Government and Legal Issues in

Compensation

Chapter

17

Fair Labor Standards Act (FLSA) of 1938

“Independent Contractor” exclusion “Drivers Deliver Trouble to FedEx by Seeking Employee

Benefits” In reviewing classification re: independent contractor vs.

employee, regulators likely to consider worker to be Ee if s/he works set hours is required to follow instructions on how to do job receives training from Er works on Er’s premises

Estimated that 38% of Ers examined by IRS have misclassified workers as independent contractors

Source: Wall Street Journal, 1/7/05

“The Ground War at FedEx” Suits over independent contractor status have bedeviled Cos since

Microsoft lost suit over issue in 2000 and sharply curbed use of contractors

In October 2005, CA judge ruled that among ground drivers who had filed class action there, those who drive single routes should be classified as Ees

Ground drivers also recently succeeded in consolidating class actions pending in 23 other states into single case in IN federal court

Co maintains that such drivers aren’t Ees because they don’t have specific start times, can buy and sell own routes and trucks, and can hire and fire ees

~20% of ground drivers manage multiple routes Use of independent contractors (who can’t form U) has helped FedEx to

avoid labor disputes, such as 1997 Teamster strike at UPS

“The Ground War at FedEx” Outside consultant estimates that use of lower-cost

contract drivers enables FedEx Ground to deliver packages for average cost of $5.82 apiece, cf. $7.17 average for UPS to deliver both air and ground packages over its integrated network Cost differential has helped FedEx Ground’s market share to

increase from 13% to 18% since 2000, while UPS’s share has declined to 74%

Source: Business Week, 11/28/05 IRS ruled against FedEx in December 2007, finding

drivers to be employees rather than independent contractors, assessed $319m in back taxes and fines

Source: Wall Street Journal, 12/22/07

Fair Labor Standards Act (FLSA) of 1938

Minimum Wage Provision Legislated increases

Federal minimum wage increased from $5.15/hr to $5.85/hr in July 2007, $6.55/hr in July 2008, $7.25/hr in July 2009

States may also have minimum wage laws

Child Labor Provision Overtime Pay Provision

Exempt/Nonexempt

Wage and Hour Laws for Federal Contractors (“prevailing wage” laws)

Davis-Bacon Act of 1931 (best known) Walsh-Healey Public Contracts Act of 1936 and others…

Equal Pay Provision: Equal Pay Act of 1963

Amendment to FLSA Men and women in “substantially equal” jobs must

receive equal pay Allows pay differences based on

Seniority Merit Productivity Any factor other than gender

Equal Pay Provision: Equal Pay Act of 1963 To support a pay difference due to unequal work, the

employer must show Skill, effort, and responsibility requirements are

substantially different The tasks involving those differences consume a

significant amount of the employee’s time The pay differential corresponds to these criteria

The Wage and Hour Division of the Department of Labor Minimum wage Record-keeping Child labor Contractor laws Overtime pay

Equal Employment Opportunity Commission Equal pay

Wage and Hour LawsAdministration

Wage and Hour Laws &Compensation Decision Making

• Audit the pay system regularly

• Make full use of Wage and Hour Division offices for help in interpretation of the law

• Look to the courts for direction in adherence to equal pay provision

• Carry out task-oriented job analysis and subsequent job evaluation

Court Direction in Adherence to Equal Pay Provision

Pay policy should contain provision for equal pay for substantially equal work

Equal work determination must be based on content of job; skill, effort, and responsibility requirements; and working conditions

Civil Rights Act of 1964, Title VII Prohibits discrimination in employment based on

race, color, gender, religion, national origin Disparate treatment Adverse (disparate) impact

One implication is that differential cost of providing benefit (e.g., pensions by gender) can not be used to justify discrimination in pension benefit by gender

Civil Rights Act of 1964, Title VII Pay discrimination and dissimilar jobs

Unlawful under Title VII, but… Market rates are defense to paying dissimilar jobs differently

(unlike Equal Pay Act, and equal work) Comparable worth

Advocates that women performing jobs judged to be equal on some measure of worth should be paid the same as men (e.g., AFSCME v. State of Washington)

Not mandated by federal law Some states, for public employees; Ontario, public and private

The Earnings Gap (see 17.4A, 17.4B, 17.4C) Differences in Occupational Attainment

Discrimination and gender stereotyping or choice?

Differences in Personal Work-Related Characteristics Experience, seniority, education

Differences in Union Membership

Worker’s Compensation (see also ch. 13)

Worker’s Compensation Laws:Worker’s Compensation Laws: state laws intended to continue the flow of income, for a specified period, for workers whose injuries are job-related

Worker’s Compensation Laws: Common Features

Income lossfrom totaldisability

(weekly cashpayments)

Income lossfrom death

(burial allowancesurvivor benefits)

Rehabilitationexpense

payments(to return tolabor force)

Medicalexpense

payments(cost management

increasing)

Income lossfrom permanentpartial disability

(lump sumpayments)

Worker’s Compensation Laws: Additional Common Features

All job-relatedinjuries and

illnessesare covered

Co-insurance: withthis, the beneficiary

of the coverageabsorbs part of the

loss that iscovered

Payments areusually made

through insurancefinanced by

employer-paidpremiums

Coverage isprovided regardless

of whose negligence causedthe injury or illness

Workers’ CompensationAdministration

Administered by state workers’ compensation boards or courts

Company’s premium rates are based on the company’s claim experience

Workers’ Compensation& Compensation Decision Making

Recognize:

safety violations

+ high rate of injuries & illnesses

high experience ratings

higher workers’ compensation higher workers’ compensation premium paymentspremium payments

Unemployment Compensation (see also ch. 13)

Unemployment CompensationUnemployment Compensation provides income to a provides income to a subset of workers who are temporarily unemployed and subset of workers who are temporarily unemployed and searching for suitable employment.searching for suitable employment.

Based on state laws (w/federal supervision), funded by Based on state laws (w/federal supervision), funded by employers, experience ratedemployers, experience rated

Unemployment CompensationDenial of Benefits

Voluntarily quit without a good cause Discharged for misconduct (not incompetence) Discharged for fraud Failed to seek or accept suitable employment Received certain other unemployment benefits (e.g., severance

pay) Unemployment was caused by labor disputes resulting in work

stoppages (some limited exceptions, distinction between strike and lockout, between strikers and those involuntarily idled)

Unemployment Compensation& Compensation Decision-Making

Monitor the organization’s turnover rate to control experience ratings

Develop appropriate supplementary unemployment benefits (SUB) packages (maintain tax advantages via non-discrimination [income])

Social Security Act of 1935 (see also ch. 13)

Basic floor of continuing income Ill and disabled workers Dependents of disabled workers Retired workers Survivors of workers

Pay-as-you-go system Taxes employee AND employer equally through

Federal Insurance Contribution Act (FICA)

Social Security Act of 1935

Born before 1937: retire at 65 with full benefits Born after 1937: work beyond 65 to retire with full

benefits With retirement eligibility comes eligibility for

Medicare Part A Hospital coverage Part B Medical insurance component Now also Parts C (Medicare Advantage, alternative to

Medigap coverage) and D (prescription drugs)

Social Security Act of 1935

1950’s 1999 2040Ratio ofWorkers

to

SocialSecurityRecipients

10 4 2

1 1 1

Family and Medical Leave Act (see also ch. 13)

FMLA guarantees workers up to 12 weeks of unpaid leave for childbirth, adoption, foster care, personal serious illness, or serious illness of a close family member

Job protection upon return California has passed law making leave paid

(and most recently Washington state)

Employee Retirement and Income Security Act: Minimum Standards (see also ch. 13)

Who must be covered by a plan (participation requirement)

How long a person must work to be entitled to the benefits (vesting requirement)

How much money the employer must set aside each year to fund the (defined) benefit plan

Pension Benefit Guarantee Corporation (PBGC)

Pension Plans: Defined Benefit

Defined Benefit Plans:Defined Benefit Plans: either guarantee the retiree a specific amount of income or specify the method for determining the benefits the retiree will receive

Funding based on the organization’s payroll costs and employers’ contributions (based on anticipated retirement income obligations for the workforce as a whole)

Pension Plans: Defined Contribution

Defined Contribution Plans:Defined Contribution Plans: all forms of capital accumulation that do not allow withdrawal of funds until retirement

Employer’s contribution is guaranteed and plans are, by definition, fully funded

Income is a function of the fund’s investment growth

DifferencesDefined Benefit

Retirement income is guaranteed

Employer’s contribution is not guaranteed

Might not be fully fundedParticipants not

immediately vestedERISA pension provisions

apply

Defined ContributionRetirement income is not

guaranteed

Employer’s contribution is guaranteed

Fully funded by definition

Participants are immediately vested

ERISA pension provisions don’t apply

.

ERISA Additional Requirements

Plan must be handled in the best interests of the participants and their beneficiaries (fiduciary requirement)

Participants must be informed of their rights under the plan (communication requirement)

Other Legislation Age Discrimination in Employment Act

now prohibits mandatory retirement Pregnancy Discrimination Act

Pregnancy must be treated as any other disability Consolidated Omnibus Budget Reconciliation Act (COBRA)

Must offer extended group health plan participation for up to 36 months following termination

Workers Adjustment and Retraining Notification Act (WARN) Requires 60-day notice of plant closings, mass layoffs

Americans with Disabilities Act Note: disabilities not identified by listing

Health Insurance Portability and Accountability Act (HIPAA) Improves ‘portability’ of health insurance (limits exclusions for pre-existing conditions,

discrimination based on health status) Note that HIPPA impacts Er’s ability to use incentives re: health insurance and wellness

programs

Health Insurance Portability and Accountability Act (HIPAA)

Intended to address “job lock” (where Ee is “locked” into current job given health insurance considerations)

Protections for coverage under group health plans that limit exclusions for pre-existing conditions

New Er must credit Ee for previous continuous health coverage (reduces or eliminates exclusion period)

Prohibits discrimination against Ees based on health status (including charging different premiums)

Does not… Ensure that Ee who changes jobs will have access to health insurance on

new job Ensure affordability of health insurance on new job Enable individuals to maintain same group health plan on job change

Recall that under COBRA Ee provided w/ limited extension of group health insurance (premium to be paid by Ee) when coverage lost due to qualifying events (e.g., layoff)

Pension & Welfare Benefits &Compensation Decision Making

Monitor pending legislation and tax law Communicate benefit coverage and legal

requirements to employees Assure avoidance of discrimination and assure

fair treatment of all Evaluate the potential impact of plans, especially

flexible benefit plans