Chapter
17
Government and
Legal Issues in
Compensation
Fair Labor Standards Act (FLSA)
of 1938

“Independent Contractor” exclusion

“Drivers Deliver Trouble to FedEx by Seeking Employee
Benefits”

In reviewing classification re: independent contractor vs.
employee, regulators likely to consider worker to be Ee if

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s/he works set hours
is required to follow instructions on how to do job
receives training from Er
works on Er’s premises
Estimated that 38% of Ers examined by IRS have misclassified
workers as independent contractors
 Source: Wall Street Journal, 1/7/05
“The Ground War at FedEx”



Suits over independent contractor status have bedeviled Cos since
Microsoft lost suit over issue in 2000 and sharply curbed use of
contractors
In October 2005, CA judge ruled that among ground drivers who had
filed class action there, those who drive single routes should be
classified as Ees
Ground drivers also recently succeeded in consolidating class
actions pending in 23 other states into single case in IN federal court

Co maintains that such drivers aren’t Ees because they don’t have specific
start times, can buy and sell own routes and trucks, and can hire and fire
ees

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~20% of ground drivers manage multiple routes
Use of independent contractors (who can’t form U) has helped FedEx to
avoid labor disputes, such as 1997 Teamster strike at UPS
“The Ground War at FedEx”

Outside consultant estimates that use of lower-cost
contract drivers enables FedEx Ground to deliver
packages for average cost of $5.82 apiece, cf. $7.17
average for UPS to deliver both air and ground
packages over its integrated network

Cost differential has helped FedEx Ground’s market share to
increase from 13% to 18% since 2000, while UPS’s share has
declined to 74%
 Source: Business Week, 11/28/05

IRS ruled against FedEx in December 2007, finding
drivers to be employees rather than independent
contractors, assessed $319m in back taxes and fines
 Source: Wall Street Journal, 12/22/07
Fair Labor Standards Act (FLSA)
of 1938

Minimum Wage Provision

Legislated increases

Federal minimum wage increased from $5.15/hr to $5.85/hr
in July 2007, $6.55/hr in July 2008, $7.25/hr in July 2009
 States may also have minimum wage laws


Child Labor Provision
Overtime Pay Provision

Exempt/Nonexempt
Wage and Hour Laws for Federal
Contractors (“prevailing wage” laws)

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Davis-Bacon Act of 1931 (best known)
Walsh-Healey Public Contracts Act of 1936
and others…
Equal Pay Provision: Equal Pay
Act of 1963



Amendment to FLSA
Men and women in “substantially equal” jobs must
receive equal pay
Allows pay differences based on

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Seniority
Merit
Productivity
Any factor other than gender
Equal Pay Provision: Equal Pay
Act of 1963

To support a pay difference due to unequal work, the
employer must show
 Skill, effort, and responsibility requirements are
substantially different
 The tasks involving those differences consume a
significant amount of the employee’s time
 The pay differential corresponds to these criteria
Wage and Hour Laws
Administration

The Wage and Hour Division of the Department of
Labor

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Minimum wage
Child labor
Overtime pay
Record-keeping
Contractor laws
Equal Employment Opportunity Commission

Equal pay
Wage and Hour Laws &
Compensation Decision Making
• Make full use of Wage and Hour
Division offices for help in interpretation
of the law
• Look to the courts for direction in
adherence to equal pay provision
• Carry out task-oriented job analysis and
subsequent job evaluation
• Audit the pay system regularly
Court Direction in Adherence to
Equal Pay Provision


Pay policy should contain provision for equal
pay for substantially equal work
Equal work determination must be based on
content of job; skill, effort, and responsibility
requirements; and working conditions
Civil Rights Act of 1964, Title VII

Prohibits discrimination in employment based on
race, color, gender, religion, national origin


Disparate treatment
Adverse (disparate) impact

One implication is that differential cost of providing benefit
(e.g., pensions by gender) can not be used to justify
discrimination in pension benefit by gender
Civil Rights Act of 1964, Title VII

Pay discrimination and dissimilar jobs



Unlawful under Title VII, but…
Market rates are defense to paying dissimilar jobs differently
(unlike Equal Pay Act, and equal work)
Comparable worth

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
Advocates that women performing jobs judged to be equal on
some measure of worth should be paid the same as men (e.g.,
AFSCME v. State of Washington)
Not mandated by federal law
Some states, for public employees; Ontario, public and private
The Earnings Gap (see 17.4A, 17.4B,
17.4C)

Differences in Occupational Attainment

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Differences in Personal Work-Related
Characteristics

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Discrimination and gender stereotyping or choice?
Experience, seniority, education
Differences in Union Membership
Worker’s Compensation (see also ch.
13)
Worker’s Compensation Laws: state laws
intended to continue the flow of income,
for a specified period, for workers whose
injuries are job-related
Income loss
from total
disability
Income loss
from permanent
partial disability
(weekly cash
payments)
(lump sum
payments)
Worker’s Compensation
Laws: Common Features
Medical
expense
payments
(cost management
increasing)
Rehabilitation
expense
payments
(to return to
labor force)
Income loss
from death
(burial allowance
survivor benefits)
All job-related
injuries and
illnesses
are covered
Coverage is
provided regardless
of whose
negligence caused
the injury or illness
Worker’s Compensation
Laws: Additional Common
Features
Payments are
usually made
through insurance
financed by
employer-paid
premiums
Co-insurance: with
this, the beneficiary
of the coverage
absorbs part of the
loss that is
covered
Workers’ Compensation
Administration


Administered by state workers’
compensation boards or courts
Company’s premium rates are based on
the company’s claim experience
Workers’ Compensation
& Compensation Decision Making
Recognize:
safety violations
+ high rate of injuries & illnesses
high experience ratings
higher workers’ compensation
premium payments
Unemployment Compensation (see
also ch. 13)
Unemployment Compensation provides
income to a subset of workers who are
temporarily unemployed and searching for
suitable employment.
Based on state laws (w/federal supervision),
funded by employers, experience rated
Unemployment Compensation
Denial of Benefits

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Voluntarily quit without a good cause
Discharged for misconduct (not incompetence)
Discharged for fraud
Failed to seek or accept suitable employment
Received certain other unemployment benefits (e.g., severance
pay)
Unemployment was caused by labor disputes resulting in work
stoppages (some limited exceptions, distinction between strike
and lockout, between strikers and those involuntarily idled)
Unemployment Compensation
& Compensation Decision-Making


Monitor the organization’s turnover rate to
control experience ratings
Develop appropriate supplementary
unemployment benefits (SUB) packages
(maintain tax advantages via non-discrimination
[income])
Social Security Act of 1935 (see also
ch. 13)

Basic floor of continuing income
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Ill and disabled workers
Dependents of disabled workers
Retired workers
Survivors of workers
Pay-as-you-go system
Taxes employee AND employer equally through
Federal Insurance Contribution Act (FICA)
Social Security Act of 1935

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Born before 1937: retire at 65 with full benefits
Born after 1937: work beyond 65 to retire with full
benefits
With retirement eligibility comes eligibility for
Medicare

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Part A Hospital coverage
Part B Medical insurance component
Now also Parts C (Medicare Advantage, alternative to
Medigap coverage) and D (prescription drugs)
Social Security Act of 1935
Ratio of
Workers
1950’s
1999
10
4
2040
2
to
Social
Security
Recipients
1
1
1
Family and Medical Leave Act (see
also ch. 13)

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FMLA guarantees workers up to 12 weeks of
unpaid leave for childbirth, adoption, foster
care, personal serious illness, or serious illness
of a close family member
Job protection upon return
California has passed law making leave paid
(and most recently Washington state)
Employee Retirement and Income Security
Act: Minimum Standards (see also ch. 13)

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Who must be covered by a plan (participation
requirement)
How long a person must work to be entitled to the
benefits (vesting requirement)
How much money the employer must set aside each
year to fund the (defined) benefit plan
Pension Benefit Guarantee Corporation (PBGC)
Pension Plans: Defined Benefit

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Defined Benefit Plans: either guarantee the retiree a
specific amount of income or specify the method for
determining the benefits the retiree will receive
Funding based on the organization’s payroll costs
and employers’ contributions (based on anticipated
retirement income obligations for the workforce as a
whole)
Pension Plans: Defined Contribution

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Defined Contribution Plans: all forms of capital
accumulation that do not allow withdrawal of funds
until retirement
Employer’s contribution is guaranteed and plans are,
by definition, fully funded
Income is a function of the fund’s investment growth
Differences
.
Defined Benefit
Defined Contribution
Retirement income is
guaranteed
Employer’s contribution is
not guaranteed
Might not be fully funded
Participants not
immediately vested
ERISA pension provisions
apply
Retirement income is not
guaranteed
Employer’s contribution is
guaranteed
Fully funded by definition
Participants are
immediately vested
ERISA pension provisions
don’t apply
ERISA Additional Requirements


Plan must be handled in the best
interests of the participants and their
beneficiaries (fiduciary requirement)
Participants must be informed of their
rights under the plan (communication
requirement)
Other Legislation

Age Discrimination in Employment Act

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Pregnancy Discrimination Act


Requires 60-day notice of plant closings, mass layoffs
Americans with Disabilities Act


Must offer extended group health plan participation for up to 36 months following
termination
Workers Adjustment and Retraining Notification Act (WARN)


Pregnancy must be treated as any other disability
Consolidated Omnibus Budget Reconciliation Act (COBRA)


now prohibits mandatory retirement
Note: disabilities not identified by listing
Health Insurance Portability and Accountability Act (HIPAA)

Improves ‘portability’ of health insurance (limits exclusions for pre-existing conditions,
discrimination based on health status)

Note that HIPPA impacts Er’s ability to use incentives re: health insurance and wellness
programs
Health Insurance Portability and
Accountability Act (HIPAA)

Intended to address “job lock” (where Ee is “locked” into current job
given health insurance considerations)

Protections for coverage under group health plans that limit exclusions for
pre-existing conditions

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New Er must credit Ee for previous continuous health coverage (reduces or
eliminates exclusion period)
Prohibits discrimination against Ees based on health status (including
charging different premiums)
Does not…



Ensure that Ee who changes jobs will have access to health insurance on
new job
Ensure affordability of health insurance on new job
Enable individuals to maintain same group health plan on job change

Recall that under COBRA Ee provided w/ limited extension of group health
insurance (premium to be paid by Ee) when coverage lost due to qualifying
events (e.g., layoff)
Pension & Welfare Benefits &
Compensation Decision Making

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Monitor pending legislation and tax law
Communicate benefit coverage and legal
requirements to employees
Assure avoidance of discrimination and assure
fair treatment of all
Evaluate the potential impact of plans, especially
flexible benefit plans