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Government and Legal Issues in Compensation

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1 Government and Legal Issues in Compensation
Chapter 17 Government and Legal Issues in Compensation

2 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


4 “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

5 “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

6 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

7 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…

8 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

9 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

10 Wage and Hour Laws Administration
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

11 Wage and Hour Laws & Compensation Decision Making
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 Audit the pay system regularly

12 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

13 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

14 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

15 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

16 Worker’s Compensation (see also ch. 13)
Worker’s Compensation Laws: state laws intended to continue the flow of income, for a specified period, for workers whose injuries are job-related

17 Worker’s Compensation Laws: Common Features
Income loss from total disability (weekly cash payments) Income loss from permanent partial disability (lump sum payments) Worker’s Compensation Laws: Common Features Medical expense payments (cost management increasing) Income loss from death (burial allowance survivor benefits) Rehabilitation expense payments (to return to labor force)

18 Worker’s Compensation Laws: Additional Common Features
All job-related injuries and illnesses are covered Coverage is provided regardless of whose negligence caused the injury or illness Worker’s Compensation Laws: Additional Common Features Payments are usually made through insurance financed by employer-paid premiums Co-insurance: with this, the beneficiary of the coverage absorbs part of the loss that is covered

19 Workers’ Compensation Administration
Administered by state workers’ compensation boards or courts Company’s premium rates are based on the company’s claim experience

20 Workers’ Compensation & Compensation Decision Making
Recognize: safety violations + high rate of injuries & illnesses high experience ratings higher workers’ compensation premium payments

21 Unemployment Compensation (see also ch. 13)
Unemployment Compensation provides income to a subset of workers who are temporarily unemployed and searching for suitable employment. Based on state laws (w/federal supervision), funded by employers, experience rated

22 Unemployment Compensation Denial 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)

23 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])

24 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)

25 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)

26 Social Security Act of 1935 1950’s 1999 2040 10 4 1 1 1 Ratio of
Workers to Social Security Recipients 10 4 2 1 1 1

27 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)

28 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)

29 Pension Plans: Defined Benefit
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)

30 Pension Plans: Defined Contribution
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

31 Differences Defined Benefit Defined Contribution
Retirement income is guaranteed Employer’s contribution is not guaranteed Might not be fully funded Participants not immediately vested ERISA pension provisions apply Defined Contribution Retirement income is not guaranteed Employer’s contribution is guaranteed Fully funded by definition Participants are immediately vested ERISA pension provisions don’t apply .

32 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)

33 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

34 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)

35 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

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