CHAPTER SEVENTEEN
GOVERNMENT AND LEGAL ISSUES IN
COMPENSATION
Overview
The last part of the total pay model is management. This means ensuring the right people get
the right pay for achieving the right objectives in the right way. While the text has touched on
issues of management, several issues remain. First, noted in Chapter 16, is the significant role
government plays in managing compensation. Legal issues in compensation in the U.S. are
covered in Chapter 17. Chapter 18 covers several aspects of managing compensation: costs
and added value, communication, and change.
Governments around the world play varying roles in the workplace. Legislation in any society
reflects people’s expectations about the role of government, with laws and regulations being
the most obvious government intervention. Beyond direct regulation, government affects
compensation in other ways. As a major employer, as a consumer of goods and services, and
through its fiscal and monetary policies, government affects the supply of and demand for
labor. The objective in this chapter is to help you become more familiar with the legal and
regulatory framework of compensation. Compliance will require legal advice.
This chapter begins by examining the role of government in the employment relationship.
Next, the chapter examines key U.S. laws affecting compensation issues. In the U.S.,
legislation has reflected the changing nature of work and the work force. In the 1930s,
legislation was concerned with correcting the harsh conditions and arbitrary treatment facing
employees. In the 1960s, legislation turned to the issue of equal rights. Laws affecting wages
are addressed first; these include the Fair Labor Standards Act of 1938 and prevailing-wage
laws. Since society continues to wrestle with the issue of discrimination, the next section of the
chapter examines issues associated with pay discrimination and the significant laws governing
this area. Pay discrimination laws—the Equal Pay Act of 1963, Title VII of the Civil Rights Act
of 1964, and the Civil Rights Act of 1991—require special attention for several reasons. First,
these laws regulate the design and administration of pay systems. Second, the definition of pay
discrimination and the approaches used to defend pay practices are in a state of flux. The issues
associated with pay differences for dissimilar jobs are discussed next. The chapter concludes
with a discussion of the continuing earnings gap between men and women and among racial
groups and issues related to the concept of comparable worth.
Learning Objectives
Understand the role of government in the employment relationship including the Fair
Labor Standards Act of 1938, living wage and the importance of taking a proactive
approach to compliance.
Distinguish between an employee and an independent contractor and discuss prevailing
wage laws, including antitrust laws.
Identify pay discrimination and discuss the outcome of The Equal Pay Act and Title VII
of the Civil Rights Act of 1964, including Executive Order 11246 and other pay
discrimination issues.
Discuss the earnings gap, including sources of the earnings gap, differences in both
occupations and industries, the presence of discrimination and global issues concerning
pay discrimination
Lecture Outline: Overview of Major Topics
I. Government as Part of the Employment Relationship
II. Fair Labor Standards Act of 1938
III. Living Wage
IV. Employee or Independent Contractor?
V. Prevailing Wage Laws
VI. Antitrust Issues
VII. Pay Discrimination: What Is It?
VIII. The Equal Pay Act
IX. Title VII of the Civil Rights Act of 1964 and Related Laws
X. Executive Order 11246
XI. Pay Discrimination and Dissimilar Jobs
XII. Earnings Gaps
XIII. Compliance: A Proactive Approach
XIV. Your Turn: From Barista to Manager
XV. Still Your Turn: “I Was Gaga’s Slave”
Lecture Notes: Summary of Key Chapter Points
The presumption that people should be paid different wages based on “general sociological
factors” was still evident in the United States in the 1960s. The 1960s civil rights movement
and subsequent legislation were intended to end such practices.
Historical practices and subsequent legislation still affect pay decisions. However, legislation
does not always achieve what it intends nor intend what it achieves. Consequently, compliance
and fairness are continuing compensation objectives.
In democratic societies, the legislative process begins when a problem is identified and
corrective legislation is proposed. If enough support develops, often as a result of compromises
and tradeoffs, the proposed legislation becomes law. Employers, along with other stakeholders,
attempt to influence the form any legislation will take.
Once passed, laws are enforced by agencies through:
Rulings
Regulations
Inspections
Investigations
Companies respond to legislation by auditing and perhaps:
Altering their practices
Defending their practices before courts and agencies
Lobbying for still further legislative change
The laws and regulations issued by governmental agencies created to enforce the laws are a
significant influence on compensation decisions throughout the world.
In the United States, there are three branches of federal government and each plays a role in
the legal and regulatory framework in which employers work toward compliance objectives.
The legislative branch (Congress) passes laws (or statutes).
The executive branch, headed by the President, enforces laws through agencies and its
other bodies (e.g., the Department of Labor).
The judicial branch interprets laws and considers their constitutionality.
Over time, the legislative branch may change existing laws or pass new ones. The way that the
judicial branch interprets laws can also change. Finally, enforcement priorities and intensity
can vary from one presidential administration to the next. Compliance efforts by employers
must take that fact into account.
The regulatory environment is also a function of state and local laws, which often cover
employers not covered by federal laws and/or include requirements that go beyond federal
laws.
For example, Title VII of the (federal) Civil Rights Act, which prohibits employment
(including pay) discrimination on the basis of race, color, religion, sex, or national origin,
covers employers with 15 or more employees.
Under the Wisconsin Fair Employment Act, all employers are covered and discrimination
on the basis of some characteristics (e.g., sexual orientation) not included in Title VII is
prohibited.
Compliance issues fall into two corresponding areas:
oEmployment discrimination (especially Title VII of the Civil Rights Act), and
oWage and hour (especially the Fair Labor Standards Act, FLSA)
Government agencies fine corporations for non-compliance or directly sued by
employees with class action suits being the most costly.
I. Government as Part of the Employment Relationship
People differ in their view of what role government should play in the
contemporary workplace.
oSome call for organizations and the government to act in concert to carry out a
public policy that protects the interests of employees.
oOthers believe that the best opportunities for employees are created by the
constant change and reconfiguring that is inherent in market-based economies; the
economy ought to be allowed to adapt and transform, undistorted by government
actions.
All countries throughout the world must address these issues.
oHowever, different countries and cultures have different perspectives.
Governments’ usual interests in compensation decisions are whether:
oProcedures for determining pay are fair (e.g., pay discrimination)
oSafety nets for the unemployed and disadvantaged are sufficient (e.g.,
unemployment compensation, workers compensation)
oEmployees are protected from exploitation (e.g., overtime pay, minimum wage,
child labor restrictions)
Consequently, company pay practices set the context for national debates on:
oMinimum wage
oHealth care
oSecurity and portability of pensions
oImmigration
oQuality of public education
oAvailability of training
In addition to being a party to all employment relationships, government units
are also employers and purchasers.
oConsequently, government decisions also affect conditions in the labor market.
A. Demand
The U.S. federal government employs 2.73 million people; state and
local governments employ many times that. Overall, government employment
is 16 percent of the U.S. labor force.
In addition to being a big employer, government also indirectly affects
labor demand through its purchases as well as its financial policy decisions.
B. Supply
In addition to being an employer, government affects labor supply
through legislation. Laws aimed at protecting specific groups also tend to
restrict those groups’ participation in the labor market.
Licensing requirements for certain occupations (e.g., plumbers,
cosmetologists, psychologists) restrict the number of people who can legally
offer a service.
Immigration policy and how rigorously it is enforced is an increasingly
important factor in labor supply.
Exhibit 17.2 provides an overview of the regulatory framework,
especially as it applies to wages and salaries and other forms of direct pay.
An early emphasis was basic protection: Child labor was prohibited and
overtime wage provisions were specified in the Fair Labor Standards Act.
oHowever, the main thrust of legislation shifted in the 1960s to emphasize
civil rights. More recently, legislation has dealt with issues in the changing
contemporary workplace.
II. Fair Labor Standards Act of 1938
The Fair Labor Standards Act of 1938 (FLSA) covers all employees (with
some exceptions) of companies engaged in interstate commerce or in the production
of goods for interstate commerce. The FLSA’s major provisions are:
oMinimum wage
oHours of work
oChild labor
An additional provision requires that records be kept of employees, their hours
worked, and their pay.
A. Minimum Wage
Minimum-wage legislation is intended to provide an income floor for
workers in society’s least productive jobs.
When first enacted in 1938, the minimum wage was 25 cents an hour. It
has been raised periodically; in 2009, it was raised to $7.25.
Forty-five states plus the District of Columbia have their own minimum
wages to cover jobs omitted from federal legislation. If state and federal laws
cover the same job, the higher rate prevails.
Several states have minimums higher than the federal rate, with
Washington being the highest at $9.47.
Exhibit 17.4 shows the purchasing power of the federal minimum wage
over time, adjusted for inflation.
Estimates from the U.S. Bureau of Labor Statistics indicate that
approximately 3.3 million U.S. workers are paid at or below the minimum
wage.
oThe majority (2.1 million) of those earning minimum wage or less are in
service occupations, mostly food service, where tips supplement hourly
wages for many workers.
oThe proportion of hourly-paid workers earning minimum wage or less has
trended downward since 1979 when data first began to be collected
systematically.
oIn 1979, 13.4 percent of hourly workers (7.7 percent of men and 20.2
percent of women) earned at or below minimum. More recently, the
figures are 4.3 percent of hourly workers (3.3 percent of men and 5.4
percent of women).
Changes to the federal minimum wage have direct effects (on workers
having a current wage between any state minimum wage and the federal
minimum wage).
oThere are also indirect, spillover effects because as legislation forces pay
rates at the lowest end of the scale to move up, pay rates above the
minimum often increase in order to maintain differentials.
oThis shift in pay structure does not affect all industries equally.
The lowest rates paid in the software, chemical, oil, and
pharmaceutical industries are already well above minimum; any
legislative change has little direct impact on them.
In contrast, retailing and hospitality firms tend to pay at or near
minimum wage to many clerks, sales persons, and cleaning people.
Why would anyone be opposed to a mandated minimum wage or
making increases to it?
oThe concern is that the resulting higher labor costs for affected firms may
lead them to decrease their demand for workers and/or their hours worked.
In other words, a higher minimum wage, which is intended to help low
wage workers, runs the risk of reducing employment opportunities for
these very workers it is intended to help.
oAnother consideration in evaluating minimum wage law effectiveness is
whether wage gains go primarily to workers from low income families
rather than going to workers from families with higher incomes.
Employers certainly have a stake in minimum wage public policy and
thus may seek to influence it over time. In the shorter run, employers must be
in compliance and will need to consider how changes to the minimum wage
will affect their labor costs, to what degree they can pass the higher costs on to
customers, and to what degree they will need to take some other action to
control or offset higher labor costs.
B. Overtime and Hours of Work
The overtime provision of the FLSA requires payment at one-and-a-half
times the standard for working more than 40 hours per week.
oThe law’s objective is to share available work by making the hiring of
additional workers a less costly option than the scheduling of overtime for
current employees.
However, the conditions that inspired the legislation have changed since
the law was passed. Contemporary employers face:
oAn increasingly skilled workforce with higher training costs per employee
oHigher benefits costs, the bulk of which are fixed per employee
These factors have lowered the break-even point at which it pays
employers to schedule longer hours and pay the overtime premium, rather
than hire, train, and pay benefits for more employees.
Exemptions
oThe Wage and Hour Division of the Department of Labor, which is
charged with enforcement of the FLSA, provides strict criteria that must
be met in order for jobs to be exempt from minimum-wage and overtime
provisions. These are summarized in Exhibit 17.6.
President Obama issued an executive order instructing the
Secretary of Labor to “update and modernize” the overtime exemption
rules of the FLSA. Those new regulations should be in effect.
oUnscrupulous employers sometimes try to get around the overtime
requirement by classifying employees as executives, even though the work
of these “executives” differs only slightly from that of their co-workers.
However, in the eyes of the Department of Labor, the job title is
not relevant. Rather, it is the actual nature of the work that matters.
oAnother challenge in compliance is that “in an evolving, always-on
workplace where employees routinely put in extra hours and shoot off
e-mails late at night from mobile devices, when the workday begins and
ends has become an issue for employers.”
oThe impact of FLSA and other laws depend importantly on the degree to
which they are enforced.
A Government Accountability Office (GAO) report found that
the Labor Department’s Wage and Hour Division “mishandled” 9 of
10 cases brought by GAO undercover agents posing as workers who
had experienced FLSA violations.
oIn Japan, unpaid overtime is a major issue.
The Japanese Trade Union Confederation reports that two-thirds
of men work more than 20 hours of unpaid overtime each month.
Some large companies have introduced “no overtime” days on
which employees are to leave at 5:30 p.m.
However, the concern is that many employees just take the work
home, which is referred to as furoshiki, or “cloaked overtime.”
“Death by overwork” (karoshi) has resulted in lawsuits against
companies in Japan.
What Time Is Covered?
oOccupational Safety and Health Administration legislation specifies the
number of breaks that must be provided in an 8-hour workday.
oThe Portal-to-Portal Act provides that time spent on activities before
beginning the “principal activity” is generally not compensable.
The law is also relevant to “on-call employees” who must be
available to respond outside the usual workday.
In general, if employees can use this “on-call” time for their own
purposes, there is no legal requirement to pay employees for such
time, even if they are required to carry a beeper or must let their
employer know where they can be reached.
However, if they are required to stay on the employer’s premises
while on call, then they must be compensated for that time.
Sometimes, a flat rate is paid for the added inconvenience of
being on call. These payments must be included when computing
overtime pay.
What Income Is Covered?
oAs more employees became eligible for bonuses, there was an argument
over whether bonus, gain-sharing, and stock option payments needed to be
included for calculating overtime pay.
A 1999 advisory from the Wage and Hour Division said they did.
But the extra bookkeeping and calculations provided enough of a
burden that employers simply did not offer these forms of pay to
nonexempt employees.
oThe Worker Economic Opportunity Act, a 2000 amendment to FLSA,
allows stock options and bonuses to be exempt from inclusion in overtime
pay calculations.
Compensatory Time Off
oFederal legislation has been proposed (but not yet passed) that would give
employees and employers the option of trading overtime pay for time off.
Rather than being paid overtime after 8 hours for a 10-hour
workday, an employee would have the option of taking 2 or more
hours off at another time.
Or, a 50-hour workweek could be banked against a future
30-hour workweek.
oThe employee would get more scheduling flexibility to attend to personal
matters, and the employer would save money.
C. Child Labor
Generally, persons under 18 cannot work in hazardous jobs such as meat
packing and logging; persons under 16 cannot be employed in jobs involving
interstate commerce except for nonhazardous work for a parent or guardian.
oAdditional exceptions and limitations also exist.
The union movement in the U.S. has taken a leading role in publicizing
the extent of the use of child labor outside the U.S. to produce goods destined
for U.S. consumers.
Government guidelines help importers monitor the employment
practices of subcontractors producing goods for the U.S. market.
A recent International Labor Organization report finds that globally,
child labor is declining, particularly in Latin America.
oBrazil and Mexico, where half the children in Latin America live, have
made the greatest strides, which the study attributed to increased political
will, awareness, poverty reduction, and education.
The steepest declines were among children 14 and younger, and
among hazardous occupations.
oThe highest rates of child labor are in sub-Saharan Africa, where high
population growth, grinding poverty, and the HIV/AIDS epidemic have
left a lot of families in need of the income that children can provide.