Compensation Cafe

When is the Minimum Wage Not the Minimum Wage?

We all know that the minimum wage is the lowest hourly rate that employers may legally pay to workers. Or is it?

It turns out that there are some exceptions to minimum wage laws. The Fair Labor Standards Act contains some exemptions that apply to certain types of businesses, specific types of work, and certain individuals.

Here's the run-down on sub-minimum wages:

• Young workers: employees under the age of 20 can be paid an hourly rate of $4.25 during the first 90 consecutive calendar days of employment, as long as their work does not displace other workers. After the 90-day period or attainment of age 20 (whichever is first), the employee must receive the "standard" minimum wage of $7.25.

• Student learners: a student learner is a high school student at least 16 years old who is enrolled in vocational education. Employers who hire student learners can obtain a certificate from the Department of Labor that allows the student to be paid 75% of the minimum wage as long as the student is enrolled in the vocational education program.

• Full time students: full-time students employed in retail or service stores, agriculture or colleges and universities can be paid 85% of the minimum wage, provided the employer obtains a certificate from the Department of Labor. The certificate limits the student's employment to 8 hours per day and a maximum of 20 hours per week while school is in session. Students are permitted to work 40 hours per week when school is not in session. Upon graduation or departure from school, the "standard" minimum wage rate applies.

• Tipped employees: employers can pay tipped employees $2.13 per hour in direct wages, provided that (a) this hourly rate plus tips received are at least equal to the federal minimum wage, (b) the employee retains all tips and (c) the employee customarily and regularly receives more than $30 per month in tips. If the combination of tips and direct wages of $2.13 per hour are less than the federal minimum wage, the employer must make up the difference.

• Workers who have disabilities for the work being performed: employers who receive a certificate from the Department of Labor can pay individuals less than the minimum wage - and less than the prevailing wage rate - for workers who have disabilities for the work being performed. A worker who has disabilities for the job being performed is one whose earning or productive capacity is impaired by a physical or mental disability, including those relating to age or injury. This exemption doesn't apply unless the disability actually impairs the worker's earning or productive capacity for the work being performed. The fact that a worker may have a disability is not in and of itself sufficient to warrant the payment of a special minimum wage.

• Employees in specific industries and occupations: individuals employed by certain seasonal amusement or recreational establishments, seamen employed on foreign vessels, employees engaged in fishing operations, farm workers employed on small farms, employees engaged in newspaper delivery, and casual babysitters and individuals employed as companions to the elderly or infirm may be exempt from minimum wage laws.

The current federal minimum wage is $7.25 per hour. But that may not be the lowest hourly rate employers can legally pay employees. If one of these exemptions applies, employers may be permitted to pay an hourly rate less than $7.25. On the other hand, if you live in one of the 18 states (or the DIstrict of Columbia) where the state minimum wage is higher than the federal minimum wage, the lowest hourly rate legally allowed may be greater than $7.25

Be sure to comply with all federal and state minimum wage laws, and check with your legal counsel with any questions.

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics and is the host of The Proactive Employer Podcast. Follow her on Twitter at ProactiveStats. 

 

Overtime for Nannies

Home companions and live-in nannies may become entitled to overtime, under the latest Department of Labor Notice of Proposed RuleMaking (NPRM) affecting the Fair Labor Standards Act (FLSA).   

A limited exemption was written into the US FLSA law  in 1974 for casual babysitters and companions for the aged and infirm.  At that time, Congress also created an exemption from the overtime pay requirement only for live-in domestic workers who still must receive the minimum wage.  Now DOL wants to modify those rules and require overtime to millions of workers who currently qualify for exemptions under the status quo regulatory interpretations.

"Although the regulations governing exemptions have been substantially unchanged since they were promulgated in 1975, the in-home care industry has undergone a dramatic transformation. There has been a growing demand for long-term in-home care, and as a result the in-home care services industry has grown substantially. However, the earnings of in-home care employees remain among the lowest in the service industry, impeding efforts to improve both jobs and care. Moreover, the workers that are employed by in-home care staffing agencies are not the workers that Congress envisioned when it enacted the companionship exemption (i.e., neighbors performing elder sitting), but instead are professional caregivers entitled to FLSA protections. In view of these changes, the Department believes it is appropriate to reconsider whether the scope of the regulations are now too broad and not in harmony with Congressional intent." (http://www.dol.gov/whd/flsa/companionNPRM.htm)

The revisions in the 56-page document published in the Federal Register of December 27, 2011, would clarify definitions of “domestic service employment” and “companionship services.”  DOL also proposes to narrow the type of duties permitted for exempt companions, to require tighter record-keeping requirements for live-in domestic workers and to deny exemptions to employees of third party employers such as staffing agencies.   Law firms advise their clients who supply nannies and domestic home-care workers to expect steep labor cost increases.  This is all quite consistent with the DOL’s broad theme of Plan/Prevent/Protect.     

This latest regulatory tweak might not extend minimum wage or overtime protections to babysitters but it certainly does spread a wider net over domestic companions and home-care workers of various types.  The overtime enforcers appear to be attempting to lasso more of the helpers and caregivers involved in serving our growing assistance-needing and increasingly elderly population.  Observers of the US political scene know that every administration wants a record of creating good jobs when it seeks re-election.  If you don’t control Congress to the extent that you can create massive public works projects similar to those of the Great Depression, the next best attention-grabber during an economic downturn is to be seen as forcing recalcitrant employers to increase the pay for bad jobs in order to make them more palatable.  That was the intent in 1938, too.  It was no accident that the Fair Labor Standards Act requiring overtime in America was passed during the depression doldrums when so many were unemployed that companies could hire workers for peanuts. 

This is a test:  What was the first minimum wage established by the FLSA in 1938?

 E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Image courtesy of fandango.com

That Comment Bubble Could Get You In Trouble

We all know about the importance of document creation and retention. But there are times when documentation is not a good thing. Consider the following (extreme) example:

This comment bubble is age discrimination litigation waiting to happen...

While most cases are not as extreme - and outwardly discriminatory - as the example shown here, there are hundreds of examples where a written remark in interview notes, records of conversations, performance evaluations or other documentation has created significant problems for employers. A remark on new hire paperwork that a candidate "accepted initial offer - didn't negotiate" might be interpreted as gender-biased. A comment like "needs work on oral communication" could be interpreted as race-biased.

It's important to think about the comments and notes you commit to writing. There are lots of remarks that may seem innocuous when you write them, but could be interpreted multiple ways. Common examples include statements regarding:

• adaptability and ability to learn new skills;
• "commitment" to the job or organization and "drive" to advance to higher level positions;
• potential for future advancement within the organization;
• "toughness" versus "sensitivity";
• compensation negotiation skills and knowledge of market rates for job in question;
• personality traits and characteristics not related to the job.

Also avoid comments directly referencing protected status (age, gender, race and ethnicity, disability status and medical conditions, family composition, etc.). While references to someone's medical condition is appropriate in FMLA documentation or short term disability paperwork, it's not appropriate in documentation regarding merit increases, training opportunities, and so forth.

In a perfect world, we would never have to worry about this issue. Everyone would be basing all decisions on 100% objective criteria and no thought would be given to the personal characteristics of the people being evaluated. We would read the comments of others with 100% clarity and know the exact meaning and intent behind every remark. But we don't live in a perfect world. We do let personal characteristics and preconceived notions influence our decisions, consciously and subconsciously. Semantics can be a real problem. People twist words to make them mean what they want them to mean, not necessarily how they were spoken or written.

Before committing pen to paper and writing comments on official documentation or entering your handwritten notes into an employee's permanent record, think about whether anything you're written could be interpreted more than one way. Even though you may not have meant the comment to have a discriminatory meaning, it might be read that way.  If it is, that comment bubble could get you in trouble.

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics and is the host of The Proactive Employer Podcast. Follow her on Twitter at ProactiveStats. 

Executive Compensation and the Great Wizard of Oz

Executive compensation holds as much mystery and magic as the Great Wizard of the Emerald City.  Of course, if the curtain were to be pulled back, the real magic would be found in how a lack of information, combined with fear and imagination, have colored the pay of all executives with the same brush. Remember that when Dorothy and Toto met the wizard he was just as unhappy and scared as they were.

I find it amusing and frustrating that there is so much misinformation about executive compensation. Let’s state the givens: Yes, there are many CEOs who make more money than most people can comprehend. Yes, executive compensation is a complex arena with many assumptions and estimates being made at any given point. Yes, companies spend a lot of time and effort on disclosure. So why am I frustrated?

Everyone discussing executive compensation has some type of an agenda. Companies don’t want to upset their shareholders or fight with the media. Journalists want a story that stands out among the noise of the day. Shareholder advisory firms want to show their knowledge and ability to shift practices. Consultants want to defend their past practices or point out their superiority when compared to pay at non-clients. Survey data providers want information that can be easily understand and digested. Politicians want to look good to their constituents without upsetting their contributors.

Each perspective leads to a different approach to the positives and negatives of executive compensation. Companies tend to paint things grey and play it safe. The media tends to hyperbolize and point out the outliers. ISS and Glass Lewis point out new issues to remain relevant and gain new clients. Consultants point out their successes and explain their failures as “beyond their control,” or “not their fault.” Survey data is defended as holistic even when it is often made up of a tiny fraction of representative companies. Politicians focus on the obvious problems and talk about them like they represent the majority of pay practices (but, they seldom act in the same way.)

All of this posturing has turned the topic of executive compensation into a kind of omnipresent wizard with terrifying powers and a capricious temper. It’s spoken about in hushed terms or artificially confident booming voices. The curtain is never really pulled back, since everyone already “knows” what’s behind it.

Imagine if the wizard had simply invited Dorothy behind the curtain the moment she arrived. Consider what his life would have been like had he rejected the mysticism of his new role from the day he arrived in Oz. Of course, he wouldn’t have had the power over people that mutual fear and misunderstanding granted him. Perhaps he wouldn’t have also had a lonely misunderstood existence that made him miserable.

When preparing this year’s proxy disclosure, say on pay voting and overall communications regarding executive compensation, consider pulling back the curtain on your pay. If you give people the truth only the crazy will find a way to dispute it. If you give people the whole picture you will lose the power of mystery but, in return, gain the power of understanding.

(Dear Readers: Yes, I know that I have used the Wizard of Oz twice in recent posts. No, I don’t know why, since I have not seen the movie in several years. Who knew it was created to inspire compensation articles?)

 Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation” and “Beyond Stock Options.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter @Performensation and @SayOnPay

If I Shred It, Will I Dread It?

Are your personnel and payroll files bursting at the seams? Are you ready to oil up the shredder and start turning old payroll records into compost, biofuel, or fodder for a practical joke? 

Before you start purging, take a look at your document retention policies and make sure that they're up to date. Different federal and state laws dictate how long certain kinds of documentation must be maintained. So before you shred it, make sure it's "expired" under all relevant laws, litigation holds, and your internal document retention policies.

Here’s a quick run-down on some of the records retention requirements at the federal level:

Internal Revenue Service (IRS) - four year retention period for the following:

• Name, address, social security number and occupation of each employee;
• Dates of employment for each employee;
• W-4 form (Employee WIthholding Allowance Certificate) for each employee;
• Total compensation paid to each employee during the calendar year;
• Dates and amounts of total compensation paid each pay period (including tips and non-cash payments);
• Employee tip reports;
• Fair Market Value of in-kind wages paid;
• Pay period covered for each pay date;
• Details of fringe benefits provided to employee (including Summary Plan Description and any relevant policy documentation);
• Dates and amounts of annuity and pension payments;
• Fringe benefits records;
• Compensation subject to withholding for federal income, social security and Medicare tax;
• Explanation of any differences in total compensation and taxable compensation;
• Dates and amounts of wage continuation payments made by employer or third party to an absent employee because of sickness or injury;
• Dates and amounts of tax deposits;
• Dates and amounts of adjustments or settlements of taxes;
• Compensation subject to Federal Unemployment Tax Return (FUTA) and all information shown on Form 940;
• State unemployment contributions made;
• Employee copies of Form W-2 that were returned as undeliverable.

Department of Labor (DOL) - three year retention period for the following:

• Basic identifying information (name, address, gender, occupation, and date of birth if employee is under age 19):
• Hours worked each workday and each workweek;
• Dates of the beginning of each employee's work week;
• Regular rate of pay for overtime weeks;
• Straight-time earnings (including straight-time portion of overtime earnings);
• Overtime earnings
• Total wages paid for each pay period including additions and deductions;
• Dates and amounts of compensation paid (including pay period covered);
• Wage rate tables and piece rate schedules (2 years only);
• Work time schedules that establish hours and days of employment (2 years only).

Family Medical Leave Act (FMLA) – three year retention period for the following:

• Basic payroll and identifying data (name, address, occupation, pay rate, hours, deductions,  etc.);
• Dates FMLA leave is taken;
• Hours of FMLA leave (if leave is taken in increments of less than one full day;
• Copies of written notice of leave from employee to employer and notices given to employee as required under FMLA;
• Documents regarding employee benefits or employer policies and practices regarding paid and unpaid leaves.

 Fair Labor Standards Act (FLSA) - three year retention period for the following:

• Basic identifying data (name, address, gender, occupation, date of birth if employee is under age 19);
• Hours worked each workday and each workweek;
• Dates of the beginning of each employee's work week;
• Regular rate of pay for overtime weeks;
• Straight-time earnings (including straight-time portion of overtime earnings);
• Overtime earnings;
• Total wages paid for each pay period including additions and deductions;
• Dates and amounts of compensation paid (including pay period covered);
• Certain plans, trusts, contracts or collective bargaining agreements;
• Written agreements or memoranda summarizing terms of oral agreements;
• Certificates and notices listed or named in FLSA regulations;
• Sales and purchase records reflecting total dollar volume of sales or business and total volume of goods purchased or received.

Image: "We are all here to do what we are all here to do", Costume Sculpture by Fabio Lattanzi Antinori

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics and is the host of The Proactive Employer Podcast. Follow her on Twitter at ProactiveStats. 

Out of Control?

Have we lost the ability to self-regulate?  It appears that the current culture built on expectations of instant gratification will lead to a new tragedy of the commons.  Compensation commitments may exceed capacity.

Michael Lewis (Beware of Greeks Bearing Bonds, Moneyball, Liar’s Poker) has done it again…. His newest article, California and Bust, captures the current economic crisis and identifies the next one forthcoming, now predicted to be at the U.S. municipal level.  His statements about what I call “the ratchet effect” at the bottom of page 4 are key.  At the top of page 6, he offers diagnoses and introduces prescriptions.  Pretty light on solutions, but both entertaining and very interesting.

When the engine that has reliably powered and enabled ever-increasing public sector reward expansions sputters and falters, decisions that were easy no-brainers in flush times may come back to haunt those who made them.  Long-term commitments (like progressionary promotions, labor contracts, automatic step-increases or municipal pay programs enshrined in city ordinances) made with the assumption of uninterrupted positive income gains in the future cannot be met when the new reality suffers from far less prosperity than anticipated.  Despite TV advertising slogans, political sound-bite phrases and recurrent movie themes to the contrary, bold dreams, confident hopes and optimistic projections are not self-fulfilling prophesies.  The Pollyannas who cut the employee-friendly deals of yesterday are frequently not around today to suffer the consequences of their short-sighted assumptions.

As a behavioral economist with much experience dealing with labor relations, payroll budgeting and organizational design at that municipal level, I can’t disagree with anything Michael Lewis said.  Bargaining groups will continue to push for higher compensation.  No union negotiator ever lost an election campaign to be on the bargaining committee because they were too tough on management.   But elected public servants are vulnerable to the kind of strong lobbying unions can bring to elections; they are likely to cave in rather than offer strong resistance to wage demands from powerful special interest groups.   Generous actions taken in the past to placate workers (organized or not) can become millstones around the necks of states, provinces, counties or cities confronted with declining tax revenues that are now proving insufficient to cover the expenses they have committed to incur.  Our Western system of adversarial process (head-butting) by which each side ignores what is best in the single-minded pursuit of partisan advantage, counting on the other side to respond accordingly (equally strident from the opposite narrow perspective) until they hash out a mutually agreeable synthesis compromise somewhere between the two extremes, doesn’t fare well when one side is able to effectively dominate the negotiation and dictate terms.  Unbalanced power permits reckless results.  The effect can be hidden for a while, when money keeps pouring in, but when the flow of cash slows or stops, it can have the same effect on a municipality as sudden drops in blood flow have on human hearts.

Rewards professionals should realize that the next decade may feature service level insolvency among states, counties and municipalities.  Imagine the problems when a city trims personnel and reduces activity.  Streets go without repairs.  Police patrols are cut back.  Fire houses are shut down.  Emergency services are less available.  Not to be an alarmist, but this is real, folks.  These things are not likely to happen.  They are guaranteed to occur unless unforeseen events intervene in ways no one can envision at present.  The law of unintended consequences will continue to punish those who ignore it and act upon unwarranted assumptions.

You know what they say about “assume!”

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Creative Commons Image: Comedy & Tragedy Part 2 by richardgardner69

Get a Fresh Start on Misclassification in 2012

Have you made your New Year's Resolution yet? If not, I have a suggestion for you... make 2012 the year you get a "fresh start" and properly classify all of your employees and independent contractors.

And thanks to a new program from the IRS, it may be less painful than sticking to that diet and exercise routine you commit to every January!

I'm sure you know that misclassification of employees is at the top of the Department of Labor's agenda for 2012. The Agency has promised to redouble its efforts to combat worker misclassification, and is in the process of signing a Memorandum of Understanding with the IRS. Under the agreement, the agencies would work together and share information to reduce misclassification of employees, reduce the tax gap, and to improve compliance with federal labor laws.

But the two agencies seem to be taking different approaches to remedying misclassification. While the DOL is focusing on increased enforcement and audit activities, the IRS is taking a proactive approach with its new Voluntary Classification Settlement Program. The VCSP is part of the larger "Fresh Start" Initiative from the IRS aimed at giving businesses and individuals a fresh start with their tax obligations.

The program allows those employers who are concerned that they have misclassified employees in the past to voluntarily come forward, rather than wait for an IRS examination.

If you think you may have misclassified employees as independent contractors, the VCSP offers some significant advantages. Companies can reclassify individuals as employees for future tax periods and only pay 10 percent of the employment tax liability as a result of the reclassification for the most recent tax year. There are no penalties or interest on the employment tax liability. The IRS also agrees not to audit the employer on the classification of these workers for prior years.

In exchange for this deal, employers agree to extend the limitations period for assessment of employment taxes for an additional three years for the first three years after reclassification. This means that rather than the standard three year look-back window, the IRS now has a six year window to go back and review your tax returns to see if additional tax monies are owed.

In order to take advantage of the VCSP, employers have to apply to the program by completing  Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees. Employers also have to satisfy some basic eligibility criteria:

• workers to be reclassified have been consistently treated as non-employees;
• employer has filed the appropriate 1099 forms for the prior three years;
• employer is not currently undergoing a classification audit by the IRS, Department of Labor or any state agency;
• if the employer was previously audited by the IRS, DOL or state agency, it must have complied with the results.

It's important to be aware that the IRS is not obligated to accept an employer's application and allow participation in the VCSP.

So what happens if your application is rejected by the IRS? Because this program is so new, there's not a lot of real-world experience yet. But the IRS has stated that rejection of the employer's application will not automatically trigger an investigation, and employers can re-apply to the program in the future.

Employers should also be aware that the IRS and Department of Labor are working collaboratively on the issue of misclassification, and the DOL is not offering a similar amnesty program. Even though the VCSP may limit an employer's federal tax liability for misclassified employees, there's no guarantee that the DOL and/or state agencies won't impose back penalties and assessments for misclassification.

The IRS has stated that information about employers participating in the Voluntary Classification Settlement Program won't be shared directly with the DOL. But, again, we don't have a lot of real-world experience with the program yet.

If you think you have misclassified employees in the past, the Voluntary Classification Settlement Program may be a great way to proactively address the issue, rather than waiting for an IRS investigation, and save some money in the process. But before signing up, think about what reclassification may mean beyond your federal tax liability. There are implications for payroll, employer-sponsored benefits programs, unemployment and workers compensation insurance, etc. - not to mention the possibility of penalties from the DOL and state agencies.

Tax liabilities, penalties and other implications aside, properly classifying your employees is essential. If you have improperly classified individuals as independent contractors, correct that mistake now and start the new year off on the right foot. Putting off proper classification will only make it worse. Don't wait until 2013 - make proper classification the one new year's resolution you stick to in 2012!

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics and is the host of The Proactive Employer Podcast. Follow her on Twitter at ProactiveStats.

American Employers Face Form W-2 Challenges Next Month (and Beyond)

Has anyone reviewed the 2012 rules for IRS Form W-2?  The instructions for Box 12 include details about using code DD to identify the Cost of Employer-Sponsored Health Coverage.  While these amounts are not presently taxed, they must be revealed in tax year 2012:  that will have implications.  Naturally, in the current economic climate, people suspect that once the amounts are shown, there will be a temptation to tax those currently untaxed “income” elements.  Even if the dollars are not immediately taxed at the Federal, State, county or municipal levels, the very fact of disclosure will create havoc with payroll communications. 

Unions can be expected to use the figures to organize laborers, claiming that they can negotiate higher wages and benefits.  At non-union enterprises, individual employees will argue that they prefer the cash to the coverage.  It’s my money and I want it right now!  Or they may bicker over the cost of benefits they don’t use or don’t want.  I can hear them now: Why should a single man subsidize maternity benefits?  But refusing to disclose the figures or reporting them improperly is not an option.  Penalties for violating the new W-2 reporting rules can be as high as $1,500,000, although the maximum is limited to merely half a million dollars for small businesses.  Deliberate filing errors may incur unlimited costs.

The rules are complex and quite detailed, including complicated provisions for such items as adoption benefits. 

Those who carefully follow government regulations will realize that penalties up to $3,000 per person will be levied on employers who grant health care benefit packages where the employee cost for minimum individual coverage exceeds 9.5% of the employee’s household income.  The Affordable Care Act says that companies must collect details about “household income” and analyze it in terms of their employee’s share of an individual coverage premium cost, even if the worker actually has family coverage.  Employers would be required to intrude into the privacy of their people, polling workers for the incomes of every household wage earner, in order to compute the 9.5% break point that will vary for each household.  It is unclear how that will be done.  It is tough enough to collect such information in the US Census, which is completely confidential; company surveys could be inaccurate, and the consequences of error are unknown.

The penalties that start in 2014 will greatly complicate matters for firms that share premium costs with their workers. Under the PPACA law, employers with at least 50 employees must offer affordable health coverage or pay penalties.   A plan is not considered affordable if the employee's share of the premium for individual coverage exceeds 9.5% of their household income.  If the majority of an enterprise’s employees are low-wage workers, there will be pressure to shift more overall premium costs to higher income employees so households with little income can stay under the 9.5% penalty trigger point.  As covered elsewhere, this could mean someone paying the full premium must earn a six-figure income before the average health benefit cost will not trigger a penalty, the company must pick up more of the premium than before, or the employer must reduce coverages to stay within the permitted cost window.  These rules may change, because IRS considered the household income comparison feature unworkable and prefers to apply the affordability test to individual W-2 wages.

If employees choose to buy subsidized coverage on their state health insurance exchange, the employer will be penalized:  it will cost $3,000 for each employee who chooses the exchange and gets a premium tax credit.  Penalizing the company because an employee rejects the company’s health plan and opts to accept a public Exchange plan means the enterprise pays for that individual’s health care, no matter what.

In addition, it appears that even if an employer makes good-faith efforts to provide affordable health care benefits, such an employee free choice could expose the firm to massive penalties.  If any employee receives a premium tax credit or cost sharing subsidy in the state health insurance Exchange, the hapless employer will be subject to penalties of $2,000 per employee minus 30 employees each year! 

Much care must be taken to comply with these rules.  A tremendous amount of clear and careful communication will also be necessary to assure that American enterprises can survive and thrive under these requirements.

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

2012 and the Great (Compensation) Upheaval

The start of another new year is only a few days away and most of us are thinking about what 2012 has in store. Some among us are contemplating the end of the world on December 21st. Even though NASA assures us "nothing bad will happen to the Earth in 2012", some are convinced that the end is indeed coming in the form of a polar shift or a terrible solar storm. After all, the Mesoamerican Long Count Calendar ends on December 21, 2012 and who are we to question the Maya? 

From a compensation perspective, 2012 is also likely to bring "great change". There are parallels between the prophecies about the way the world will end and what's likely to happen to compensation regulation during 2012:

End of Mayan Calendar and OFCCP's Rescission of Compensation Standards

December 21, 2012 marks the conclusion of the 13th baktun, the end of a Mayan Long Count period. We know this to be true. We also know that OFCCP has proposed the rescission of the Compensation Standards and Guidelines. It's highly likely that 2012 will mark the end of the Agency's use of a standardized methodology in investigating claims of compensation discrimination.

Both events could be interpreted as the end of the world as we know it. OFCCP contends the Standards have limited its ability to effectively investigate, analyze and identify compensation discrimination. OFCCP believes that the current methodology - multiple regression  analysis based on similarly situated employee groupings is too "rigid", overly narrow and is not required under Title VII principles.

The "new world" of OFCCP enforcement will bring the use of "broad Title VII principles" rather than a defined methodology. The Agency could rely on any investigative approach or tool (both statistical and non-statistical) it deems appropriate on a case-by-case basis.

We don't know what will happen at the end of the Mayan calendar. It could be the end of the world, or another new calendar beginning on December 22nd could start and continue for another 4,000 years. We have a little more insight into what the end of the Compensation Standards will bring. Employers will be left with little, if any, formal guidance on the examination of internal pay equity under the best-case scenario. Under the worst-case scenario, we could be returning to an analysis method that doesn't account for legitimate nondiscriminatory factors influencing compensation, doesn't test the statistical significance of any difference found, and makes inferences of systemic pay discrimination based on a non-statistical and barely scientific method.

Polar Shift and EEOC's Focus on Systemic Claims of Discrimination

Some are hypothesizing that the end of the world will come in the form of floods, earthquakes and tsunamis as a result of polar shift. Under this theory, the north and south poles will change places in a matter of days, leading to planetary disaster.

A similar polar shift is taking place at the EEOC. Historically, the EEOC has focused on cases of individual discrimination. But that focus shifted with the launch of the Systemic Initiative, a program that prioritizes identification, investigation and litigation of 'pattern or practice' cases with a broad impact on an industry, profession, company or geographic location.

The EEOC's Fiscal Year 2012 budget proposal confirms its commitment to that initiative. According to EEOC Chair Jacqueline Berrien, a “strong, nationwide systemic initiative not only ensures that agency resources are directed towards addressing issues that will have broad impact in the workplace, but because systemic cases generate substantial media and other public notice, they help to deter other employers from engaging in similar prohibited conduct.”  

This polar shift is likely to mean increased scrutiny from the EEOC, and it's possible that claims of individual discrimination initially filed with the agency could rapidly evolve into a class-wide investigation. Like the reversal of the Earth's magnetic poles, the shift of priorities at the EEOC could turn employers' worlds upside down.

Solar Storms and Wage & Hour Issues

Unlike the Earth, whose poles shift slowly over time, areas of the Sun's magnetic sphere can shift within minutes. Rapid changes in the magnetic sphere can lead to solar flares and coronal mass ejections. Scientists have discovered a pattern in these solar flares and coronal mass ejections - the Solar Cycle. According to the Space Weather Prediction Center at NOAA, we're approaching a solar maximum that could unleash static discharges and geomagnetic storms disrupting or disabling the electronic equipment we're so dependent on in every area of our lives.

On the wage and hour front, we may be in a similar Solar Maximum Season. The Department of Labor is focusing intently on misclassification, and is actively recruiting partners for its Misclassification Initiative. Recently, the DOL has has signed a Memorandum of Understanding with the IRS. Under this agreement, the DOL and the IRS will work together and share information to reduce the incidence of employee misclassification, to help reduce the tax gap, and to improve compliance with federal labor laws. Additionally, 11 states have signed similar memoranda with the DOL's Wage and Hour Division, and in some cases EBSA, OSHA, OFCCP and the Office of the Solicitor.

Nobody knows for sure how the storms during the Solar Maximum Season will directly affect us. We don't know exactly how the increased cooperation between the DOL and other federal and state agencies will affect employers. But in both cases, we do know there will be some effect. Like the Sun, the increased focus on misclassification - and wage and hour issues in general - is not likely to burn out any time soon. Employers can expect anything from minor disruptions (e.g., increased paperwork to be filed with the DOL) to upheavals of epic proportions (e.g., agency investigators on-site performing time and motion studies of all employees).

Final Prediction for 2012

My final prediction for 2012 is that it will be a year of upheaval, if for no other reason than people expect it to be a year of upheaval. In terms of compensation, regulation is likely to be the watchword. The Department of Labor and the EEOC will be paying closer attention to employers' compensation policies and practices. There are some changes on the horizon that could have a big impact.

My suggestion is to follow the advice of the "2012 survivalists" - stockpile some potable water and canned food, have some first aid supplies on hand, and plan some evacuation routes. Start looking at your compensation policies and practices now and get prepared. Or, you could just do nothing and wait for everything to be destroyed on December 21st - your call.

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics and is the host of The Proactive Employer Podcast. Follow her on Twitter at ProactiveStats.

Coming at You: 2012 State Minimum Wage Changes

American employers with operations in various States may need to comply with minimum wage increases again on 1/1/12.  

Eight states (Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington) boost their minimum wage on January one.  Although the United States federal minimum wage still stands at $7.25 an hour, individual cities and states are free to impose rules for higher pay.

San Francisco will be the first city to require a minimum wage over $10 via a formula that will generate a 3.2% increase to $10.24 an hour on 1/1/2012.  Santa Fe also has had a high minimum wage of $9.85 an hour specific to the city since 2009.

The various State rules are so complex and arcane that lists tend to fall out of date quite rapidly.  Internet searches made at different times reveal articles with different states cited.  For example, some articles skip Colorado; others suggest that Connecticut will increase sometime in 2012; one article from Oregon leaves Connecticut completely out of their list. 

It will not be surprising if a new internet search will discover even more differences in various lists by the time this article is published.  States like Illinois, with statuatory minimums that exceed the current federal $7.25, could pass new laws at any time.  As the fellow* said, "No man’s life, liberty, or property are safe while the Legislature is in session.”

About 5% of employed Americans earn the minimum wage. It is generally considered the lowest figure payable to the least-qualified and most inexperienced workers with no particularly useful skills. 

When a political body mandates an increase to the minimum amount you are permitted to pay to your least valuable employee, they have created an artificial floor for wages that generally exceeds the market-clearing level that would otherwise apply.  After all, employers quickly learn what hourly rate is required to attract and engage competent workers in specific locations.  Offer too little and no one applies; offer too much and you are overwhelmed by “overqualified” candidates whose credentials greatly exceed your actual needs.  The free and open marketplace (to the extent that it truly exists) will swiftly assist the employer to sort out the proper number.  When a government intervenes, however, to impose an arbitrary universal rate as the mandated minimum, it increases employment costs at the lowest level in that jurisdiction.  Bumps to minimum wages also have a ripple effect on jobs and positions paid close to the old minimum, although such effects should diminish and virtually disappear at higher income levels.

It has been some years since the US federal minimum changed last, so many compensation analysts may not be familiar with the various options for legal compliance steps that are both cost-effective and motivationally sound.  An ancient article on the mechanics of Increasing Minimum Wages Without Maximum Cost is still available.  The warnings and suggested solutions are still relevant.   For example:

• Practices based on the old obsolete minimum rate must be reviewed.
• Flat general structure increases are a bad idea.
• Min-wage changes do not compel changes to range midpoints or maximums.
• Across-the-board salary adjustments are unwise.
• Pay compression relationships at the lowest levels should be reconsidered.

In particular, internal equity relationships that have become so ingrained and habitual that they are seen as automatic perpetual entitlements should be reexamined in the light of current circumstances.

Be sure to periodically check the appropriateness of all your pay practices. Since organizations are human enterprises, it should come as no surprise that what fits at one time may not fit so well when the times change, and State minimum wages changes can be particularly troublesome.

*The quote is generally attributed to either Mark Twain or NY judge Gideon J. Tucker.  As a native Missourian, I’ll go with Mark Twain.

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Creative Commons photo: Keeping Your Eye on the Money by Darin House