LER424:

Lesson 02: Contextual Influences

Overview and Objectives (1 of 6)
Overview and Objectives

Lesson 2

Learning Objectives

The readings and topics in the lesson will help you to: 

  • Identify and describe federal laws impacting compensation practices
  • Recognize how other contextual factors affect compensation practices

Key Terms

  • Executive Orders
  • FLSA Exemptions
  • Exempt
  • Nonexempt
  • Compensable Work Activities
  • Disparate Treatment
  • Disparate Impact
  • Prevailing Wage 

Lesson Readings & Activities

By the end of this lesson, make sure you have completed the readings and activities found in the Lesson 2 Course Schedule.

Employment Laws (2 of 6)
Employment Laws

Employment Laws

Contextual influences on compensation practices include federal laws, state laws and regulations. This lesson is going to cover both laws and other influences impacting compensation practices. Knowledge of these laws is critical to building a strong compensation foundation.

There are four federal constitutional amendments that form the basis of employment law. Article I, Section 8 provides congressional power to regulate commerce. The First Amendment specifies what Congress can’t do relating to making laws abridging the freedom of speech, religion, etc. The Fifth Amendment stating that “No person shall…be deprived of life, liberty, or property, without due process of law…” Finally, the Fourteenth Amendment, Section 1states governments’ limitations to make laws which shall abridge the privileges or immunities of citizens of the United States.

The following is a timeline of United States laws that impact compensation practices. The bolded laws in the diagram are those related to compensation practices. In general it is important to know and understand the laws and regulations in a country where the business is located before assuming that a company’s compensation plans will be in compliance.

United States federal laws center around four basic themes:

Regulating Compensation & Benefits (3 of 6)
Regulating Compensation & Benefits

Evolution of Regulating Compensation and Benefits


Chart tracking the evolution of worker compensations and benefits from the early 20th century to present day

Fair Labor Standards Act of 1938 (FLSA) (4 of 6)
Fair Labor Standards Act of 1938 (FLSA)

Fair Labor Standards Act of 1938 (FLSA)

The Fair Labor Standards Act of 1938 (FLSA) may be one of the most challenging laws for employer compliance. This act passed in 1938 defines minimum wage, overtime pay, and child labor provisions.

Overtime

Maybe the most challenging provision of the law is the requirements for overtime payment. The FLSA provides for exemptions for paying overtime for six job categories: executive, administrative, learned professional, creative professional, computer, and outside sales. Determining eligibility to not pay overtime is complex and often leads to employers being fined. The U.S. Department of Labor, Wage and Hour Division provided Fact Sheet #17A as guidance in regard to determining exemption status.

Minimum Wage

Establishing a minimum wage may appear simple. That is until you take into consideration the financial impact on organizations, geographic differences in wages, and employee expectations. This is further compounded with federal and state regulations concerning minimum wages. Minimum wage increases also create challenges for employers, such as: how to handle salary compression, impact on pay structures, and impact on the overall budget.

Child Labor

This provision under FLSA focuses on protecting children from being overworked and working in hazardous conditions. Although employers are required to comply with the law there is limited judicial activity around compliance. More specifically, several industries targeted for enforcement initiatives in 1999 included agriculture, retail trade, restaurants, garment manufacturing, and health care.

Compensable Work Activities

The Portal-to-Portal Act of 1947 basically amended the FLSA to include what work activities are compensable. This act applies to nonexempt employees and helps in determining what activities are compensable. Table 2-3 in the Martocchio text provides some guidance on activities considered compensable. Additionally, Table 2-4 in the Martocchio text provides the U.S. Department of Labor definitions of the compensable factors.

Common FLSA Violations:

Learning Exercise 2.1

Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) of 1938 continues to impact compensation practices today. Noted above are seven common FLSA violations made by employers. The objective of this exercise is to research at least three of the violations noted above. Utilizing HR journals, newspapers, magazines, or websites provide the following details for each of the three selected. Consider using acceptable sources such as: professional journals, business newspapers and publications and website devoted to Human Resources. Sources should be recent, within the last three years. Document the sources and list the citations in your submission. If the source is a website, designate the URL of the website where the source is located.

Exercise Guidelines:

The quality of the response is more important than the length

Other Significant Laws (5 of 6)
Other Significant Laws

Other Significant Compensation Related Laws

Throughout Chapter 2 of the Martocchio text there are other significant laws that impact how compensation is managed by organizations. These laws include:

Other Contextual Factors (6 of 6)
Other Contextual Factors

Other Contextual Factors Influencing Compensation Practices

Executive Orders and Federal Employee Laws

There are a multitude of executive orders and laws that apply to protect federal government employees. These are listed in Table 2-6 of the Martocchio text. These exist because often the laws enacted by Congress do not apply to federal government employees.

Labor Unions

The National Labor Relations Act of 1935 (NLRA) – this Act requires employers to enter into good-faith negotiations with works over the terms of employment. These terms include: employment related decisions, job security, wages, benefits, and supervisory practices. Examples of negotiated terms include:

Competitive Labor Markets

Some organizations are unable to compete on the basis of their ability to pay wages and benefits. Inter-industry differentials can be attributed to several factors, including: industry market, degree of capital intensity, profitability, unionization, and availability of workers with required skills.

Workforce – Manufacturing to Service Industry Movement

There has been a general movement in the U.S. from a manufacturing environment to a more services environment. This shift impacts the workforce as new skills are required and older skills become scarce. Scarce skill requirements, although fewer workers are needed, can eventually make these skills more expensive. On the other side, service skills may not demand the same level of skill and result in lower compensation levels. Also, the service environment can require special skills related to technology and create a whole new job segment and compensation demands.

There are also changes in the gender make-up of the workforce. Positions are becoming more gender neutral with increasing number of women in management positions. This will continue the pressure for equal pay.

Technology

Technology is an influencing factor both in skill requirements and compensation. A whole new industry has been created. Just think that there will be workers in a few years that haven’t grown up without a computer. Position requirements will need to be changed to reflect this change.

Outsourcing and Offshoring

This trend continues as organizations seek skilled personnel and lower labor costs. This factor presents both challenges and opportunities for compensation practices. There is a potential for reducing headcount as a cost control feature if offshoring. And, today there is some indication that organizations are bringing resources back to the U.S. as both outsource and offshore labor costs are becoming more expensive.

Generational Employee Expectations

Shortly there will be five generations of employees in the workplace: Traditionalist, Baby Boomers, Generation X, Generation Y (Millennials), and Generation Z (Digital Natives). There are several sources for examining these groups and each group has different assets, strengths, weaknesses, and styles. How will these differences impact and be accommodated in organization’s compensation practices?

One trend that seems to be identified is that employees are expecting clearer understanding of how positions are aligned within organizations. This can also extend to how the organization’s compensation practices compare to competitors. Most employers are ill equipped to provide communications of how compensation is determined.

Salary Transparency

Along the same line as employee expectations, employees are seeking more salary transparency. This discussion is even resulting in some employers opting to publish employees’ salaries. This decision should not be taken lightly by organizations. Today the debate is active with organizations trying to consider impacts like: (1) Does salary transparency affect job satisfaction?; (2) Do the upsides outweigh the traditional concerns?; and (3) Will coworkers resent your salary? This factor may be further impacted by the proposed Paycheck Fairness Act that would prohibit employers from retaliating against employees who share salary information with their co-workers.

Employees as Total Reward Consumers

Organizations that are serious about developing integrated total rewards are likelier to have high employee engagement, according to John Bremen, Towers Watson. By segmenting and differentiating programs, employers can make total rewards more effective. Does this change the way employers communicate and develop compensation practices?

Please view this video.

Treating Employees as Total Rewards Consumers Video Transcript

JOHN BREMEN: The organizations that have truly gotten serious about understanding the workforce demographics, segmenting them, and developing integrated total rewards and employ value propositions around them, believe it or not, have a five times greater chance of having high levels of employee engagement and twice the chance of having outperformance in terms of financial results than organizations who don't.

RYAN JOHNSON: Welcome to this special edition of Work Span TV. I'm Ryan Johnson from World at Work, talking with John Bremen today about treating employees as consumers of total rewards. Now John, this is kind of an interesting concept. A couple of years ago, it was fashionable to think about employees as customers, and now we're talking about consumers. Tell me what you're seeing here.

JOHN BREMEN: There was a notion that came out probably five to seven years ago about treating employees as customers, and it never really took on. I think that's because certain senior level executives believed that calling or relating an employee to a customer might create too much of an entitlement mentality. The reality is customers are different than employees. Organizations think about serving customers and meeting the needs of customers. I think historically, they've been less focused on meeting the needs of employees.

But more recently, organizations have found that, in fact, their employees are consumers of many aspects of their experience. They are consumers of the employer's brand. They are consumers of the employer's programs. They are consumers of the employer's culture. They are consumers of many different aspects of the work experience. And as it turns out, they are also consumers of total rewards.

And what we learn in times of great economic change, when employee populations and labor forces really go through a transformation, that as it turns out, employees do shop around for different aspects of the employee value proposition. Some look for mission and vision. Our clients who have missions, such as saving 100,000 lives a month, or creating lasting memories for families, or saving lives abroad-- these organizations are able to attract people who are really tied to that mission.

Other organizations, it's clear people are just there for the money, pure and simple. Others yet, they like the collaborative culture. Others yet, it's about their life's work. It's about the job. If you let employees do a certain job, they'll do it for life as long as you just pay them enough. So the idea is if we can understand the preferences of various segments of the employee population, we can tailor the aspects of our total rewards program and our employee value proposition around that.

RYAN JOHNSON: Obviously, it sounds like you're borrowing terminology from the marketing realm.

JOHN BREMEN: Yes, it's not borrowing, whatsoever. It's actually shamelessly adapting, if you will. We are, in effect, taking concepts that have been known to the marketing world for as long as there have been marketers and as long as there has been marketing about segmentation, differentiation, preferences, and such. And what we learn is, just like our external consumers have different preferences, so do our internal consumers.

And recently, we were talking to a senior executive at one of our clients-- a large global diversified organization. And he was sitting, reflecting, musing about the current labor market. He said, you know, we really have taken the time to understand and to get to know our external consumers very well, but we really don't know our internal consumers. We really don't know what makes our employees tick. And we're about to invest in a fairly significant change in our total rewards program. Shouldn't we really understand whether it's going to work before we do it?

This has kind of represented a sea tide change where an organization that had the marketing skills focused more on their external customers is now bringing that inside and using it to focus on their internal consumers as well. And what they found in doing that was their employees really had a very different set of preferences than they thought-- by conducting surveys, by doing conjoint analysis, just by asking the employees what was important to them. How did they rank different rewards and how did they value each reward? Was it worth-- every dollar we spend, is it worth $1 of rewards? Is it worth $1.50? Is it worth $0.30? We should be doing more of the programs that are worth $1.50 for every dollar we spend and fewer for every $0.30 that we spend.

RYAN JOHNSON: Seems like an absolute no-brainer the way you describe it in borrowing these marketing terms. Are you seeing any resistance to this concept?

JOHN BREMEN: You ask yourself why companies haven't been doing this for as long as there's marketing. I think 10, 15 years ago, there was a really good reason, which was you didn't have access to this data. There really was no good way to collect this information. We didn't understand indifference curves, rewards for internal consumers, for employees. We didn't know how to go about getting the data. We didn't have a sense that you could actually use conjoint analysis to measure how much an employee values a reward economically. To know for every dollar we spend, it's only worth $0.30 versus $1.50-- that's pretty new technology.

So I don't think it's so much resistance. It's more companies not understanding that this is available. And the only resistance we find is there are organizations who really believe they know and understand their employees when, in fact, they may not.

We've had a couple clients who were about to terminate certain specific programs, either related to their culture or their total rewards. And at the last minute, they said, we should really find out how important these things are to our folks. And as it turned out, those were the top reasons people worked for those companies. And so they averted disaster before it was too late by asking employees what was important to them, measuring it. And sometimes you can do it by asking directly. Sometimes you do it indirectly. But it's just important to understand it before you do it.

RYAN JOHNSON: The concept is very compelling, of course, John. If I'm a comp analyst, a comp manager that might be watching this video, and I'm trying to get my organization to think about employees as consumers, what are some of the first steps I might think about?

JOHN BREMEN: The first thing we have to do is just generate awareness about this topic. And the way I like to think about it is the average company with 20,000 employees spends between $2 and $3 billion a year US on their total rewards programs. If I was a young up-and-coming comp analyst or comp manager, director of total rewards, I would ask my executives whether there's anything else in this company we would be willing to spend $3 billion a year on without first understanding whether it's going to work.

Is there a piece of equipment we would buy for $3 billion without first making sure it was effective in the process it was meant to be effective in? Would we spend $3 billion on a new technology system that we first did not clearly define the requirements? Would we spend $3 billion on anything without thoroughly understanding the impact it's going to have on the organization economically and its potential effectiveness? That's all we're talking about. It's a matter of raising awareness of the issue, and also, as a practical point, understanding how we can collect this information.

Some organizations collect this information through their engagement studies. Some do it through sophisticated conjoint analysis. Some do it through focus groups. Some have firms come in and conduct blind research on their employees as if they were customers buying soap or cereal or a car or any other product. There's myriad of ways to collect it, but the main point is we have to first be willing to open up a dialogue about shaping our programs around the ultimate consumers of them.

RYAN JOHNSON: I want to thank John Bremen. And of course you can read John's article in the May 2013 issue of Work Span. John Bremen from Towers Watson. Let me get your coauthor. I can make sure his name's in there.

JOHN BREMEN: Sure. Tom Davenport and I have been doing research on this, and we're very excited to have the article published.

RYAN JOHNSON: So John Bremen and Tom Davenport, the May 2013 issue of Work Span. And for World at Work, I'm Ryan Johnson.

[MUSIC PLAYING]

Case Study 2.1

Exempt or Nonexempt

The goal of this Case Study is to analyze if the company has properly classified employees as exempt or nonexempt. In order to accomplish this assignment you will need to research the Fair Labor Standards Act (FLSA) that addresses the issues of minimum wages and overtime pay.

Case summary and questions can be found on pages 48 & 49 of the text.

Exercise Guidelines:


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