BUS 434 WEEK 1 DQ 1 & 2

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Learning Objectives

After reading this chapter, you should be able to:

1. Discuss the origins of federal laws related to compensation.

2. List and explain critical early compensation laws.

3. Discuss the progression of minimum wage standards and the laws that are critical in its implementation today.

4. Cite and explain antidiscrimination laws that impact the workplace today.

5. Cite and explain compensation law that impacts families and those with disabilities.

6. Discuss the difference between mandatory and discretionary bene�its.

7. Cite and explain laws that guide nonwage bene�it rewards today.

2 Compensation and the Law

Stockbyte/Exactostock-1491/Superstock

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Introduction Who pays when a worker gets hurt on the job?

What is the minimum that a worker has to be paid?

When can a company pay one person differently than another person?

Where can a worker turn during times of job loss?

Why do we have Social Security?

Questions such as these are answered in part by laws and regulations that have been created over time in response to factors such as key historical events and changes in society’s norms and priorities. Companies also answer these questions using their own business strategies, goals, and culture as guides, all while staying within the framework dictated by the legal system.

Some laws and regulations directly impact compensation and bene�its, whereas others are more broad in nature and impact general human resource practices. Given that the legal system has its own professionals —lawyers and judges—and is very complex in and of itself, this chapter will not attempt to cover all employment law. Instead, we will focus on the key laws that impact the creation, implementation, and maintenance of compensation and bene�it programs. However, an overview of the broader business regulatory environment is needed to better understand the in�luence this environment has on compensation and bene�its, so a brief overview will be covered for these areas as well.

While this chapter is written with a focus on laws and regulations in the United States, every country has its own legal history and philosophy with regard to compensation and bene�its. To be an effective compensation and bene�its professional, you will need to have a solid understanding of the speci�ic laws and regulations of the country in which your company operates.

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The Great Depression caused a large number of people to lose their jobs.

2.1 Origins of Laws Impacting Reward Systems For the �irst 150 years after the founding of the United States, the workplace went largely unregulated. While there were incidents of workers banding together to try to improve their situation, such as �ighting for higher wages or better working conditions, these incidents were typically isolated and temporary. For example, a printer’s union was formed in New York City in 1778 that achieved its goal of higher wages, but the �irst large national union, the National Labor Union, was not formed until 1866, almost 90 years later and just after the Civil War. The National Labor Union was successful in persuading Congress to require an eight-hour workday that applied to all federal employees; however, the union lasted less than 10 years and was dissolved in 1874. The regulations and laws that emanated from the efforts of labor unions were patchwork, addressing a particular grievance at a particular time. This began to change during the 1930s in response to the economic conditions of the time.

Throughout the 1920s, there was a sense of euphoria in the aftermath of World War I, the end of an in�luenza epidemic, and sustained economic prosperity. During this time period, known as “The Roaring Twenties,” there was excessive spending on new inventions and leisure activities. The nation’s total wealth more than doubled between 1920 and 1929, and the stock market more than quadrupled in value due to speculation. This all came to abrupt end in October 1929 when the stock market crashed. The Great Depression, the worst economic crisis in United States history, had begun.

Following the stock market crash, investors lost tremendous amounts of money, with many losing all that they had. People began to panic, especially when rumors started that the banks were failing. This caused “runs on the banks” where people would attempt to withdraw the cash they had placed in the banks for safekeeping. The banks, however, did not have the money available to pay all demands—the money had been loaned out and was not sitting in the banks’ vaults—so banks collapsed (https://www.youtube.com/watch?v=_Er69b4HMl8) .

This created a downward spiral of failing companies that had to lay off workers who then were unable to afford their homes, food, and other purchases. This resulted in a huge drop in demand for companies’ goods, so many employers went out of business and the vicious cycle continued.

The Great Depression lasted throughout the 1930s and was characterized by failing companies, high unemployment, plunging tax revenues, reduced consumer spending, and severe homelessness. At its height in 1933, close to a quarter of the American workforce was unemployed and an additional 25% of the remaining workforce had their wages and hours drastically reduced. The unemployment rate was over 15% for most of the decade.

The severity of the economic downturn induced the government to pass federal laws in an attempt to boost the potential for economic recovery and get people back to work. It took World War II to move the United States fully out of the Great Depression, and the war itself led to changes in the workplace through factors such as wage and price controls. The laws passed during the 1930s and 1940s represented a categorical shift in the way government dealt with business in the United States.

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Let’s begin by taking a look at some of the laws passed during this time period that would directly impact compensation systems as well as broader economic and business practices. We’ll then explore relevant laws, with a focus on those that in�luence compensation systems, that have occurred since then on up to the modern day. Of course, due to the constantly evolving legal landscape, an overview of laws is not a substitute for consulting with a legal professional who is up to date with the most current legislation.

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2.2 Early Compensation Law Throughout the Industrial Revolution and during the midst of the Great Depression, large numbers of people were seeking work at any wage they could get. As such, workers had little or no in�luence on their wages. Paired with rapid changes in technology and a societal shift from a primarily agrarian economy to one based on manufacturing, regulations and laws did not keep pace with changes in the workplace. As mentioned previously, that began to change during the Great Depression. Following are key laws that were passed in the 1930s that built the foundation for addressing issues such as minimum standards on how much workers should be paid and how to help needy groups such as the elderly and poor.

Davis-Bacon Act of 1931

Under the Davis-Bacon Act (http://www.dol.gov/whd/contracts/dbra.htm) , employers, for the �irst time, were required to provide laborers and mechanics on covered federally �inanced or assisted construction contracts in excess of $2,000 (approximately $36,600 in today’s dollars) the right to receive at least the locally prevailing wage rate (the de�inition of the locally prevailing wage rate was left vague in the law, but it essentially meant the typical wage being paid in a particular area). This act offered a benchmark for future federal and state wages and bene�its related to government contracts and even the private sector.

Norris-LaGuardia Act of 1932

The Norris-LaGuardia Act (http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi? article=3121&context=fss_papers) outlawed the practice of employers mandating that workers pledge not to join a labor union (also called yellow-dog contracts). The act curtailed the use of court injunctions that employers had been using to stop union strikes, picketing, and boycotts. Although it had few enforcement powers, the act was one of the �irst federal labor laws supporting organized labor, and it marked a signi�icant change in labor reform. Its passage fostered a trend toward more favorable government labor policies, including compensation practices, in the years to come.

The National Labor Relations (Wagner) Act of 1935

With passage of the Norris-LaGuardia Act, the groundwork was laid for an even more important labor bill —the National Labor Relations Act of 1935 (http://www.nlrb.gov/resources/national-labor-relations-act) (also called the Wagner Act). The Wagner Act continued the mission of reforming and regulating labor relations. Unions acquired fundamental rights and powers, including the right of collective bargaining, which is good-faith negotiations between an employer and a group of employees aimed at reaching agreements related to employment issues, and the recognition of unfair labor practices, which are tactics used by employers to prevent employees from joining unions and to disrupt union activities in the workplace. (For more detailed information on collective bargaining visit: http://www.dol.gov/dol/topic/labor-relations/collbargaining.htm (http://www.dol.gov/dol/topic/labor-relations/collbargaining.htm) ). This act also established penalties for violating these rights and powers. The Taft-Hartley Act of 1947 amended the National Labor Relations Act by extending the prohibition of unfair labor practices to labor unions, not just employers as under the 1935 law.

The gain of power by labor unions has had a big impact on compensation issues, such as wages paid and bene�its offered. The impact of labor unions has lessened in many industries in current times, although

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some industries, such as automobile manufacturing and law enforcement, continue to have a signi�icant labor union in�luence.

The Social Security Act of 1935

On August 14, 1935, President Franklin D. Roosevelt became the �irst president to advocate federal assistance for the elderly. As part of his Second New Deal, the Social Security Act of 1935 (http://www.ssa.gov/history/35act.html) was signed into law to establish old-age bene�its at the federal level. The bene�its were to be paid in proportion to the previous earning of individuals, and a reserve fund to pay for the bene�its would be created by a tax paid equally by employees and employers. Originally, only employees in industrial and commercial occupations were eligible for bene�its, but numerous important amendments since then have expanded those covered under the act.

Additionally, the act provided money and bene�its to the unemployed, funded by a tax on employers. It also enabled states to make provisions for those needing the most help. See Franklin D. Roosevelt’s statement on signing the Social Security Act here: http://www.presidency .ucsb.edu/mediaplay.php? id=14916&admin=32 (http://www.presidency.ucsb.edu/mediaplay.php?id=14916&admin=32) . Prior to the passage of the act, there was no federal unemployment compensation and states did not universally or evenly support older Americans or those who were blind, dependent and disabled children, welfare for mothers and children, and public health.

Walsh-Healey Public Contracts Act (PCA) of 1936

The Walsh-Healey Public Contracts Act (PCA) (http://www.dol.gov/whd/govcontracts/pca.htm) was the �irst federal act to provide employees the right to be paid at least the minimum wage for all hours worked and to be paid for overtime work at a rate not less than one and one-half times the regular rate of pay (“time and a half”) for any hours worked beyond 40 hours per week. The act applies only to companies that provide materials, supplies, articles, or equipment to the U.S. government or the District of Columbia and covers employees who produce, assemble, handle, or ship goods under such contracts. Executive, administrative, and professional employees and outside salespersons are exempt from the minimum wage and overtime provisions of the act. While the act was limited in its focus—covering only federal contracts —it was the beginning of providing wage protection in the form of minimum wages and overtime pay to employees.

Fair Labor Standards Act (FLSA) of 1938

The Fair Labor Standards Act (FLSA) (http://www.dol.gov/whd/�lsa/) expanded on the Walsh-Healey Act and established minimum wage, overtime pay, record keeping, and child-labor standards affecting full- time and part-time workers in both the private and government sectors. The law also set the current standard of a 40-hour workweek for private industry.

Not all jobs, however, are covered by overtime and minimum wage requirements. Executive, professional, and administrative professionals are generally considered to be exempt from FLSA provisions. Most other jobs are considered to be nonexempt and covered by FLSA regulations. Keep in mind that receiving a salary does not automatically mean that you are exempt from FLSA requirements. While a salary employee is typically exempt from overtime and minimum wage requirements, it is not always the case, as salary is not the determining factor as to whether an employee is exempt or nonexempt under FLSA. See

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Critical Thinking

Which federal law established during the Great Depression era do you believe has the most in�luence today? Why?

http://www.�lsa.com/coverage.html (http://www.�lsa.com/coverage.html) for additional information on exempt versus nonexempt status of jobs.

The Wage and Hour Division (WHD) of the U.S. Department of Labor administers and enforces the FLSA with respect to private employment, state and local government employment, and federal employees. Its enforcement umbrella includes wages, family and medical leave, break time for nursing mothers, child labor, government contracts, immigrant workers, agricultural employment, special employment (such as workers with special needs), and even lie detector tests used in employment practices (through the Employee

Polygraph Protection Act of 1988).

Today, more than 130 million American workers are covered by the provisions of the FLSA. Together, the Social Security Act of 1935 and the FLSA of 1938 were sweeping bills that introduced a change in attitudes toward the role of government and generated an array of programs to aid numerous groups of Americans.

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Critical Thinking

Review the regulations set forth in the Fair Labor Standards Act. Do you think the modern workplace would be the same had such legislation not been passed? If so, how? If not, why?

2.3 Basic Wage Standards Numerous dif�iculties occurred early in the implementation and administration of the FLSA. It quickly became apparent that there were both logistical and tactical dif�iculties with the enforcement of legislation across various regions and industries. For example, the statutory minimum wage was likely to produce undesirable effects upon the economies of Puerto Rico and the Virgin Islands if applied to all of their covered industries because they didn’t have the developed economies that the rest of the United States had. Consequently, on June 26, 1940, a special committee was set up that ultimately allowed minimum wage levels in Puerto Rico and the Virgin Islands to be less than the rates applicable elsewhere in the United States.

On May 14, 1947, the FLSA was amended by the Portal-to-Portal Act. This legislation was signi�icant because it resolved some issues as to what constitutes compensable hours worked (i.e., had to be paid) under FLSA, establishing that activities that bene�ited employers were compensable, but activities such as commuting to work were a normal part of the work process and not normally compensable. In 1949, the FLSA was amended to extend child labor coverage, raise the minimum wage 40 cents an hour to 75 cents an hour for all workers, and expand minimum wage coverage to include workers in the air transport industry. The minimum wage was increased again in 1955 to one dollar per hour.

The 1961 amendments greatly expanded the scope of the FLSA within the retail and service sectors and also increased the minimum wage for previously covered workers to $1.15 an hour in September 1961 and an additional ten cents an hour two years later. In 1974, Congress included under the FLSA all nonsupervisory employees of federal, state, and local governments and many domestic workers.

Between 1978 and 2006, the federal minimum wage was raised in stages from $2.90 to $5.15. The Fair Minimum Wage Act of 2007 raised the minimum wage, over time, such that as of 2015, covered, nonexempt workers are entitled to a federal minimum wage of not less than $7.25 per hour.

In each of the cases and stages of increases, Congress, which has legislative authority over federal spending, has from time to time provided challenges to increasing the minimum wage. The Supreme Court also has made its share of contributions to questioning and interpreting the FLSA.

Some states and municipalities have legislated a minimum wage higher than that speci�ied by the federal government, while others don’t designate a minimum wage at all, in which case the federal wage rate applies (see Table 2.1). President Obama signed an executive order that applies to public contractors— those who hold federal contracts—requiring them to pay a minimum wage of $10.10 per hour beginning on January 1, 2015.

Debate about the minimum wage has been ongoing since it was introduced, with ardent supporters on both sides. Currently, the debate revolves around the issue of raising the minimum wage in response to the rising cost of living. Numerous companies have chosen to act on their own and pay their workers above the mandated minimum wage levels. For example, Aetna announced at the beginning of 2015 that it set $16 an hour as its lowest level of pay, with the stated goals of the change being to recruit top talent and reduce turnover. Gap Inc. and Starbucks Corp.TM are also companies that have

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recently raised the minimum amount they pay their workers (Mathews & Francis, 2015).

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The Pay Gap

2.4 Antidiscrimination Laws Throughout history, numerous groups have faced discrimination, bias, and unfair treatment in all facets of life. This has occurred in employment practices as well. As such, numerous laws have been passed to protect the rights of applicants and employees from discrimination, including in their compensation. The U.S. Equal Employment Opportunity Commission (EEOC) enforces these antidiscrimination laws. Below are some of the key laws related to preventing discrimination in compensation and bene�its practices.

Table 2.1: Consolidated state minimum wages as of 09/01/2014

Greater than federal minimum wage*

Equal to federal minimum wage of $7.25*

Less than federal minimum wage*

No minimum wage required*

AK - $7.75 MN - $8.00 HI NH AR - $6.25 AL

AZ - $7.90 MO - $7.50 IA OK GA - $5.15 LA

CA - $9.00 MT - $7.90 ID PA WY - $5.15 MS

CO - $8.00 NJ - $8.25 IN SD SC

CT - $8.70 NM - $7.50 KS TX TN

DC - $9.50 NV - $8.25 KY UT

DE - $7.75 NY - $8.00 MD VA

FL - $7.93 OH - $7.95 NC WV

IL - $8.25 OR - $9.10 ND WI

MA - $8.00 RI - $8.00 NE

ME - $7.50 VT - $8.73

MI - $8.15 WA - $9.32

23 states + DC 19 states 3 states 5 states

* Where federal and state law have different minimum wage rates, the higher standard applies.

Note: Like the federal wage and hour law, state law often exempts particular occupations, industries, or sizes of employers from the minimum labor standard generally applied to covered employment. Particular exemptions are not identi�ied in this table. Users are encouraged to consult the laws of particular states in determining whether the state’s minimum wage applies to a particular employment. This information often may be found at the websites maintained by state labor departments. Links to these websites are available at www.dol.gov/whd/contacts/state_of.htm.

Souce: United States Department of Labor. http://www.dol.gov/whd/minwage/america.htm (http://www.dol.gov/whd/minwage/america.htm)

Equal Pay Act (EPA) of 1963

During World War II, with most men of working age �ighting overseas, women had to �ill important jobs, particularly in the manufacturing sectors, that had formerly been held by men. In December 1940, the number of active military personnel in the United States

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The Pay Gap: Sexism or Something Else?

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Critical Thinking

The Equal Pay Amendment was passed in 1963, yet by some estimates, women still make on average 77 cents to every dollar men earn. Does such a disparity in

totaled approximately 800,000, but by June 1945, this number had grown to 12.3 million. Over this time period, the number of women in the workforce increased from 10 million to 19 million.

The increasingly female workforce, however, highlighted a discrepancy in monetary compensation practices in that women were being paid less simply for the fact that they were not men. The War Labor Board, established in 1942 to resolve disputes between workers and employers to ensure that disputes didn’t disrupt the war effort, addressed the issue by specifying that equal pay should be provided to both men and women performing similar jobs. Employers, however, routinely circumvented this requirement by either assigning women to lower-skill- level jobs or by reclassifying jobs so they would not have to provide equitable pay.

It would take two decades before any federal legislation was passed to formally address this issue. In 1963, the Equal Pay Act (http://www.eeoc.gov/laws/statutes/epa.cfm) was passed and signed into law, asserting that gender-based discrimination was prohibited and, within the same workplace, men and women were to be given equal pay for equal work. The concept of what constituted comparable pay was interpreted to mean that jobs need not be identical; instead, equality is established by the requirement of substantially equal knowledge, skills, and abilities as well as the production of similar results. Hiring for “women’s jobs” and “men’s jobs” with unequal compensation policies became unlawful.

Speci�ically, the Equal Pay Act contains the following language:

Employers may not pay unequal wages to men and women who perform jobs that require substantially equal skill, effort, and responsibility, and that are performed under similar working conditions within the same establishment.

The content and performance of a job, not the title of the position, determines whether jobs are substantially equal.

Lilly Ledbetter Fair Pay Act of 2009 The Lilly Ledbetter Fair Pay Act (http://www.gpo.gov/fdsys/pkg/PLAW- 111publ2/html/PLAW-111publ2.htm) was enacted to clarify that a discriminatory compensation decision is considered to have occurred each time compensation is paid, and not just at the time an employer makes an initial discriminatory decision. This act basically

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pay mean that that EPA has failed in its mission? Explain your rationale.

Jakob Helbig/Cultura/Getty Images

Race, sex, and religion are equally protected against discrimination.

extends the statute of limitations for �iling a lawsuit that asserts violation of equal-pay legislation.

Title VII of the Civil Rights Act of 1964

Broad-sweeping legislation against discrimination was created with the Civil Rights Act of 1964 (http://www.eeoc.gov/laws/statutes/titlevii.cfm) . Speci�ically related to employment, Title VII of this act protects individuals against employment practices that discriminate based on race, color, national origin, sex, or religion. Title VII applies to employers with 15 or more employees, employment agencies, labor organizations, and local, state, and federal governments.

This law states that equal employment opportunity cannot be denied any person because of his or her racial group or perceived racial group, race-linked characteristics (e.g., hair texture, color, facial features), or because of marriage to or association with someone of a particular race or color. Title VII also prohibits employment decisions, including compensation practices, based on stereotypes and assumptions about abilities, traits, or the performance of individuals of certain racial groups. Sex and religion are also equally protected against discrimination, and bias against a person’s sex or religion is prohibited from impacting employment decisions. The prohibitions apply regardless of whether the discrimination is directed at Caucasians, African-Americans, Asians, Latinos, Arabs, Native Americans, Native Hawaiians and Paci�ic Islanders, multiracial individuals, or persons of any other race, color, sex, religion, or perceived national origin.

Disparate Treatment and Adverse Impact It is important to note that Title VII of the Civil Rights Act of 1964 covers not only intentional discrimination against protected groups but also accidental discrimination if such discrimination could have been reasonably prevented.

Disparate treatment represents intentional employment discrimination. Evidence of disparate treatment may be direct, such as a policy that women or members of a racial group may not be hired for a given set of jobs. Evidence may also involve a mixed motive, which occurs when a protected characteristic, such as sex, and a legitimate reason, such as a lack of skill sets, are commingled and thus contribute to a denial of hiring or promotion. To make an adequate determination if disparate treatment occurred, four factors are involved:

1. The person is in a protected class, 2. The applicant for a job was quali�ied, 3. Rejection occurred in spite of quali�ications, and 4. The position remained open and recruiting continued in spite of having a quali�ied applicant

available.

Adverse impact occurs when an individual in a protected group is unintentionally discriminated against due to the way employment practices are carried out. An example of this is a company that requires an

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Critical Thinking

Describe the differences between disparate treatment and adverse impact in compensation and bene�its decisions.

Critical Thinking

Do you think the Civil Rights Act of 1964 has been successful in making the workplace free from discrimination? In what ways do you feel it has succeeded? In what ways do you think it has failed?

employee to not have an arrest record. Since an arrest is different than a conviction (innocent until proven guilty!), this practice could be discriminatory if a particular group, such as men or minorities, are more likely to have been arrested. While the company is probably just intending to not hire criminals, because of the way the company is going about this—looking at arrests rather than convictions—unintentional discrimination can occur. Adverse impact focuses on the

effect of the actions taken, rather than underlying motives or intentions.

Age Discrimination in Employment Act (ADEA) of 1967 (as Amended in 1978, 1986, and 1990)

The Age Discrimination in Employment Act of 1967 (http://www.eeoc.gov/laws/statutes/adea.cfm) protects individuals who are 40 years of age or older from employment discrimination based on age. The ADEA’s protections apply to both employees and job applicants. Under the ADEA, it is unlawful to discriminate against a person because of his or her age with respect to any term, condition, or privilege of employment, including hiring, �iring, promotion, layoff, compensation, bene�its, job assignments, and training. It also prohibits mandatory retirement in most sectors.

It is also unlawful to retaliate against an individual for opposing employment practices that discriminate based on age, for �iling an age discrimination charge, and for testifying or participating in any way in an investigation, proceeding, or litigation under the ADEA.

It is important to note that the ADEA does not cover individuals who are younger than 40 years of age.

Older Workers Bene�it Protection Act (OWBPA) of 1990 As a result of the aging of the Baby Boom Generation, the 1990 Older Workers Bene�it Protection Act (http://www.eeoc.gov/eeoc/history/35th/thelaw/owbpa.html) was created as an amendment to the ADEA to provide additional support for older workers. The OWBPA prohibits employers from denying employee bene�its to older workers based on age. The amendment was created to protect older workers who were laid off from receiving unfavorable severance packages in relation to younger workers. It also covers other employee bene�its, such as health insurance, by dictating that employers may not charge older workers more for health care even though illness is more likely with older workers.

Civil Rights Act of 1991

The Civil Rights Act of 1991 (http://www.eeoc.gov/eeoc/history/35th/1990s/civilrights. html) was passed to update and clarify the Civil Rights Act of 1964. Legislators noted that additional federal remedies were required to prevent unlawful harassment and that additional protections against unlawful discrimination were necessary. Additionally, several Supreme Court decisions had weakened the original law, particularly in Wards Cove Packing Co. v.

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Atonio, 490 U.S. 642 (1989), in which the Court determined that the employee, not the employer, held the burden of proof to show which speci�ic practice created adverse impact. The passage of the Civil Rights Act of 1991 reversed this practice, shifting the burden of proof to employers such that they must show that the company practice being challenged is a business necessity. The act also expanded the geographical scope of protection against job discrimination to include American employers and American-controlled companies operating abroad.

Compensation and Bene�its in the Real World: Walmart Stores Inc.

For legal, �inancial, and ethical reasons, it is critical that employers consider both laws and employee perceptions when designing compensation systems. It can be quite costly in terms of money and resources when issues occur.

Walmart can attest to this. In 2010, Walmart paid $11.7 million to settle a sex discrimination case (http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm (http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm) ). The settlement of this case, however, did not end Walmart’s legal issues. For several years, Walmart has been involved in a lawsuit brought by a group of current and former female employees, led by Betty Dukes, that alleges the corporation engaged in company-wide gender discrimination by paying women less than men, promoting fewer women to management positions, and promoting male employees more quickly. In 2011, the Supreme Court of the United States ruled that the employees did not have standing to sue Walmart as a class action (http://www.supremecourt.gov/opinions/10pdf/10-277.pdf (http://www.supremecourt.gov/opinions/10pdf/10-277.pdf) ). The ruling, however, did not rule on individual discrimination claims, so plaintiffs have narrowed the scope of the class and �iled new suits (http://www.tennessean.com/story/news/2015/07/09/ruling-reopens - discrimination-claims-women-walmart/29935131/ (http://www.tennessean.com/story/news/2015/07/09/ruling-reopens-discrimination-claims-women- walmart/29935131/) ).

Walmart continues to �ight legal issues that have had a negative impact on its reputation in the marketplace. Walmart illustrates the critical need to follow both the spirit and the letter of the law when setting compensation and bene�its practices.

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JGI/Jamie Grill/Getty Images

The Pregnancy Discrimination Act of 1978 protects the rights of pregnant women in regard to hiring, leaves of absence, and fringe bene�its.

2.5 Accommodating Disabilities To clarify and make earlier laws related to equity in the workplace more explicit, the Pregnancy Discrimination Act of 1978, the Americans with Disabilities Act of 1990, and the Family and Medical Leave Act of 1993 were passed. These laws provide speci�ic legal requirements and guidelines related to individuals and families to meet the needs of a changing society.

Pregnancy Discrimination Act (PDA) of 1978

The Pregnancy Discrimination Act of 1978 (http://www.eeoc.gov/laws/statutes/pregnancy.cfm) amended Title VII of the Civil Rights Act of 1964 to preclude any form of discrimination toward pregnant women. The act affects employers with 15 or more employees and impacts hiring, leaves of absence due to pregnancy and maternity, and fringe bene�its. With respect to hiring, employers may not refuse to hire any pregnant woman due to her pregnancy, pregnancy- related condition, or the prejudices of others in the workplace.

Special procedures may not be used to determine ability to perform job duties unless the same procedures are used for all employees. Inability to perform a job by a pregnant woman must be treated in

the same manner as afforded any other temporarily disabled employee. A pregnant employee must be permitted to work as long as she is capable of doing so, and an equivalent job must be available when she returns to work, the same as for any employee otherwise on sick or disability leave.

Employer-provided health insurance plans must cover all pregnancy-related expenses and reimbursements on the same basis as any other covered medical expense. Limitations, exclusions, and amounts payable for health-related costs must be equally applied to pregnancy-related conditions (i.e., the company cannot charge more for pregnancy-related medical expenses). Additionally, the same level of health bene�its for spouses of either male or female employees must be provided.

If an employer provides any bene�its to workers on leave, the same bene�its must be provided to those on leave for pregnancy-related conditions. Any bene�its such as vacation accrual, temporary disability bene�its, seniority calculations, and pay increases provided to any employees on leave are required to be provided to pregnant employees.

Americans with Disabilities Act (ADA) of 1990

The Americans with Disabilities Act of 1990 (http://www.ada.gov/) prohibits discrimination against quali�ied individuals with disabilities in job application procedures, hiring, �iring, advancement, compensation, promotions, seniority accrual, job training, and other terms, conditions, and privileges of employment. The ADA covers employers with 15 or more employees and also includes employment agencies, labor organizations, and local and state governments. The ADA’s nondiscrimination standards also apply to federal employees under Section 501 of the Rehabilitation Act.

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Critical Thinking

Do you think employers generally do enough to accommodate disabilities?

Under this act, an individual with a disability is a person who

has a physical or mental impairment that substantially limits one or more major life activities, has a record of such impairment, or is regarded as having such impairment.

It is important to note that if a person is perceived to have a disability but does not actually have one, he or she is still covered under the act.

Family and Medical Leave Act (FMLA) of 1993

The Family and Medical Leave Act (http://www.dol.gov/whd/fmla/) became effective in August 1993 and entitles eligible employees to take up to 12 weeks of unpaid, job-protected leave in a 12-month period for speci�ied family and medical reasons, such as long-term illnesses of the employee or the employee’s immediate family members. FMLA applies to all public agencies, including state, local, and federal employers; local education agencies (schools); and private-sector employers who employ 50 or more employees in 20 or more workweeks in the current or preceding calendar year, including joint employers and successors of covered employers.

When the law was initially signed, many employers did not have well-thought-out policies and practices to deal with its implications, so some employees �igured out how to manipulate the system. For example, the 12-month period was assumed to be a calendar or �iscal year. Therefore, employees would apply for the 12-week leave period at the end of the calendar (or �iscal) year and then reapply for another 12-week leave period at the start of the next calendar (or �iscal) year. Such actions allowed the employee to combine the two periods into a six-month leave of absence. In some cases, of course, this time off was necessary; however, others would take advantage of the company’s lack of effective policy management and receive an extended period of time off.

Companies also found it cost-prohibitive to remove an employee from their group plans (e.g., health insurance) and then reinstate the employee upon his or her return to work. Consequently, companies kept the employee actively enrolled in their plans, paying the expenses for noncontributory employees since there was no other procedure in place.

Once �irms integrated their HR practices with the new law, most developed policies that required employees intending to use FMLA to �irst use any accrued sick or vacation leave before going on FMLA leave. Most, if not all, companies also now have policies in place stating that the leave of absence provided through the FMLA is based on a “rolling year.” That is, once an employee utilizes his or her leave option, the 12-month clock begins again upon the employee’s return to work.

Amendments to the FMLA by the National Defense Authorization Act for FY 2008 (NDAA), Public Law 110- 181, expanded the FMLA to allow eligible employees to take up to 12 weeks of job-protected leave in the applicable 12-month period for any “qualifying exigency” arising out of the fact that a covered military member is on active duty or has been noti�ied of an impending call or order to active duty in support of a contingency operation. The NDAA also amended the

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FMLA to allow eligible employees to take up to 26 weeks of job-protected leave in a “single 12-month period” to care for a covered service member with a serious injury or illness.

It is important to note that leave under FMLA is not required to be paid for by the company. Many employers do continue to pay an employee for at least a portion of the leave, but that is the company’s choice, not mandated by the law. The law just speci�ies that the employee will still have a job when he or she returns after the leave.

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Everett Collection/Superstock

President Franklin Roosevelt signs the Social Security Bill in 1935.

2.6 Nonwage Bene�its The change in the workforce during World War II (that is, the increase in working women due to the men �ighting), along with wage and price controls, spurred a growth in nonmonetary bene�its. Companies had to �ind other ways to attract, motivate, and retain employees since they couldn’t just give raises or pay more due to the wage and price controls in place at the time. Also, the need to maintain a steady production �low in order to meet the demands of war caused companies to offer perks to workers to reduce absenteeism and turnover. For example, the federal government provided on-the-job training and on-site cafeterias, while some private companies, such as Kaiser Steel and Boeing, offered child-care facilities adjacent to their factories. These were key incentives to entice and enable women to successfully enter the workforce at a time when they were greatly needed.

These nonwage bene�its have since become an important part of an employee’s compensation package and account for an increasing percentage of total payroll costs. In the early 1900s, nonwage bene�its accounted for only about 3% of payroll costs—hence, the name “fringe” bene�its, since they were on the edge of basic and common compensation practices—while today, nonwage bene�its can account for over 50% of a company’s payroll costs, with payroll costs composing the largest operating expense for most companies.

Some bene�its—Social Security, unemployment, and worker’s compensation—are required by law. Health insurance is now required by law per the Patient Protection and Affordable Care Act (PPACA) of 2010, but on the level of the individual. Other bene�its are discretionary or not mandated by law. Examples of discretionary bene�its include dental insurance, 401(k) retirement plans, and paid time off for vacation or sick days. (Note: Time is given for qualifying illness under FMLA, as discussed above, but the time off is not required to be paid. The term paid sick days covers the voluntary bene�it of paying an employee when he or she is not working due to a short-term illness such as the �lu.) An important aspect of discretionary bene�its that must be kept in mind is that if a company offers that bene�it, then it falls under any laws that regulate that type of bene�it. For example, if a company offers a 401(k) retirement plan, then the company must adhere to the provisions of the Employee Retirement Income Security Act (ERISA) even though the offering of a 401(k) retirement plan itself is not required.

We’ll begin by discussing the laws related to required bene�its, followed by a discussion of legislation impacting commonly given discretionary bene�its.

Federal Insurance Contributions Act (FICA)

The Federal Insurance Contributions Act (http://www.gpo.gov/fdsys/granule/USCODE-2011- title26/USCODE-2011-title26-subtitleC-chap21/content-detail.html) funds the federal system of old-age, survivors, disability, and hospital insurance (OASDI) as established under the Social Security Act of 1935. Social Security bene�its comprise payments made to workers after they have retired from work as well as payments made in cases of disability where a worker can no longer work and payments made to a

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Critical Thinking

The cost and implementation of Social Security is often a source of political debate. After reading this section, what’s your assessment of how Social Security is implemented in the workplace?

spouse and dependent children in the case of a worker’s death. This is the “old-age, survivors, disability” portion of the act. The hospital insurance portion is �inanced by the Medicare tax.

The system works by requiring payment of a percentage of the employee’s wages, with equal amounts paid by both the employee and the employer. Employee wages are subject to Social Security and Medicare taxes irrespective of the employee’s age or whether he or she is receiving Social Security bene�its under the system. The current tax rate for Social Security is 6.2% for the employee and 6.2% for the employer, or 12.4% total. The current tax rate for Medicare is 1.45% for the employee and 1.45% for the employer, or 2.9% total.

For Social Security, the amount of wages that is taxable is capped at a certain amount ($118,500 as of 2015), but this amount is subject to change. After the limit is reached, the employee and the employer both no longer pay the Social Security tax for that calendar year. In 1993, the Consolidated Omnibus Budget Reconciliation Act (COBRA) (covered below) removed the taxable wage limit for Medicare tax so that all covered wages are subject to a Medicare tax.

The amount of Social Security bene�its a worker receives at retirement varies based on the worker’s

earnings, length of time working, and the age at which the worker begins to collect bene�its. Table 2.2 shows the change in an employee’s full retirement bene�it that will be received if an employee retires and starts to draw Social Security either earlier or later than normal retirement age.

Table 2.2 Social Security bene�it

Year of birth

Reduction in bene�it if retire at age 62

Normal retirement age—full bene�it received

Increase in bene�it if retire at age 70

1924 20.00% 65 15.00%

1925-26 20.00% 65 17.50%

1927-28 20.00% 65 20.00%

1929-30 20.00% 65 22.50%

1931-32 20.00% 65 25.00%

1933-34 20.00% 65 27.50%

1935-36 20.00% 65 30.00%

1937 20.00% 65 32.50%

1938 20.83% 65, 2 mo. 31.42%

1939 21.67% 65, 4 mo. 32.67%

1940 22.50% 65, 6 mo. 31.50%

1941 23.33% 65, 8 mo. 32.50%

1942 24.17% 65, 10 mo. 31.25%

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Year of birth

Reduction in bene�it if retire at age 62

Normal retirement age—full bene�it received

Increase in bene�it if retire at age 70

1943-54 25.00% 66 32.00%

1955 25.83% 66, 2 mo. 30.67%

1956 26.67% 66, 4 mo. 29.33%

1957 27.50% 66, 6 mo. 28.00%

1958 28.33% 66, 8 mo. 26.67%

1959 29.17% 66, 10 mo. 25.33%

1960 and later

30.00% 67 24.00%

Note: Persons born on January 1 of any year should refer to the previous year of birth.

Source: Social Security Administration http://www.ssa.gov/OACT/ProgData/ar_drc.html (http://www.ssa.gov/OACT/ProgData/ar_drc.html)

The amount a dependent or spouse receives at an employee’s death or the amount an employee receives if disabled varies by the level of the employee’s earnings, the length of time the employee has been paying into the system, and other such factors. More information can be obtained from the Social Security Administration (http://www.ssa.gov) , the agency responsible for administering Social Security.

Unemployment Compensation

Unemployment compensation provides workers who have lost their jobs through no fault of their own with monetary payments for a given period of time or until they �ind a new job. The intent of the bene�it is to help workers by partially contributing to necessities, such as food, clothing, and shelter, as a bridge until the workers are able to �ind a new job. Unemployment compensation is paid and administered by the individual states within the parameters set by the federal government. Therefore, the amount of unemployment compensation and the amount of time out of work for which individuals may receive compensation varies by state. In addition, there are some adjustments to the amounts the unemployed may receive. For example, in Louisiana and Illinois, the amount of unemployment compensation received will be adjusted downward if the worker also receives Social Security bene�its.

Unemployment compensation for U.S. workers is funded by the Federal Unemployment Tax Act (FUTA), which is paid by the company, not the employee. The FUTA rate varies by company and is determined by factors such as the size of the company and how many unemployment claims a company’s workers have made. Once the speci�ied dollar limit is reached, no further taxes for FUTA are collected for that calendar year.

Workers’ Compensation Law

Workers’ compensation law was devised to resolve disputes over workplace injuries. It was created to handle workplace injuries outside the traditional tort law system that deals with personal injuries as a compromise between both employer and employee rights and defenses traditionally available under tort law. Workers' compensation is largely a matter of state law, although a similar system exists for railroad employees under the Federal Employer Liability Act (FELA), 45 U.S.C. §51.

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All employees are covered by workers’ compensation insurance, which compensates an employee for lost time, medical expenses, and loss of life or dismemberment arising from a work-related injury, disease, or death. Employees must immediately report any accident or injury to their supervisor and the human resources department so that the necessary paperwork is completed.

Patient Protection and Affordable Care Act (PPACA) of 2010

The Patient Protection and Affordable Care Act (http://www.hhs.gov/healthcare/rights/) , often referred to as the Affordable Care Act (ACA) or more colloquially as Obamacare, enacted major changes to health care insurance practices in the United States. Until this act was signed into law, health insurance was considered a discretionary bene�it driven by the employer’s need to be competitive in the marketplace in attracting and retaining employees as well as in an effort to maintain a healthy and productive workforce. Now, under the act, health insurance is required, but the impetus is on the individual to obtain the insurance. Employers of a suf�icient size and scope to be covered under the law have the choice of offering health insurance or of paying a tax penalty in lieu of offering insurance.

The act also reforms the health care system by expanding the availability of health insurance, regulating health insurance coverage, and restructuring health care delivery, including the manner in which it is funded. Some of the other features of the legislation include the following:

Health care exchanges. The law requires states to create and maintain health care “exchanges” in which health insurance providers compete for customers on equal terms. The exchanges will be open to anyone without employer-provided coverage who wants to purchase a health insurance plan. If a state does not create an exchange, the federal government will create one for it. Low-value plans. No penalty for waiting periods. Employer-provided free-choice vouchers. Automatic enrollment procedure. Incentives for wellness. Tax on high-value plans. Beginning in 2018, there will be a 40% excise tax on insurance companies and plan administrators for group health coverage that exceeds a threshold of $10,200 for single coverage and $27,500 for families, not counting stand-alone dental and vision plans. For retirees above age 55 and for plans that cover employees in high-risk professions, the thresholds are $11,850 for single coverage and $30,950 for families. Work breaks for nursing mothers without �inancial penalties.

It is important to note that legal challenges, delays in enforcement, and lack of clarity have delayed the implementation of many aspects of PPACA. This is very much a law that is in �lux, and its complete impact on health care and employment in general remain to be seen as these issues work themselves out through the courts and through future legislation.

Employee Retirement Income Security Act (ERISA) of 1974

The Employee Retirement Income Security Act of 1974 (http://www.dol.gov/general/topic/health- plans/erisa) regulates retirement plans and other employee bene�it plans that are offered by private-sector organizations. In common usage, ERISA also often refers to Internal Revenue Code regulations of bene�it plans as well as the actual act. The plans covered under ERISA are voluntarily offered by the organization; they are not required by ERISA. If offered, ERISA does dictate the minimum levels of bene�its that are

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required under a plan as well as the reporting and disclosure requirements. Examples of plans covered under ERISA include pension plans, 401(k) plans, and health care savings accounts as well as the establishment of disability bene�its, death bene�its, prepaid legal services, vacation bene�its, company- sponsored day care centers, scholarship funds, and apprenticeship and training bene�its.

ERISA has been expanded to include new health laws—the Consolidated Omnibus Budget Reconciliation Act of 1985 and the Health Insurance Portability and Accountability Act (HIPAA) of 1996—which are discussed below.

Consolidated Omnibus Budget Reconciliation Act of 1985

Throughout their careers, workers will likely face multiple life events that may cause job changes or even job losses. The Consolidated Omnibus Budget Reconciliation Act (http://www.dol.gov/dol/topic/health- plans/cobra.htm) helps workers and their families keep their group health coverage during times such as these. COBRA applies to plans in the private sector and those sponsored by state and local governments.

COBRA provides workers who lose their health bene�its the option to continue group health bene�its provided by their current plan under certain circumstances. If the employer continues to offer a group health plan, the employee and his or her family can retain their group health coverage for up to 18 months by paying group rates. The COBRA premium may be higher (the full cost of the bene�it plus a 2% administration charge) than what the individual was paying while employed. Historically, however, the cost has typically been lower than for private, individual health insurance coverage. It is unclear, however, how more recent legislation, such as the PPACA, will impact pricing and, therefore, the need for COBRA coverage.

The American Recovery and Reinvestment Act (ARRA) of 2009 provided for premium reductions and additional election opportunities for health bene�its under COBRA for a limited time for those workers who lost their jobs between September 1, 2008, and May 31, 2010. The employee received a premium reduction while the company received a tax credit for the remaining portion of the premium.

On June 26, 2013, the U.S. Supreme Court, in United States v. Windsor, found unconstitutional Section 3 of the federal Defense of Marriage Act (DOMA), which had prohibited the federal government from acknowledging marriages between same-sex couples. As a result, federal laws governing employee bene�it plans require companies to treat employees’ same-sex and opposite-sex spouses equally for purposes of bene�its that are extended to spouses, meaning �irms are required to offer COBRA continuation coverage to same-sex spouses.

Health Insurance Portability and Accountability Act of 1996

The Health Insurance Portability and Accountability Act (http://www.dol.gov/ebsa/newsroom/fshipaa.html) helps workers as they move to different jobs by protecting workers’ ability to get and keep health insurance coverage. Key aspects of HIPAA are that it

protects workers and their families by limiting exclusions for preexisting medical conditions (known as preexisting conditions); provides credit against maximum preexisting condition exclusion periods for prior health coverage and a process for providing certi�icates showing periods of prior coverage to a new group health plan or health insurance issuer;

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provides new rights that allow individuals to enroll for health coverage when they lose other health coverage, get married, or add a new dependent (versus having to wait for a company’s annual enrollment period); prohibits discrimination in enrollment and in premiums charged to employees and their dependents based on health status–related factors; guarantees availability of health insurance coverage for small employers and renewability of health insurance coverage for both small and large employers; and preserves the states’ role in regulating health insurance, including the states’ authority to provide greater protections than those available under federal law.

Again, it is unclear how PPACA will impact the need for HIPAA, as it provides more extensive coverage than that offered under HIPAA.

Case Study

A Moat for Your Castle Inc.: Growing Pains

Alex Lloyd and Rebecca Lee are lifelong friends who graduated from college and moved back home to El Paso, Texas, 10 years ago to start a business—A Moat for Your Castle Inc.—building wood, vinyl, and metal fences for residences. The business started small, with just the two of them handling all aspects of the business except for the actual installation of the fences, which was done with the assistance of day laborers. As business grew, they added support staff as well as permanent installers to the company’s payroll. Three years ago, they expanded into the pool business and began offering the installation of pools in addition to fences for residences. They have been successful with this new venture and have now hired their 20th employee.

What laws covered in this chapter now apply to A Moat for Your Castle Inc. that did not apply before it hired its 20th employee? What laws already applied? How many employees must be hired before FMLA is applicable? At this stage, should the company handle compliance in-house or outsource it? Why?

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Summary & Resources

Summary In this chapter, we discussed federal laws that impact reward systems offered by organizations. Most of the laws that in�luence compensation and bene�its systems today have their origins in the 1930s, when the country suffered economic devastation due to the Great Depression. These are a few of the most impactful laws generated from that period:

The National Labor Relations (Wagner) Act continued the mission of reforming and regulating labor relations. Unions acquired fundamental rights and powers, including the right of collective bargaining, de�initions of unfair labor practices, and established penalties for violating them. The Social Security Act was created to establish bene�its for the elderly and the unemployed. It also enabled states to provide for those who were blind, dependent and disabled children, mothers and children, and public health. The Fair Labor Standards Act established the concepts of a minimum wage, overtime pay, record keeping, and child-labor standards.

It was not until 1963, when the Equal Pay Act was passed and signed into law, that gender-based discrimination was prohibited and, within the same establishment, men and women were to be given equal pay for equal work. Title VII of the Civil Rights Act of 1964 protects individuals against employment discrimination on the basis of race, color, national origin, sex, or religion. The Age Discrimination in Employment Act protects individuals who are 40 years of age or older from employment discrimination based on age.

The Civil Rights Act of 1991 was enacted to strengthen and improve federal civil rights laws and to clarify provisions regarding adverse impact actions. The Pregnancy Discrimination Act amended Title VII of the Civil Rights Act of 1964 to preclude any form of discrimination toward pregnant women. The Americans with Disabilities Act prohibits private employers, state and local governments, employment agencies, and labor unions from discriminating against quali�ied individuals with disabilities.

Worker’s compensation law was devised to resolve disputes over workplace injuries outside the traditional tort law system and represents a compromise between both employer and employee rights and defenses traditionally available under tort law. Unemployment compensation represents insurance bene�its paid by the state or federal government to individuals who are involuntarily out of work in order to provide them with assistance while obtaining other employment by partially contributing to necessities, such as food, clothing, and shelter.

More recently, the Patient Protection and Affordable Care Act reformed the health care system by expanding the availability of health insurance, regulating health insurance coverage, and restructuring health care delivery, including the manner in which it is funded. The future impact of the PPACA is still not clear due to ongoing legal and legislative issues.

Key Terms

adverse impact Occurs when an individual in a protected group is unintentionally discriminated against due to the way employment practices are carried out.

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collective bargaining Good-faith negotiations between an employer and a group of employees aimed at reaching agreements related to employment issues, such as wages, hours, and working conditions.

disparate treatment Occurs when an employer knowingly and willingly discriminates against people on the basis of religious beliefs, race, or gender.

Great Depression A severe worldwide economic depression in the decade preceding World War II.

mixed motive Occurs when a protected characteristic, such as gender, and a legitimate reason, such as a lack of skill sets, are commingled and thus contribute to a denial of hiring or promotion.

Social Security bene�its Comprises payments made to workers after they have retired from work as well as payments made in cases of disability where a worker can no longer work and payments made to a spouse and dependent children in the case of a worker’s death.

unemployment compensation Provides workers who have lost their jobs through no fault of their own with monetary payments for a given period of time or until they �ind a new job.

unfair labor practices Tactics used by employers to prevent employees from joining unions and to disrupt union activities in the workplace. (The Taft-Hartley Act of 1947 amended the de�inition to also include tactics used by labor unions, such as coercing employees to join a union and refusing to bargain with employers, to disrupt company activities.)

workers’ compensation insurance Compensates an employee for lost time, medical expenses, and loss of life or dismemberment arising from a work-related injury, disease, or death.