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