1.6 More Information on Total Rewards

Paid vacations and paid holidays create the impression that employees are being paid for not working and that the company is generously providing wonderful benefits. Consequently, vacations, holidays, personal excused absences, and other opportunities for not working are regarded as part of the benefit package.

Paid Holidays

Holidays are days of special religious, cultural, or patriotic significance on which work and business ordinarily ceases. Workers usually receive time-off from work, at full or partial pay, for a specified number of holidays each year. Some employers also include "personal holidays," such as an employee's birthday or "floating holidays" that vary from year-to-year as determined by the employer or employee. When a holiday falls on a scheduled day off, such as a weekend, another day off is often substituted. The most common paid holidays include New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The average number of paid holidays per year is eight. Fifty-nine percent of the workforce have between six and nine paid holidays, while nine percent have less than six holidays and 33 percent have more than nine holidays. 1

Paid Vacations

Paid vacations consist of continuing the employees' regular wages during vacation periods. Before World War II, employees generally were not paid during their vacations; in fact, most employees were not even granted vacations. Today, however, paid vacations are offered by about 77 percent of all companies. The length of the vacation period is generally tied to an employee's length of service. The average number of paid vacation days is 10 for employees with one year of service, 14 days after five years, 17 days after ten years, and 19 days after 20 years. 2

Vacation plans with a carryover provision allow employees to move a certain number of unused vacation days into the next leave year. Any unused vacation days above the carryover limit are lost. Cash-in provisions allow employees covered by such plans to receive their normal daily earnings or some other amount for each unused vacation day up to a certain number of vacation days per year. Like carryover provisions, any unused vacation days above the cash-in limit are lost.

Paid Personal Leave

Personal leave allows employees to be paid while absent from work for a variety of reasons not covered by other specific leave plans. Employees granted personal leave are usually eligible for one to five days per year, and a few employees are provided as much personal leave as needed.

Union Activities

Union activities often require union officers to be excused from work. The nature of the activities and the time allowed for them is specified in most labor contracts. For example, most unionized companies permit time off with pay to employees who are involved in a grievance procedure.

Reporting Time

Reporting time guarantees that employees who report for work will receive a minimum amount of pay even if they do not work. In construction and manufacturing, for example, employees normally get paid for so many hours of work just for reporting to work even if there is nothing to do.

Sabbatical Leaves

Sabbatical leaves have been popular for college professors for many years. A few businesses have started to permit certain professionals and executives to have up to one year of sabbatical leave when they perform work that has value to society or that enhances their professional competence. For example, some executives are asked by their companies to become involved in urban development projects and other full-time civic activities.

Paid Funeral Leave

Bereavement or funeral leave provides time off from work due to a death in the family. Eligible employees usually receive a set number of days per occurrence and the number of days off may vary depending on the employee's relationship to the deceased. For example, a plan may provide three days off for the death of a spouse, parent, or child, but only one day off for the death of other relatives. Employees who do not have a formal funeral leave plan may be allowed to use other types of paid leave such a paid sick leave days to attend the funeral.

Jury Duty

Jury duty leave provides time away from work when an employee is summoned to serve as a juror. Paid time off for jury duty is usually provided as needed; employer payments commonly make up the difference between the employer's regular pay and the court's jury allowance.

Military Leave

Military leave provides time away from work so employees can fulfill military commitments. Pay for military leave is either regular pay or the difference between employees' regular earnings and the amount they receive from the military. Employees who are called up to duty in any of the uniformed services are granted a military leave of absence with the promise of being able to return to the same or a similar job when they return. Military leave is regulated by the Uniformed Services Employment and Re-employment Rights Act of 1994 (USERRA). This law and its provisions are described in Unit 2.

Differential Pay

In addition to their base pay, employees often receive additional compensation for factors that make work more difficult or unpleasant. These wage differentials are considered an important and essential part of making compensation fair.

Overtime

The Fair Labor Standards Act requires employers to pay time and one-half for hours worked in excess of 40 hours per week. Some employers provide additional overtime payments, such as paying overtime for more than eight hours a day and paying double time for more than ten hours a day or 50 hours a week.

Shift Pay

Since night shifts and swing shifts are less desirable and more disruptive to an employee's life, companies often pay a shift differential, such as an additional 50 cents per hour.

Hazard Pay

Employers who have jobs that are especially hazardous typically provide a hazardous pay differential to compensate employees for the added risk of performing them and also to remind employees of the need for greater caution.

On-call Pay

Employees who are on-call receive their normal hourly wage if they are restricted in their ability to move about and not free to plan their own activities. If they are free, however, employers often pay on-call employees a premium anyway even though it is not required by the FLSA.

Call-back Pay

Employees who are called back to work because of emergencies often receive an additional premium to compensate them for the inconvenience and disruption this creates.

Geographic Differentials

Employees who live in or are transferred to locations with a high cost of living may receive a geographic differential to offset the high cost of living.

Weekend and Holiday Pay

Employees who are required to work on weekends or holidays may receive a higher rate of pay, especially if they do not receive overtime for it. For example, Saturday work may be paid time and one half, while Sunday and holiday work is paid double time.

Fair Labor Standards Act (1938) as Amended

The Fair Labor Standards Act (FLSA) of 1938 is commonly referred to as the Wage and Hour Law or FLSA. It has been amended many times and is the most important law regulating compensation practices. This law is the result of Congress's decision to extend the provisions and controls of the Davis-Bacon Act and the Walsh-Healey Act to all organizations involved in interstate commerce. It sets minimum wage standards, overtime pay standards, and child labor restrictions. FLSA is administered by the Wage and Hour Division of the Department of Labor, which tries to correct injustices via conciliation, the assessment of fines, or legal decisions through the federal courts.

The Department of Labor has issued detailed interpretive guidelines explaining how the FLSA is interpreted and administered. This information is available on the Internet at http://www.dol.gov/whd/regs/compliance/hrg.htm and in the following bulletins:

Regulations, Part 541: Defining the Terms "Executive," "Administrative," "Professional," and "Outside Salesman"
Regulations, Part 778: Interpretive Bulletin on Overtime Compensation
Interpretive Bulletin, Part 785: Hours Worked Under the Fair Labor Standards Act of 1938
Child Labor Requirements in Nonagricultural Occupations under the Fair Labor Standards Act
Records to be Kept by Employers Under the FLSA

Because the FLSA is so complex, compensation analysts ought to have access to these bulletins and review them carefully. Only some of the major highlights are summarized here.

Exempt Employees

The FLSA requires that most employees be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, Section 13(a)(1) provides an exemption from both minimum wage and overtime pay for bona fide executive, administrative, professional, and outside sales employees. Sections 13(a)(1) and 13(a)(17) also exempt certain computer employees. To qualify for exemption, these exempt employees generally must meet certain salary and job duties tests. Nonexempt employees are those who are covered by the minimum wage and overtime pay provisions of the FLSA. Nonexempt workers are those who are generally paid on an hourly basis, such as blue-collar workers, maintenance workers, construction workers, technicians, laborers, and semiskilled workers. Job titles and salaries paid to employees, in and of themselves, do not determine the employee's exempt or nonexempt status. The true test is based on the employee's actual duties and responsibilities. The major categories of employees who are exempt from both minimum wage and overtime pay include:

executive employees
administrative employees
professional employees
computer employees
outside salespersons

Some limited exemptions are also available in selected occupations, such as for certain seasonal amusement or recreational establishments, employees of certain small newspapers, some farm workers, casual baby-sitters, and persons employed as companions to the elderly or infirm.

Executive Exemption: To qualify for the executive employee exemption, all of the following tests must be met:

The employee must be compensated on a salary basis at a rate not less than $455 per week;
The employee's primary duty, meaning the major or most important duty the employee performs, must be managing the enterprise, or a recognized department or subdivision of the enterprise;
The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
The employee must have the authority to hire or fire other employees, or the employee's recommendations about the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

"Management" refers to such activities as interviewing, selecting, and training employees; setting and adjusting their pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision; evaluating employees' performance for the purpose of recommending promotions or other changes in status; handling complaints and grievances; disciplining employees; planning the work; apportioning the work among the employees; controlling the flow and distribution of materials; planning and controlling the budget; and monitoring legal compliance measures.

Administrative Exemption: To qualify for the administrative employee exemption, all of the following tests must be met:

The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

"Directly related to management or general business operations" means that an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished from working on a manufacturing production line or selling a product in a retail or service establishment. Such work might include work in functional areas such as finance; accounting; quality control; purchasing; marketing; research; safety and health; human resources; public relations; computer network, and legal and regulatory compliance. Also, employees acting as advisors or consultants to their employer's clients or customers, such as tax experts or financial consultants, may be exempt.

The DOL has tried to help employers interpret what it means to exercise discretion and independent judgment. In general, this concept involves the evaluation of possible courses of conduct and making a decision after the various possibilities have been considered. This concept implies that the employee has authority to make an independent choice, free from immediate supervision, and is interpreted in each situation by such factors as whether the employee has authority to formulate, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree; whether the employee has authority to commit the employer in matters that have significant financial impact; and whether the employee has authority to deviate from established policies and procedures without prior approval.

The fact that an employee's decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures, or specific standards described in manuals or other sources. Also, an employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee's duties may cause serious financial loss to the employer.

The administrative exemption is also available to salaried employees whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment, such as the superintendent of an elementary or secondary school system; assistants responsible for administration of such matters as curriculum, instruction, and testing of students; the principal and any vice-principals responsible for the operation of an elementary or secondary school; department heads in institutions of higher education responsible for the various subject matter departments; and academic counselors and other employees with similar responsibilities.

Professional Exemption: An employee can qualify for a professional exemption as either a "learned professional" or a "creative professional." For both classifications, the employee must be compensated on a salary or fee basis at a rate not less than $455 per week.

To qualify for the learned professional employee exemption, all of the following tests must be met:

The employee's primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
The advanced knowledge must be in a field of science or learning; and
The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

"Work requiring advanced knowledge" means work that is predominantly intellectual and includes work requiring the consistent exercise of discretion and judgment. Professional work involves more than routine mental or mechanical work. A professional employee uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances.

Fields of science or learning include disciplines such as law, medicine, theology, accounting, engineering, architecture, teaching, chemical and biological sciences, pharmacy and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning.

The learned professional exemption is restricted to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best evidence of meeting this requirement is having the appropriate academic degree. However, the word "customarily" means the exemption may be available to employees who have the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. This exemption does not apply to occupations in which most employees acquire their skill by experience rather than by advanced specialized intellectual instruction.

To qualify for the creative professional employee exemption, the employee's primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

This requirement distinguishes the creative professions from work that primarily depends on intelligence. Exemption as a creative professional depends on the extent of the invention, originality, or talent exercised by the employee. Whether the exemption applies, therefore, must be determined on a case-by-case basis. These requirements are generally met by such people as actors, musicians, composers, soloists, artistic painters, writers, cartoonists, essayists, and novelists. Journalists are creative professionals if their work requires invention, imagination, originality, or talent, but not if they only collect, organize, and record information that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product.

Teachers are exempt if their primary duty is teaching and imparting knowledge in an educational establishment, such as regular academic teachers; kindergarten or nursery school teachers; teachers of gifted or disabled children; teachers of skilled and semi-skilled trades; driving instructors; aircraft flight instructors; and music teachers. However, the salary and salary basis requirements do not apply to bona fide teachers.

Employees who have valid licenses or certificates permitting them to practice law or medicine are exempt if they are actually engaged in such a practice. Employees are also exempt if they hold the requisite academic degrees and are working in an internship or resident program for the profession. The salary requirements also do not apply to bona fide practitioners of law or medicine.

Computer Employee Exemption: Section 13(a)(1) and Section 13(a)(17) of the FLSA provide an exemption from both minimum wage and overtime pay for skilled workers in the computer field who are paid at least $455 per week on a salary basis or on an hourly rate not less than $27.63 an hour. To meet this exemption, the employee must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled computer worker whose primary duty must consist of:

The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
A combination of the aforementioned duties requiring the same level of skills.

The computer-employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment. Nor does it include employees whose work is highly dependent upon the use of computers and computer software programs (e.g., engineers, drafters, and others skilled in computer-aided design software), but who are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations.

Outside Sales Exemption: Unlike the other exemptions, the weekly salary requirements do not apply to the outside sales exemption. To qualify for the outside sales employee exemption, both of the following tests must be met:

The employee's primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
The employee must be customarily and regularly engaged away from the employer's place or places of business. The phrase "customarily and regularly" means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.

"Sales" includes any contract to sell, shipment for sale, or other disposition. Obtaining orders for "the use of facilities" includes the selling of time on radio or television, the solicitation of advertising for newspapers and other periodicals, and the solicitation of freight for railroads and other transportation agencies. The word "services" extends the exemption to employees who sell or take orders for a service, which may be performed for the customer by someone other than the person taking the order.

An outside sales employee makes sales at the customer's home or place of business. Outside sales does not include sales made by mail, telephone, or the Internet unless such contact is used merely as an adjunct to personal calls. Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephone solicitation of sales is considered one of the employer's places of business, even though the employer is not in any formal sense the owner or tenant of the property.

The U.S. Supreme Court has ruled that pharmaceutical sales representatives who visit physicians and promote their company's prescription drugs are exempt outside sales people. 3 Drivers who deliver products and also sell such products may also qualify as exempt outside sales employees if making sales is their primary duty.

Salary or fee basis: Exempt employees must be paid on a salary or fee basis (unless they are outside sales employees, teachers, employees practicing law or medicine, or hourly-paid computer employees). Employers who have an "actual practice" of making improper deductions from an employee's pay can lose the exemption for all employees in that same job classification.

Being paid on a "salary basis" means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. In general, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. If the employer makes deductions from an employee's predetermined salary, that employee is not paid on a "salary basis." The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee's work. Exempt employees do not need to be paid for any workweek in which they perform no work. But, if the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

Deductions from pay are permissible, however, when an exempt employee: is absent from work for one or more full days for personal reasons other than sickness or disability; for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan or policy of providing compensation for salary lost due to illness; to offset amounts employees receive as jury or witness fees, or for military pay; for penalties imposed in good faith for infractions of safety rules of major significance; or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. Also, an employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. Intermittent FMLA leave can be deducted from an employee's salary and is the only legitimate basis for making less than full-day deductions for exempt employees.

Isolated or inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions. The DOL has provided the following safe harbor: if the employer (1) has a clearly communicated policy prohibiting improper deductions, including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good faith commitment to comply in the future, the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing the improper deductions after receiving employee complaints.

As a general rule, exempt employees cannot be treated as hourly employees without losing their exempt status. However, an employer may give exempt employees additional compensation over and above their salary, even if the extra is paid on an hourly basis, without jeopardizing the employee's salaried status.

Administrative, professional and computer employees may be paid on a "fee basis" rather than on a salary basis. If the employee is paid an agreed sum for a single job, regardless of the time required for its completion, the employee will be considered to be paid on a "fee basis." A fee payment is generally paid for a unique job, rather than for a series of jobs repeated a number of times and for which identical payments repeatedly are made. To determine whether the fee payment meets the minimum salary level requirement, the test is to consider the time worked on the job and determine whether the payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours. For example, an artist paid $250 for a picture that took 20 hours to complete meets the minimum salary requirement since the rate would yield $500 if 40 hours were worked.

Highly Compensated Employees and business owners: Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee. Under a special rule for business owners, an employee who owns at least a 20-percent equity interest in the enterprise in which he or she is employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively engaged in its management, is considered a bona fide exempt executive.

Blue-collar Workers: The exemptions provided by FLSA Section 13(a)(1) apply only to "white collar" employees who meet the salary and duties tests and do not apply to manual laborers or other "blue collar" workers who perform work involving repetitive operations with their hands, physical skill, and energy. Non-management employees in production, maintenance, construction and similar occupations are entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt no matter how highly paid they might be. The exemptions also do not apply to law enforcement officers, correctional officers, firefighters, paramedics, emergency medical technicians, or rescue workers.

The FLSA provides minimum standards that may be exceeded, but cannot be waived or reduced by collective bargaining agreements. Employers must also comply with any state or municipal laws establishing a higher minimum wage or lower maximum workweek than those established under the FLSA. Similarly, employers may, on their own initiative or under a collective bargaining agreement, provide a higher wage, shorter workweek, or higher overtime premium than provided under the FLSA.

Non-employees: The overtime and minimum wage provisions of the FLSA also do not apply to independent contractors. However, an employer cannot avoid overtime and minimum wage obligations by simply calling an employee an independent contractor. The difference between employees and independent contractors is determined by the overall working relationship with the employer rather than isolated factors. An individual is an employee if the employer controls who performs the job, what is to be done, with what tools and supplies, how it is to be done, where it is to be done, and when it is to be done. Independent contractors must truly be independent. Some of the crucial tests defining the status of independent contractors are described later.

Others who are excluded from the definition of "employees" include trainees and volunteers. A trainee is not an employee and, therefore, not subject to the FLSA requirements if:

The training is similar to that which would be given in a vocational school.
The training is for the benefit of the trainees.
The trainees do not displace regular employees.
The employer derives no immediate advantage from the trainees.
The trainees and employer understand that the trainees are not entitled to wages for the time spent training.

Individuals who volunteer or donate their services without expecting to be paid, and usually on a part-time basis, for public service, religious, or humanitarian objectives, are not considered employees of the organization that receives their services. Companies that allow students to serve in unpaid internship programs need to carefully structure these experiences to make certain that they are not actually working for the employer. If a court decides that interns' work qualifies them as employees, the company could face penalties that include owing back pay; taxes not withheld; Social Security; unemployment benefits; interest; attorneys' fees; plus liquidated damages, defined by federal law as double the unpaid wages.

Losing Exempt Status. Since exempt employees are paid on a salary basis, an exempt employee's status can be lost if the employee is paid less that the minimum salary of $455 per week or treated as an hourly paid worker.

One way this exemption can be lost is when exempt employees are treated as hourly employees. Their exempt status is not necessarily eliminated if they are required to punch in and out, or if the overtime hours they work are recorded, or if they are paid overtime bonuses based on the number of hours they work. But the combination of these and similar practices could cause the Wage and Hour Division to conclude that these employees are really non-exempt hourly-paid employees since investigators look at the totality of the employment situation.

Another compromising situation is when the employer "docks" the employee in increments smaller than a full day for time away from work. If the employer docks an employee for missing a few hours, the Department of Labor and the courts take the position that the employee is paid on an hourly basis rather than on a salary and is therefore not really exempt. A limited exception to this "no-docking" rule exists under the Family and Medical Leave Act where the salaries of exempt employees may be docked for the amount of FMLA leave time lost from the regularly scheduled workweek.

When exempt employees work less than a full week because of furloughs or a reduced workload, they can lose their exempt status if their salaries are reduced proportionately. If employees have accrued vacation or paid-time-off leave, employers may be able to make deductions from these reserves during a short-term layoff without affecting their exempt status; but their salary cannot be reduced. There are three acceptable actions that employers can take with respect to short-term layoffs without affecting an employee's exempt status:

Since the regulations provide that exempt employees "need not be paid for any workweek in which they perform no work," an employer can require employees to take mandatory time off for an entire week and withhold that week's salary.
An employer is not required to pay for an employee's completely voluntary decision to take time off for personal reasons or other reasons not caused by the company's operating requirements.
When there is a permanent change in an exempt employee's regular workweek schedule, such as going from a five-day week to a four-day week, the employer can make a corresponding change in salary provided it still exceeds the $455 salary minimum.

Overtime Provisions and Computations

Overtime provisions of the FLSA require that covered employees receive one-and-one-half times the regular rate of pay for all hours worked in excess of 40 during a given week. Nonexempt employees who work more than 40 hours per week must be paid overtime even if they voluntarily worked overtime, and even if their overtime violated company policy. To avoid the problem of unauthorized overtime work, employers should adopt a policy of prohibiting employees from signing in or starting to work more than 10 minutes before their regular shifts and from signing out more than 10 minutes after their shifts.

If an employee receives a straight hourly wage, overtime calculations are quite simple. The calculations are much more complex, however, when overtime involves bonus payments, time off in return for overtime work, and work done on a salary or piece-rate basis. Elaborate rules define "regular workweek," "regular rate of pay," and "hours worked."

The regular workweek consists of seven consecutive periods of 24-hour days. An employer may choose any day and hour to begin the workweek. Each workweek stands alone for purposes of calculating overtime pay.

The regular rate of pay includes the basic hourly rate of pay plus any non-discretionary bonuses, shift differentials, production bonuses, and commissions earned. Discretionary bonuses, such as a Christmas bonus, noncash gifts, suggestion awards, expense reimbursements, and pay for unworked hours (such as holiday pay or sick pay) are not part of the regular rate of pay.

Consider the example of an employee who earns $10.00 per hour for a 48-hour week, receives a $24.00 weekly production bonus, and gets eight hours of overtime pay based on a rate that includes the bonus. The employee really earns $10.50 per hour ($10.00 per hour base pay plus the $24.00 bonus divided by the 48 hours required to earn it, or 50¢ per hour) and an overtime rate of $15.75. The employee's earnings for that week would be calculated in this way:

Regular time 40 x 10.50 = $420.00

Overtime 8 x 15.75 = 126.00

Weekly earnings $546.00

The hourly rate for those paid a salary is calculated by dividing the weekly salary by the number of hours the employee is expected to work to earn it. If a salary is paid on other than a weekly basis, the weekly amount can be determined by simple calculations: an annual salary is divided by 52, and a monthly salary is multiplied by 12 and then divided by 52.

If the salary is for a specified number of hours a week, the regular rate of pay is obtained by dividing the salary by the number of hours. For example, if an employee is paid $400 per week and expected to work 40 hours, the hourly rate is $10.00 per hour. The overtime premium would be an additional $5.00 per hour for all hours worked in excess of 40 hours in a week.

If the salary is paid for hours that may fluctuate each week, the salary is divided by the number of hours actually worked. For example, if the agreement with the employer is that the employee will be paid $600 a week for whatever number of hours the work requires, then the employee's hourly rate is $12.00 if the employee works 50 hours ($600 divided by 50), but only $10.00 if the employee works 60 hours ($600 divided by 60). In the first case, the employee's weekly earnings would be $660 (40 regular hours times $12.00 per hour, plus 10 overtime hours times $18.00 per hour overtime rate). In the second case, the employee's weekly earnings would be $700 (40 regular hours times $10.00 per hour, plus 20 overtime hours at $15.00 per hour overtime rate).

The hourly rate of pay for those paid on a piece rate basis is calculated by dividing the money they earned by the number of hours they spent earning it. For example, a worker who works 50 hours and produces 100 pieces at the rate of $4.00 per piece would have an hourly rate of pay of $8.00 (100 pieces times $4.00 per piece equals $400, divided by 50 hours equals $8.00 per hour). This worker's earnings for that week would be:

Regular time 40 hours x $8.00 = $320.00

Overtime 10 hours x $12.00 = 120.00

Weekly earnings $440.00

When a person works two jobs for the same company that have different rates of pay, there are two ways overtime pay can be calculated. The first method is for the employer and the employee to reach an agreement in advance of the hours worked which rate will be used for calculating the overtime rate. They may agree to pay the employee one and one-half times the hourly rate for either job even though the overtime hours were performed on the job with the higher rate. The second method is to use a weighted average to determine the regular rate of pay. This involves multiplying the hourly rates for each job by the hours worked on each job and dividing the sum of these amounts by the total number of hours worked. So, for example, if someone worked 30 hours at $10 per hour and 20 hours at $12 per hour, the weighted average hourly rate would be $10.80 [(30 x $10) + (20 x $12) = $540 ÷ 50 = $10.80], and the weekly pay would be $594 (40 x $10.80 + 10 x $16.20). This weighted average rate is also called a blended rate. 4

Hours worked under the FLSA includes all hours that an employee is permitted to work, plus time when the employee is required to be on the employer's premises, on duty, or at a designated work station. Depending on the circumstances, travel time, waiting and on-call time, rest periods, and training time may be considered hours worked for nonexempt employees. The Portal-to-Portal Act (1947, 1996) helped to define some of these rules.

Normal travel from home to work is not working time.
Travel as part of the employer's principle activity must be counted as hours worked, such as travel from one job site to another during the day.
A one-day travel assignment as part of the employer's principle activity is counted as hours worked.
Travel that occurs during the employee's regular working hours is compensable.
Travel after work hours is not compensated if the employee travels in a public conveyance where the employee is free to relax, or if the employee drives a company car.
Waiting time must be compensated unless three conditions are met: (a) the employee is completely relieved from duty and allowed to leave the job; (b) the employee is not required to return until a specified time; and (c) the period is long enough for the employee to use the time as he or she chooses.
On-call time is normally compensated when employees must be available to return to work on short notice and they have limited freedom to travel about or use their time for their own pursuits.
Rest periods of short duration are counted as hours worked.
Meal periods are not considered hours worked when the period is longer than 30 minutes, the employee is completely relieved of all duties, and the employee is free to leave the work station.
Training time is counted as hours worked if the training is mandatory, if the training occurs during work hours, or if the training is directly job related.
Training time is not counted as hours worked if the training is not during regular working hours, attendance is voluntary, and the training is not directly related to the employee's job.
Activities that are preliminary at the beginning of the day and postliminary at the end of the day must be compensated if they are integral to the employee's principal activities, such as putting on or taking off unique protective clothing or equipment, a practice called "donning and doffing." 5
Time spent checking or responding to electronic messages with an electronic device, such as a cell phone, PDA, or laptop, is compensable time, unless it qualifies as insubstantial and cannot as a practical administrative matter be precisely recorded. Therefore, checking messages before driving to work could even make the drive part of an employee's compensable hours under the continuous workday rule.

Compensatory Time: Some employers give nonexempt employees compensatory time off ("comp time") rather than paying cash for overtime hours. Comp time must be accrued at time and one-half for all overtime hours. Comp time is permissible in the public sector where state and local governments are allowed to substitute comp time for payment of overtime wages. Public employees can accumulate as many as 240 hours (480 for police and fire officers).

Comp time is not permissible in the private sector; private sector employees must receive overtime pay whenever they work more than 40 hours in a given week. If a private sector employer has a two-week pay period and employees work more than 40 hours the first week, it is possible for the employer to keep their pay constant by reducing their hours sufficiently during the second week (similar to comp time). Nevertheless, private sector employees cannot accumulate comp time hours.

Minimum Wages

Minimum-wage rates have increased dramatically since FLSA was first passed in 1938. The original minimum was 25 cents an hour, which only covered laborers working in the production of interstate commerce. As a result of subsequent amendments, the minimum wage has been raised multiple times, and the coverage is extended to almost all employees, including agricultural laborers and domestic workers.

Employees who receive tips can be paid a minimum wage of $2.125 per hour, as long as their tips are sufficient to reach the minimum wage rate. To use the tip credit, the employer must explain to the tipped employees how their pay is determined. All tips received by a tipped employee must be retained by the employee or pooled among a group of employees. New employees under age 20 can be paid a special "opportunity wage" of $4.25 per hour for the first 90 calendar days. But employers may not displace current workers to hire "opportunity" workers.

Minimum wage laws have been severely criticized by economists. 6 The purposes of minimum wage standards are to ensure a living wage for all laborers and to reduce poverty. In particular, the laws are intended to help low-income families, females, and minority workers. However, studies on minimum wage laws indicate that their overall effects are undesirable. Minimum wage laws tend to have the most destructive effect on the very people they are intended to help. The evidence indicates that employers are not willing to pay minimum wages to marginal workers. Therefore, employers eliminate marginal jobs by replacing them with mechanization and new Technology. Teenage employment has been especially hampered by rising minimum wages; each rise in the minimum wage rate has increased the teenage unemployment level. For example, in 2008, when the minimum wage increased 70 cents, the unemployment rate of teenagers rose 5 percent. By September 2009, after another 70-cent increase, youth unemployment rose another three percent to an all-time high of 25.9 percent, and for Black teens it was over 50 percent. This was accompanied by a dramatic increase in overall unemployment—from 4.7 percent when the legislation was passed in May 2007 to 10.2 percent in October 2009, three months after the final increase. Since other economic problems were happening concurrently, it is not clear how much the minimum wage increase caused higher unemployment. Nevertheless, the Wall Street Journal and the Federal Reserve claimed that the evidence for such a link was "overwhelming" and they recommended repealing the increase. 7

Finally, minimum wage rates are highly inflationary. When the minimum wage rate is increased, there are direct and indirect effects on the wage structure. The direct effect of a minimum wage increase refers to the increase in wages for jobs at the bottom of the wage curve that have been below the minimum wage. The indirect effect of a minimum wage increase refers to the changes in the remainder of the wage curve to maintain appropriate wage differentials for jobs that deserve higher pay. An analysis of the effects of minimum wage increases in numerous industries indicates that the indirect effect is usually greater than the direct effect. That is, companies spend more money on increasing the pay of high-level jobs than they spend on raising the pay of low-level jobs to the new minimum. The direct and indirect effects of an increase in minimum wages are illustrated in Exhibit 33. In spite of most companies' attempts to raise high-level jobs and to maintain appropriate wage differentials, a minimum wage increase typically results in a compression in wage rates. 8

Child Labor

The FLSA child labor provisions are designed to protect the educational opportunities of minors and prevent them from working in jobs and under conditions detrimental to their health or well-being.

Youths 18 years of age or older may perform any job, whether hazardous or not, for unlimited hours.
Youths between the ages of 16 and 18 may perform any nonhazardous job for unlimited hours, but they are not allowed to work in hazardous occupations, such as mining, meat-cutting, or logging.
Youths 14 and 15 years old may work outside school hours in various nonmanufacturing, nonmining, nonhazardous jobs under these conditions—no more than three hours on a school day, 8 hours on a nonschool day, or 40 hours in a nonschool week. Also, work may not begin before 7 a.m. nor end after 7 p.m., except from June 1 though Labor Day, when evening hours are extended to 9 p.m.
Youths 12 and 13 years old may work on farm jobs outside of school hours in nonhazardous jobs.
Youths under age 12 may perform nonhazardous jobs on farms with parent's written consent outside school hours.
Youth of any age may be employed by their parents at any time and in any job on a farm owned or operated by their parents.

FLSA was the first federal law restricting child labor that was not declared unconstitutional. For almost a century, state laws had attempted unsuccessfully to regulate child labor.

The child labor protections of the FLSA were strengthened by the Genetic Nondiscrimination Act (GINA) of 2008 by providing penalties up to $50,000 for the death or serious injury of any employee under age 18. For repeated or willful violations this penalty can be doubled. GINA also increased the penalties for child labor violations from $10,000 to $11,000, while minimum wage and overtime penalties were increased from $1000 to $1100. A serious injury under the FLSA now means

Permanent loss or substantial impairment of one of the senses (sight, hearing, taste, smell, tactile sensation);
Permanent loss or substantial impairment of the function of a bodily member, organ, or mental faculty, including the loss of all or part of an arm, leg, foot, hand, or other body part; or
Permanent paralysis or substantial impairment that causes loss of movement or mobility of an arm, leg, foot, hand, or other body part.

Record Keeping

The FLSA requires employers to keep records of wages, hours, and other related items. The records do not have to be kept in any particular form and time clocks need not be used. The following information should be kept:

Personal information, including name, address, occupation, gender, and date of birth (if under age 19).
Hour and day when workweek begins.
Total hours worked each workday and each workweek.
Total daily or weekly straight-time earnings.
Regular hourly pay rate for any week when overtime is worked.
Total overtime pay for the workweek.
Deductions from or additions to wages.
Total wages paid each pay period.
Date of payment and pay period covered.

Employers are encouraged to have written policies that they strictly enforce requiring nonexempt employees to accurately record all time worked. Recordkeeping is complicated when employees answer email or perform other off-the-clock work or when they punch-in early or late. The Department of Labor accepts rounding provided that it is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked. Also, insubstantial periods of time beyond the scheduled working hours, which cannot as a practical administrative matter be precisely recorded for payroll purposes, may be disregarded as de minimis. A four-factor test has been used by courts to determine whether the de minimis rule applies: (1) the amount of daily time spent on the additional work, (2) the practical administrative difficulty of recording the added time, (3) the total amount of compensable time, and (4) the regularity of the additional work.

Wages required by FLSA are due on the regular payday for the pay period covered. Deductions made from wages for such items as cash or merchandise shortages, employer-required uniforms, and tools of the trade, are not legal to the extent that they reduce the wages of employees below the minimum rate.

FLSA does not limit the number of hours in a day or days in a week an employee may be required or scheduled to work if the employee is at least 16 years old. These matters are for agreement between employers and employees. There are many other employment practices that it does not regulate. For example, FLSA does not require:

Vacation, holiday, severance, or sick pay.
Meal or rest periods, holidays off, or vacations.
Premium pay for weekend or holiday work.
Pay raises or benefits.
Discharge notices, reasons for discharge, or immediate payment of final wages to terminated employees.

FMLA Leave Eligibility

To be eligible for FMLA leave, an employee must have worked for a covered employer for at least a total of 12 months and for a minimum of 1,250 hours over the prior 12 months. Covered employers include all private-sector employers who employ 50 or more employees within a 75-mile radius, as well as all public agencies, including state and local employers, and local schools.

Employees are allowed to take unpaid FMLA leave when:

A new child is born to the employee;
A new child is placed with the employee for adoption or foster care;
The employee is needed to care for a seriously ill spouse, child, or parent (but not a parent-in-law); or
The employee has a serious health condition.
The spouse, son, daughter, or parent of a person on or about to be on active military duty for any "qualifying exigency."

A serious health condition means an illness or injury that involves a period of incapacity requiring absence from work for more than three consecutive calendar days and also involves continuing treatment by a health-care provider. A qualified health-care provider could include almost any licensed practitioner, including Christian Science practitioners. The three consecutive calendar days requirement only applies to the initial determination that the condition is "serious." Subsequent absences can be for shorter periods if they are based on the original medical condition.

The terms son or daughter do not include individuals age 18 or over unless they are "incapable of self-care" because of a mental or physical disability that limits one or more of the major life activities. Under the doctrine of loco parentis (stand-in parent) employees are also entitled to FMLA leave to care for a child for whom they have a legal responsibility, even if there is no biological relationship.

In 2008, the National Defense Authorization Act extended the FMLA by providing 12 weeks leave for family members impacted by active military duty plus 26 weeks of military-caregiver leave for the families of service members injured in the line of duty. This unpaid leave of 26 weeks during a 12-month period is available for an eligible employee who is the spouse, son, daughter, parent, or next of kin to provide care for the service member. Spouses who work for the same employer can use no more than 26 weeks combined for this leave.

Top-Down Budgeting

Top-down budgeting involves estimating the pay increase budget for an entire organization and then allocating an amount to each manager or supervisor. The managers and supervisors are then responsible for distributing the budgeted increases among the members of their groups. These pay increase distributions are typically based on performance and must be approved by a second-level manager. The human resource office generally provides guidelines, sometimes called merit increase grids, showing the appropriate pay increase for different performance levels.

Summary

In summary, this topic has explained that Total Rewards refers to the variety of ways that an organization provides value to its employees in exchange for their membership, motivation, and performance. An understanding of Total Rewards is important to HR and Compensation Managers but also to each employee working in an organization. A Total Rewards Perspective shows us that pay includes not only Cash or Financial rewards, but also required and discretionary employee benefits as well as Intangible Rewards such as meaningful work and quality relationships. These three elements need to be viewed in concert and strategically integrated. The objectives of a Total Rewards System are to have significant, efficient and long-lasting positive impacts on the performance of individuals, teams, and organizations, while facilitating the attraction and retention of those employees by monitoring their perceptions of satisfaction and fairness.

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