Overview of Compensation and Benefits:
Compare and contrast compensation and benefits strategy of the “people department” of
Southwest Airlines to overall strategies of two other airlines. What distinguishes each approach
from the others? What are the strengths and weaknesses of each?
Your initial post should be at least 250 words in length. Support your claims with examples from
required material and properly cite any references.
Compensation and the Law
After reading this chapter, you should be able to:
1. Discuss the origins of federal laws related to compensation.
2. List and explain critical early compensation laws.
3. Discuss the progression of minimum wage standards and the laws that are critical in its implementation
4. Cite and explain antidiscrimination laws that impact the workplace today.
5. Cite and explain compensation law that impacts families and those with disabilities.
6. Discuss the difference between mandatory and discretionary benefits.
7. Cite and explain laws that guide nonwage benefit rewards today.
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Origins of Laws Impacting Reward Systems
Who pays when a worker gets hurt on the job?
What is the minimum that a worker has to be paid?
When can a company pay one person differently than another person?
Where can a worker turn during times of job loss?
Why do we have Social Security?
Questions such as these are answered in part by laws and regulations that have been created over time in response to factors such as key historical events and changes in society’s
norms and priorities. Companies also answer these questions using their own business strategies, goals, and culture as guides, all while staying within the framework dictated by the legal
Some laws and regulations directly impact compensation and benefits, whereas others are
more broad in nature and impact general human resource practices. Given that the legal system has its own professionals—lawyers and judges—and is very complex in and of itself,
this chapter will not attempt to cover all employment law. Instead, we will focus on the key
laws that impact the creation, implementation, and maintenance of compensation and benefit
programs. However, an overview of the broader business regulatory environment is needed
to better understand the influence this environment has on compensation and benefits, so a
brief overview will be covered for these areas as well.
While this chapter is written with a focus on laws and regulations in the United States, every
country has its own legal history and philosophy with regard to compensation and benefits.
To be an effective compensation and benefits professional, you will need to have a solid understanding of the specific laws and regulations of the country in which your company operates.
2.1 Origins of Laws Impacting Reward Systems
For the first 150 years after the founding of the United States, the workplace went largely
unregulated. While there were incidents of workers banding together to try to improve their
situation, such as fighting for higher wages or better working conditions, these incidents were
typically isolated and temporary. For example, a printer’s union was formed in New York City
in 1778 that achieved its goal of higher wages, but the first large national union, the National
Labor Union, was not formed until 1866, almost 90 years later and just after the Civil War.
The National Labor Union was successful in persuading Congress to require an eight-hour
workday that applied to all federal employees; however, the union lasted less than 10 years
and was dissolved in 1874. The regulations and laws that emanated from the efforts of labor
unions were patchwork, addressing a particular grievance at a particular time. This began to
change during the 1930s in response to the economic conditions of the time.
Throughout the 1920s, there was a sense of euphoria in the aftermath of World War I, the
end of an influenza epidemic, and sustained economic prosperity. During this time period,
known as “The Roaring Twenties,” there was excessive spending on new inventions and leisure activities. The nation’s total wealth more than doubled between 1920 and 1929, and the
stock market more than quadrupled in value due to speculation. This all came to abrupt end
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Origins of Laws Impacting Reward Systems
in October 1929 when the stock market crashed. The Great Depression, the worst economic
crisis in United States history, had begun.
Following the stock market crash, investors lost tremendous amounts of money, with many
losing all that they had. People began to panic, especially when rumors started that the banks
were failing. This caused “runs on the banks” where people would attempt to withdraw the
cash they had placed in the banks for safekeeping. The banks, however, did not have the
money available to pay all demands—the money had been loaned out and was not sitting in
the banks’ vaults—so banks collapsed.
This created a downward spiral of failing companies that had to lay off workers who then
were unable to afford their homes, food, and other purchases. This resulted in a huge drop in
demand for companies’ goods, so many employers went out of business and the vicious cycle
The Great Depression lasted throughout the 1930s and was characterized
by failing companies, high unemployment, plunging tax revenues, reduced
consumer spending, and severe homelessness. At its height in 1933, close to
a quarter of the American workforce
was unemployed and an additional
25% of the remaining workforce had
their wages and hours drastically
reduced. The unemployment rate was
over 15% for most of the decade.
The severity of the economic downturn induced the government to pass
The Art Archive/Superstock
federal laws in an attempt to boost the The Great Depression caused a large number of
potential for economic recovery and people to lose their jobs.
get people back to work. It took World
War II to move the United States fully
out of the Great Depression, and the war itself led to changes in the workplace through factors
such as wage and price controls. The laws passed during the 1930s and 1940s represented a
categorical shift in the way government dealt with business in the United States.
Let’s begin by taking a look at some of the laws passed during this time period that would
directly impact compensation systems as well as broader economic and business practices.
We’ll then explore relevant laws, with a focus on those that influence compensation systems,
that have occurred since then on up to the modern day. Of course, due to the constantly evolving legal landscape, an overview of laws is not a substitute for consulting with a legal professional who is up to date with the most current legislation.
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Early Compensation Law
2.2 Early Compensation Law
Throughout the Industrial Revolution and during the midst of the Great Depression, large
numbers of people were seeking work at any wage they could get. As such, workers had little
or no influence on their wages. Paired with rapid changes in technology and a societal shift
from a primarily agrarian economy to one based on manufacturing, regulations and laws did
not keep pace with changes in the workplace. As mentioned previously, that began to change
during the Great Depression. Following are key laws that were passed in the 1930s that built
the foundation for addressing issues such as minimum standards on how much workers
should be paid and how to help needy groups such as the elderly and poor.
Davis-Bacon Act of 1931
Under the Davis-Bacon Act, employers, for the first time, were required to provide laborers
and mechanics on covered federally financed or assisted construction contracts in excess of
$2,000 (approximately $36,600 in today’s dollars) the right to receive at least the locally prevailing wage rate (the definition of the locally prevailing wage rate was left vague in the law,
but it essentially meant the typical wage being paid in a particular area). This act offered a
benchmark for future federal and state wages and benefits related to government contracts
and even the private sector.
Norris-LaGuardia Act of 1932
The Norris-LaGuardia Act outlawed the practice of employers mandating that workers
pledge not to join a labor union (also called yellow-dog contracts). The act curtailed the use
of court injunctions that employers had been using to stop union strikes, picketing, and boycotts. Although it had few enforcement powers, the act was one of the first federal labor laws
supporting organized labor, and it marked a significant change in labor reform. Its passage
fostered a trend toward more favorable government labor policies, including compensation
practices, in the years to come.
The National Labor Relations (Wagner) Act of 1935
With passage of the Norris-LaGuardia Act, the groundwork was laid for an even more important labor bill—the National Labor Relations Act of 1935 (also called the Wagner Act).
The Wagner Act continued the mission of reforming and regulating labor relations. Unions
acquired fundamental rights and powers, including the right of collective bargaining, which
is good-faith negotiations between an employer and a group of employees aimed at reaching
agreements related to employment issues, and the recognition of unfair labor practices,
which are tactics used by employers to prevent employees from joining unions and to disrupt union activities in the workplace. (For more detailed information on collective bargaining visit: http://www.dol.gov/dol/topic/labor-relations/collbargaining.htm). This act also
established penalties for violating these rights and powers. The Taft-Hartley Act of 1947
amended the National Labor Relations Act by extending the prohibition of unfair labor practices to labor unions, not just employers as under the 1935 law.
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Early Compensation Law
The gain of power by labor unions has had a big impact on compensation issues, such as
wages paid and benefits offered. The impact of labor unions has lessened in many industries in current times, although some industries, such as automobile manufacturing and law
enforcement, continue to have a significant labor union influence.
The Social Security Act of 1935
On August 14, 1935, President Franklin D. Roosevelt became the first president to advocate
federal assistance for the elderly. As part of his Second New Deal, the Social Security Act of
1935 was signed into law to establish old-age benefits at the federal level. The benefits were
to be paid in proportion to the previous earning of individuals, and a reserve fund to pay
for the benefits would be created by a tax paid equally by employees and employers. Originally, only employees in industrial and commercial occupations were eligible for benefits, but
numerous important amendments since then have expanded those covered under the act.
Additionally, the act provided money and benefits to the unemployed, funded by a tax on
employers. It also enabled states to make provisions for those needing the most help. See Franklin D. Roosevelt’s statement on signing the Social Security Act here: http://www.presidency
.ucsb.edu/mediaplay.php?id=14916&admin=32. Prior to the passage of the act, there was no
federal unemployment compensation and states did not universally or evenly support older
Americans or those who were blind, dependent and disabled children, welfare for mothers
and children, and public health.
Walsh-Healey Public Contracts Act (PCA) of 1936
The Walsh-Healey Public Contracts Act (PCA) was the first federal act to provide employees
the right to be paid at least the minimum wage for all hours worked and to be paid for overtime work at a rate not less than one and one-half times the regular rate of pay (“time and a
half”) for any hours worked beyond 40 hours per week. The act applies only to companies
that provide materials, supplies, articles, or equipment to the U.S. government or the District
of Columbia and covers employees who produce, assemble, handle, or ship goods under such
contracts. Executive, administrative, and professional employees and outside salespersons
are exempt from the minimum wage and overtime provisions of the act. While the act was
limited in its focus—covering only federal contracts—it was the beginning of providing wage
protection in the form of minimum wages and overtime pay to employees.
Fair Labor Standards Act (FLSA) of 1938
The Fair Labor Standards Act (FLSA) expanded on the Walsh-Healey Act and established
minimum wage, overtime pay, record keeping, and child-labor standards affecting full-time
and part-time workers in both the private and government sectors. The law also set the current standard of a 40-hour workweek for private industry.
Not all jobs, however, are covered by overtime and minimum wage requirements. Executive, professional, and administrative professionals are generally considered to be exempt
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Basic Wage Standards
from FLSA provisions. Most other jobs are considered to be nonexempt and covered by FLSA
regulations. Keep in mind that receiving a salary does not automatically mean that you are
exempt from FLSA requirements. While a salary employee is typically exempt from overtime
and minimum wage requirements, it is not always the case, as salary is not the determining
factor as to whether an employee is exempt or nonexempt under FLSA. See http://www.flsa
.com/coverage.html for additional information on exempt versus nonexempt status of jobs.
The Wage and Hour Division (WHD) of the U.S. Department of Labor administers and enforces
the FLSA with respect to private employment, state and local government employment, and
federal employees. Its enforcement umbrella includes wages, family and medical leave, break
time for nursing mothers, child labor, government contracts, immigrant workers, agricultural
employment, special employment (such as workers with special needs), and even lie detector
tests used in employment practices (through the Employee Polygraph Protection Act of 1988).
Which federal law established during
the Great Depression era do you believe
has the most influence today? Why?
Today, more than 130 million American
workers are covered by the provisions of
the FLSA. Together, the Social Security Act of
1935 and the FLSA of 1938 were sweeping
bills that introduced a change in attitudes
toward the role of government and generated an array of programs to aid numerous
groups of Americans.
2.3 Basic Wage Standards
Numerous difficulties occurred early in the implementation and administration of the FLSA.
It quickly became apparent that there were both logistical and tactical difficulties with the
enforcement of legislation across various regions and industries. For example, the statutory
minimum wage was likely to produce undesirable effects upon the economies of Puerto Rico
and the Virgin Islands if applied to all of their covered industries because they didn’t have the
developed economies that the rest of the United States had. Consequently, on June 26, 1940,
a special committee was set up that ultimately allowed minimum wage levels in Puerto Rico
and the Virgin Islands to be less than the rates applicable elsewhere in the United States.
On May 14, 1947, the FLSA was amended by the Portal-to-Portal Act. This legislation was
significant because it resolved some issues as to what constitutes compensable hours worked
(i.e., had to be paid) under FLSA, establishing that activities that benefited employers were
compensable, but activities such as commuting to work were a normal part of the work process and not normally compensable. In 1949, the FLSA was amended to extend child labor
coverage, raise the minimum wage 40 cents an hour to 75 cents an hour for all workers, and
expand minimum wage coverage to include workers in the air transport industry. The minimum wage was increased again in 1955 to one dollar per hour.
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The 1961 amendments greatly expanded the scope of the FLSA within the retail and service
sectors and also increased the minimum wage for previously covered workers to $1.15 an
hour in September 1961 and an additional ten cents an hour two years later. In 1974, Congress included under the FLSA all nonsupervisory employees of federal, state, and local governments and many domestic workers.
Between 1978 and 2006, the federal minimum wage was raised in stages from $2.90 to $5.15.
The Fair Minimum Wage Act of 2007 raised the minimum wage, over time, such that as of
2015, covered, nonexempt workers are entitled to a federal minimum wage of not less than
$7.25 per hour.
In each of the cases and stages of increases, Congress, which has legislative authority over
federal spending, has from time to time provided challenges to increasing the minimum wage.
The Supreme Court also has made its share of contributions to questioning and interpreting
Some states and municipalities have legislated a minimum wage higher than that specified by
the federal government, while others don’t designate a minimum wage at all, in which case
the federal wage rate applies (see Table 2.1 on page 34). President Obama signed an executive
order that applies to public contractors—those who hold federal contracts—requiring them
to pay a minimum wage of $10.10 per hour beginning on January 1, 2015.
Debate about the minimum wage has been
ongoing since it was introduced, with ardent
supporters on both sides. Currently, the
debate revolves around the issue of raising
Review the regulations set forth in the
the minimum wage in response to the risFair Labor Standards Act. Do you think
ing cost of living. Numerous companies have
the modern workplace would be the
chosen to act on their own and pay their
same had such legislation not been
workers above the mandated minimum wage
passed? If so, how? If not, why?
levels. For example, Aetna announced at the
beginning of 2015 that it set $16 an hour as
its lowest level of pay, with the stated goals
of the change being to recruit top talent and reduce turnover. Gap Inc. and Starbucks Corp.TM
are also companies that have recently raised the minimum amount they pay their workers
(Mathews & Francis, 2015).
2.4 Antidiscrimination Laws
Throughout history, numerous groups have faced discrimination, bias, and unfair treatment
in all facets of life. This has occurred in employment practices as well. As such, numerous
laws have been passed to protect the rights of applicants and employees from discrimination, including in their compensation. The U.S. Equal Employment Opportunity Commission
(EEOC) enforces these antidiscrimination laws. Below are some of the key laws related to
preventing discrimination in compensation and benefits practices.
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Table 2.1: Consolidated state minimum wages as of 09/01/2014
Greater than federal
Equal to federal
minimum wage of $7.25*
Less than federal
AK - $7.75
MN - $8.00
AR - $6.25
CA - $9.00
MT - $7.90
WY - $5.15
AZ - $7.90
CO - $8.00
MO - $7.50
NJ - $8.25
CT - $8.70
NM - $7.50
DE - $7.75
NY - $8.00
OR - $9.10
DC - $9.50
NV - $8.25
FL - $7.93
OH - $7.95
MA - $8.00
RI - $8.00
IL - $8.25
ME - $7.50
MI - $8.15
VT - $8.73
23 states + DC
WA - $9.32
GA - $5.15 ...
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