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)
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)
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)
 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)
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
 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.
 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.
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.
 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
 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
 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.
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.
 Overtime (continued)
Overtime is paid on time worked, not
time compensated.
A workweek is any fixed, recurring
period of 168 consecutive hours
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.
 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
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.
 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.
 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)
 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.
 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
 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
 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.
 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
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.
 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.
 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
 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.
Compensation practices which may
be discriminatory:
extra pay plans
leave policies
maternity leave
pension policies
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
 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.
Possible Determinants of Pay Differences

Differences Differences
in in
Organizations employees

Differences in
Differences
Employee Work
in
Behaviors
Unions

Differences Differences in
in Discrimination Labor Market
Work Conditions
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
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.
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.
 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?