The document discusses government and legal issues related to compensation. It covers several key acts like the Fair Labor Standards Act of 1938 which established minimum wage, overtime pay, record-keeping, and prohibitions on child labor. It also discusses other legislation around equal pay, discrimination, prevailing wages, and living wages. Challenges around compliance, estimating discrimination, and reducing earnings gaps are also summarized.

1. Compensation
Chapter 17
Government and Legal Issues in
Compensation
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Introduction
Historical practices and subsequent legislation affect pay.
• Compliance and fairness are continuing compensation objectives.
In the U.S., three branches of federal government play a role in
the legal and regulatory framework of compliance.
• The legislative branch passes laws.
• The executive branch enforces laws.
• The judicial branch interprets laws.
There are also state and local laws.
Compliance issues fall into two areas:
• Employment discrimination and wage and hour issues.

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Government as Part of the Employment Relationship
People differ in their view of what role government should play
in the workplace.
• All countries in the world must address these issues.
These are government’s usual interests in compensation.
• Procedures for determining pay are fair (pay discrimination).
• Safety nets for unemployed and disadvantaged are sufficient.
• Employees are protected from exploitation.
Governments are also employers and purchasers.
• In addition, they influence economic policy and affect labor supply.

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Fair Labor Standards Act of 1938 (FLSA)
FLSA’s major provisions.
• Minimum wage.
• Hours of work, including overtime.
• Child labor.
In addition, FLSA requires that records be kept of employees,
their hours worked, and their pay.
• Employers have paid billions of dollars resulting from FLSA lawsuits
and enforcement activity by the DOL Wage and Hour Division.

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Exhibit 17.3: FLSA Wage and Hour Settlements,
2007 to 2015, by Type of Claim

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Minimum Wage
Minimum-wage legislation is intended to provide an income
floor for worker’s in society’s least productive jobs.
• Enacted in 1938 at a rate of 25 cents per hour, now at $7.25.
• The decline of purchasing power allows some to argue the minimum
wage should be changed to reflect the consumer price index.
2.2 million workers are estimated to be paid at minimum wage.
Changes create direct effects and indirect, spillover effects.
• Some states set their own minimum wage.
Opposition to minimum wage argue it cause higher labor costs.
• Law effectiveness is also questioned.
• Employers try to influence the rate but must comply.

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Exhibit 17.4: Nominal and Real (Inflation-Adjusted)
Value of the Minimum Wage, by Year

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Overtime and Hours of Work
FLSA requires time-and-a-half for over 40 hours per week.
• Meant to share available work but times have changed.
• Skilled workforce means higher training costs per employee.
• Higher benefits costs, the bulk of which are fixed per employee.
• State laws sometimes go beyond FLSA.
Some employees are exempt and must make at least $455/week.
• Employers may bypass the law by classifying workers as “executives.”
• Another challenge is the expectation of availability after work hours.
The impact of FLSA depends on the degree of enforcement.

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Overtime and Hours of Work – Factors
What time is covered?
• OSHA specifies the number of breaks to provide in an 8-hour workday.
• The Portal-to-Portal Act provides that time spent on activities before
beginning the “principal activity” is not compensable.
What income is covered?
• The Worker Economic Opportunity Act allows stock options and
bonuses to be exempt from inclusion in overtime pay calculations.
Compensatory time off.
• There is proposed legislation to allow trading overtime pay for time off.
• Employee has scheduling flexibility and the employer saves money.

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Child Labor and FLSA
Persons under 18 cannot work in hazardous jobs.
• Those under 16 cannot be involved in interstate commerce.
• Unless working for a parent or guardian.
• Other exceptions and limitations exist.
Unions publicize the use of child labor outside the U.S.
• Government guidelines help importers monitor their subcontractors.
A recent labor study found child labor is declining globally.
• The steepest decline was those younger than 14 in hazardous
conditions.

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Living Wage
A “living wage” at local levels provides a minimum wage tailored
to living costs in an area.
• It may only cover city employees or those who do business with the city.
• It may only cover base wages, but may require health insurance,
vacations, sick pay, job security, and incentives to unionize.
Maryland was the first to adopt this ordinance, in 2009.
• A Los Angeles law covers contractors and subcontractors with city
agreements.
Increasingly popular – supported by churches and unions.
• Due to narrow tailoring, their real intention may be to reduce any cost
savings from outsourcing.
• Reduced outsourcing means more local jobs.

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Employee or Independent Contractor?
Employers must pay Social Security, unemployment, and
workers’ compensation taxes on wages and salaries.
• However, employers are not so obliged for independent contractors.
• Independent contractors do not typically receive other benefits.
Classification requires careful attention to compliance issues.
• Both the IRS and ERISA are relevant.
Two general criteria involve behavioral and financial control.
• The more control the firm has, the more likely the IRS considers the
person an employee.
• The IRS also considers the relationship, including permanence.

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Prevailing Wage Laws
Prevailing wage laws set pay for work done to produce goods
and services contracted by the federal government.
• Prevents contractors from using their size to drive down wages.
The law was passed in response to conditions on projects such as
construction of the Hoover Dam during the Depression.
• To comply, contractors must determine the “going rate” for
construction labor in the area – the union rate is the “going rate.”
• It distorts market wages and drives up cost of government projects.
New laws extend prevailing-wage coverage to immigrants
working in the U.S. under special provisions.
• But much of the legislation was passed in the 1930s and 1940s.
• Along with The Equal Pay Act and the Civil Rights Act of the 1960s.

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Antitrust Issues
Chapter 8 included information on avoiding antitrust concerns.
• Apple, Google, Intel, and Adobe agreed not to poach each others
employees.
• Employees argue this resulted in lost pay.
• The two sides settled for $435 million in back pay and legal fees.
• A similar case concerning Animation Workers resulted in settlements
totaling $168.95 million involving Lucusfilm, Disney, and DreamWorks.

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Pay Discrimination: What Is It?
The law recognizes two types of discrimination.
• Access discrimination – the denial of jobs, promotions, or training
opportunities to qualified women or minorities.
• Valuation discrimination – looks at the pay women and minorities
receive for the jobs they perform.
• Hinges on the standard of equal pay for equal work.
• Many believe it should include comparable worth.
• The standard should be equal pay for work of comparable worth.
• Also called pay equality or gender equality.
• Existing federal laws do not support this standard.
• Several states have enacted laws that require comparable-worth standards for
state and local government employees.

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The Equal Pay Act
The Equal Pay Act (EPA) of 1963, part of FLSA, forbids wage
discrimination on the basis of gender for equal work.
• Jobs are equal if they require equal skill, effort, and responsibility and
are performed under similar working conditions.
Differences in pay are legal if differences are based on any of
four criteria, called an affirmative defense.
• Seniority.
• Merit or quality of performance.
• Quality or quantity of production.
• Some factor other than sex.

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The Equal Pay Act – Definitions
Definition of equal – Schultz v. Wheaton Glass, 1970.
• There were two job classifications for the same job – male and female.
• The female job paid 10% less than the male job.
• The court ruled jobs need only be substantially equal, not identical.
• The actual work performed must be used to decide job equality.
Definition of skill, effort, responsibility, working conditions.
• Skill – experience, training, education, and ability as measured by the
performance requirements of a particular job.
• Effort – mental or physical – the degree, not type, expended on the job.
• Responsibility – degree of accountability required of the job.
• Working conditions – the physical surroundings and hazards of the job.

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The Equal Pay Act – Other Factors
Factors other than sex include the following.
• Shift differentials.
• Temporary assignments
• Bona fide training programs.
• Differences based on ability, training, or experience.
• Other reasons of “business necessity.”
“Reverse” discrimination when adjusting women’s pay.
• Viewed collectively, the courts have provided reasonable
interpretations of the Equal Pay Act.
• However, 58% of all women are in jobs not equal to jobs of men.
• So, they are not covered by the Equal Pay Act.

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Title VII of the Civil Rights Act and Related Laws
Title VII prohibits discrimination on the basis of sex, race, color,
religion, or national origin in any employment condition.
• Including hiring, firing, promotion, transfer, compensation, and training.
• The Age Discrimination in Employment Act (ADEA) and the Americans
with Disabilities Act (ADA) prohibit discrimination.
Title VII cases typically focus on differences in pay, promotions,
pay raises, and performance reviews.
• Settlements are the result of costly class action lawsuits.
• A key issue is the definition of the class.
The Lilly Ledbetter Fair Pay Act increased compliance challenges.
• Discrimination occurs, starting a new statute of limitations, each time a
discriminatory paycheck is issued.

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Title VII Discrimination Behavior Theories
Disparate Treatment
Applies different standards to
different employees.
• Asking women but not men if
they plan to have children.
Unequal treatment may prove
intention to discriminate.
If a woman must have higher
performance to be promoted,
that is disparate treatment.
Disparate Impact
Practices having a differential
effect are illegal.
• Unless work-related
differences.
• Griggs v. Duke Power Co.
Intent to discriminate is
irrelevant.
• Employer’s must demonstrate
a personnel decision is work-
related.

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Executive Order 11246
Requires government contractors to file affirmative action plans.
• Utilizing analysis comparing their workers to available external workers.
• Goals and timetables for achieving affirmative action.
• Action steps for achieving goals and timetables.
Compliance steps as it applies to compensation.
• Select contractors based on the Federal Contractor Selection System.
• Perform a desk audit and get compliance data within 30 days.
• If found in compliance, they receive a closure letter.
New standards, Directive 307, provides more “flexibility.”
To protect compliance, do not discriminate and collect and
analyze data to document that you do not discriminate.

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Pay Discrimination and Dissimilar Jobs
Pay differences for dissimilar jobs may reflect discrimination.
• The courts continue to uphold use of market data to justify pay
differences for different jobs.
• Spaulding v. University of Washington developed the argument in detail.
• A second approach to determining pay discrimination on dissimilar
jobs hinges on finding a standard to compare the value of jobs.
• It must permit jobs with dissimilar content to be declared equal.
• It must permit pay differences for dissimilar jobs that are not comparable.
Job evaluation has become that standard.
• If an employer’s own job evaluation study shows that jobs of dissimilar
content are of equal value, isn’t unequal pay proof of discrimination?
• Comparable worth proponents lobby for new laws or voluntary
compliance of comparable worth standards.

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The Mechanics of a Comparable-Worth Plan
Adopt a single “gender neutral” point job evaluation plan for all
jobs within a unit.
• The key is a single job evaluation plan for dissimilar job content.
All jobs with equal job evaluation results should be paid the same.
• If total points are equal, wage rates must also be equal.
Identify the percent of male/female employees in each job group.
• A group of positions with similar duties, requiring similar qualifications,
filled by similar recruiting practices, and paid under the same schedule.
The wage-to-job evaluation point ratio should be based on the
wages paid for male-dominated jobs.

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Union Developments and Comparable-Worth
Union support is related to its effect on union membership.
• AFSCME and CWA support comparable worth.
• The public sector faces little competition and can better absorb a
wage increase.
• Unions in industries facing stiff international competition are reluctant
to support comparable worth.
“Equity adjustments” are a separate budget item and do not
appear at the expense of pay increases for all union members.
• Collective bargaining has produced more comparable worth pay
increases than any other approach.

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Exhibit 17.10: Job Evaluation Points and Salary

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Earnings Gaps
Women’s median annual earnings compared to men’s has
changed from 60.2% to 80.5% from 1980 to 2016.
• The wage gap varies according to wage level, being larger at very high
or very low wages.
Asian men’s earnings have risen over time to now be 25% higher
than those of white men.
• Black to white men’s earnings varied from 68% to 79% and the ratio of
Hispanic to white men’s earnings varied from 55% to 72%.
• There is a similar pattern with Asian women having higher earnings.
• The gap between black and white women is less than the men’s gap.

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Exhibit 17.14: Sources of Earnings Gaps

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Differences in Occupations and Qualifications
Women of all ethnic groups are more likely than men to seek
part-time, flexible work and to interrupt careers for family.
• Today, the number of women in managerial jobs is at parity with men.
One notable concern remains: the “Glass Ceiling.”
• This is the lack of representation of women in executive and director
level positions in organizations.
• Increased levels of attainment does not mean the wage gap closes.
A small wage gap among young workers increases as they age.
• Pay differences set in place ages ago still influence today’s pay.
Level of schooling and work experience are primary sources of
pay gaps among both black and Hispanic men and women.

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Differences in Industries and Firms
A study revealed large differences between men and women
lawyers in the types of firms that employed them.
• Men are more likely in private practice or at large firms and less likely
to be in the lower-paying nonprofit sector.
Differences in compensation policies within industries accounts
for some earnings gaps.
• Unknown is if some firms attract women or minorities due to pay-mix.
Differences in policies may even exist within a firm and the size
of a firm is related to differences in wages.
• Female employment is concentrated in small firms.
When differences steer women and minorities into lower-paying
parts of a profession, they may reflect discrimination.

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Challenges in Estimating Discrimination
Disagreement remains over what constitutes discrimination.
• A statistical approach is to try to relate pay differences to the factors
of occupation, type of work, experience, education, etc.
• Statistical studies are not sufficient evidence of discrimination.
Even if legitimate factors fully explain pay gaps, discrimination
still could have occurred.
• The factors themselves may be tainted by discrimination.
• Measurable factors may underestimate the effects of pay
discrimination.
Statistical analysis needs to be treated as a pattern of evidence
and needs to reflect the wage behaviors of specific firms.

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Gaps are Global
The gender wage gap is fairly universal though in many countries
the size of the gap is smaller than in the U.S.
• European countries have a narrower pay structure.
Negotiated rates through federations, unions, and government
agencies produces a narrower range of pay rates for each job.
• And smaller differences between jobs.
Multinational companies face wide differences in how wages are
influenced by varying social policies and regulations.

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Compliance: A Proactive Approach
Compliance with laws and regulations can be a constraint and/or
an opportunity for a compensation manager.
• A proactive compensation manager can influence the nature of
regulations and their interpretation.
A compensation manager can do the following to be proactive.
• Join professional associations to stay informed on emerging issues.
• And to act in concert to inform and influence legislative opinion.
• Constantly review compensation practices and their results.
• Consult with legal counsel in doing so.
The fair treatment of all employees is the goal of a good pay
system, the same goal of legislation.

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End of Chapter 17.