Performance Appraisals and Pay Determination

Friday, March 25, 2011

We all know that there should be a strong and positive relationship between an employee’s pay and their performance. For decades, employers have been attempting to link that relationship, on the individual as well as the group level, some organizations more successfully and others less so. The history of pay for performance is littered with a host of programs designed to incent, motivate, simulate, recognize and reward work related behaviors to affect productivity.

Base Pay:

This is pay for the individual performing the routine aspects of the job.

Balanced Scorecard & Pay-For-Performance:

According to the Balanced Scorecard Institute, this is an attempt to “align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals” and the in individual employee. To do this, the organization’s individual and group reward systems must themselves be in alignment with the goals and objectives of the organization.

Broadbanding:

Typical salary ranges have widths from minimum to maximum of upwards of 50%. As organizations attempted to “flatten” their structures, there emerged a need to develop ranges far wider than traditional salary ranges. Thus “Broad Band” ranges were developed in the size of 70%-100% or even 200%. The end result is fewer but wider ranges accommodating greater individual growth potential and overlaps in job functions found in flatter organizations.

Cash Bonus Plans:

Such plans are simply a “cash” payment in exchange for achievement of some organizational goal. Plans may be simple or complex and usually employed over a short duration in design, associated with either a single employee or groups of employees in mind. Cash Bonus Plans may be used with virtually any level within the organization.

Gain-Sharing:

Gain-Sharing may be thought of a variation of a “bonus incentive” plan. The intent of Gain-Sharing is to increase organizational “productivity through employee involvement”. In return, some of the economic gains achieved are in turn “shared between the employer and the employees”. Gain-Sharing is typically applied with groups of employees but those groups could be a single or multiple organizational sub-units, such as departments, factories or a line of business.

Geographic Differential:

The cost of goods and services varies from one geographical region to another. Therefore, it is only logical that the cost of labor would likewise vary. To address this issue, many organizations establish a benchmark rate and index local labor rates to that benchmark. An example might be wages in Alaska are significantly high than in the Lower 48, thus an organization might find it must have a 50% base pay differential for workers in Fairbanks as opposed to St Louis. Such differentials generally apply to any employee assigned to the geographic location for the minimum prescribed period of time.

Goal Sharing:

Goal Sharing attempts to achieve enhancements in organizational effectiveness through “continuous improvement” in a specific strategic business unit over a well defined period of time. Group rewards, are typically paid in the form of cash payments and are paid out at the end of some predetermined time frame.

Long-Term Incentive Pay:

This is a performance based reward system which recognizes changes in organizational productivity over extended periods of time, typically over multiple years and may involve cash, stock or both. Rewards and goals may be tied to individual performance, as long as the employee is a member of the eligible class. Often such reward systems are highly complicated and require significant legal and financial management expert assistance in their design and operations. While focused on individual performance, the overarching design of the plan may involve the successful performance by several employees in a coordinated effort. Pay out of rewards may be in stages as certain significant points of achievement or at the end of the period. Deferral of current income has significant legal and tax issues relating to IRS Code Section 409.

Merit Pay:

In its simplest form, individual employees are paid cash for performing at or above the organization’s expectations. This usually takes the form of an increase to the employee’s existing base pay following some periodic (semi-annually/annually) performance review and thus compounds over time. In employees at or near the organization’s range maximum, rewards may be paid in a single lump sum.

Pay For Performance:

Similar to Merit Pay, but may be focused on a specific task(s) over a period of defined time. As with Merit Pay may take the form of an increase to the employee’s existing base pay following some periodic (semi-annually/annually) and thus compounds over time. May also be considered a form of Incentive Pay. As with Merit Pay, employees at or near the organization’s range maximum, rewards may be paid in a single lump sum.

Profit-Sharing:

A legally defined Plan sanctioned and regulated by the DOL/IRS which allows an organization to distribute a portion of “profits” to employees. Often found in combination with 401(k) plans and other retirement plans. Reward payments may take various forms related to details of the Plan. Generally are highly complicated and requires significant legal and financial expert assistance to design and operate.

Shft Differential Pay:

Pay designed to compensate employees who work evenings, nights, weekends, rotating shifts or off hours schedules. Shift Differential Pay attempts to offset the inconvenience and hardships associated with working hours other than daytime and weekday.

Short-Term Incentive Pay:

This is a individual or group performance based reward system which recognizes changes in organization productivity over short periods of time, typically less than one year. May be focused on a specific task(s) over a period of defined time. Typically involves cash compensation, but could include non-cash rewards as well. See Pay For Performance.

Skill-Based Pay:

The individual employee is paid for the organizationally needed job skills they possess and can use at some specific level. Employees may be required to learn, master, demonstrate, and maintain skill levels in different areas as the needs of the organization change over time.

Team-Based Pay:

Individual compensation is based on the overall performance of a team of employees working towards a predetermined and predefined set of goals and objectives. Rewards could be paid in proportion to roles, time on the team or other factors “designed” to motivate achievement of the goals and objectives. Could be used in a project or production environment to focus on the organization’s desired results for the team.

Total Compensation and Benefits Statement:

A periodic and highly personalized, usually annual, written summary of the employee’s current and deferred cash and cash-valued compensation. May include mandatory governmental funding such as Social Security, unemployment and worker’s compensation tax payments. Helps the employee understand the “value” of rewards other that strictly cash compensation.

Variable Pay:

A catch-all phrase, may take the form of any manner of compensation such as incentives, bonuses, skill-based short/long term incentives or team-based pay. Any form of pay which fluctuates as the performance of the employee, team or organization varies.

Labor, Fair Labor Standards Act, Anti-Retaliation

Friday, March 18, 2011

And you thought that the Fair Labor Standards Act only dealt with minimum wage and overtime!

Kevin Kasten, an employee of Saint-Gobain Performance Plastics, Corp., filed suit claiming that Saint-Gobain ended his employment due to his objections to the location of the company's timekeeping clocks. Citing that Fair Labor Standards Act (FLSA) § 215(a)(3) of the Act protects workers from employer retaliation, even for making oral complaints, Kasten filed suit in 2009. On the other hand, Saint-Gobain states that the FLSA only provides protections in the case of written complaints and only when those complaints are made to governmental agencies. In an earlier decision, the Seventh Circuit agreed with the employer. Subsequently, Kasten appealed to the U.S. Supreme Court who will hear the case sometime in early 2011. If the Court overturns the Circuit’s decision, informal employer-employee complaints could allow workers to raise workplace grievances verbally without fear of retaliation.

At issue is the placement of the company’s time clocks, which requires Saint-Gobain employees to “suit-up” by donning and doffing their protective gear before clocking in and clocking out. Kastsen argued that time spending donning and doffing protective gear should have been “time worked” under FLSA. However, the placement of the time clocks prevented recording donning and doffing time. After numinous oral and written warnings and suspensions for failing to properly clock in and clock out, Kasten was terminated. After being terminated, Kasten sued Saint-Gobain stipulating that the company retaliated against him for his verbal complaints to supervisors, which he aurgered was a protected action under FLSA.

Fair Labor Standards Act states that “it shall be unlawful for any person”, § 215(a)(3), reads: ”(3) to discharge or in any other manner discriminate against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to this chapter, or has testified or is about to testify in any such proceeding, or has served or is about to serve on an industry committee;”. Apparently, the Seventh Circuit agreed with the employer that a verbal complaint did not meet the test of “filing” a complaint. Thus when the Supreme Court hears the case in early 2011, will they agree or disagree that “filing” may be accomplished verbally as well as in writing?

While this case may seem much to do about nothing, the time, energy, costs, lost goodwill, lost productivity, distraction, and pure frustration is anything but insignificant. If Saint-Gobain’s goal was to avoid paying for “twenty minutes" to "2.5 hours of pay per week” as alleged by Kasten, legal fees alone have passed that threshold or will do so very soon. If the Supreme Court returns the case to the lower court, both parties could be at this for some time into the future.

According to Saint-Gobain’s website, they are “a Paris-based multinational corporation with more than 350 years of engineered materials” experience. Saint-Gobain is in the top “52” industrial companies “in the world with € 43.8 billion in sales, 205,000 employees in 59 countries”, and produces “more than 20,000 products”.

Independent Contractor Classifications

Friday, March 11, 2011

With the Department of Labor’s (DOL) plans to expand their “efforts to deter and detect worker misclassification”, it becomes even more important for organizations to review their use of independent contractors. To be effective, this undertaking should be a prospective rather than a retrospective process.

Key to this review process is analyzing the guidelines the IRS uses to determine whether a worker is a statutory employee or an independent contractor. These guidelines start from the presumption that the worker under review is in fact, a statutory employee and not an independent contractor. The IRS guidelines address three central areas of control: Behavioral and Financial controls, and Type of relationship.

Behavioral control deals with the who, what, when, where, and how the work is performed. Financial control addresses issues on how supplies and equipment are purchased, how the contractor is compensated, and the degree to which the contractor is exposed to financial risk. Type of relationship is focused on the presence of written contracts, whether the contractor has access to certain employee-type benefits, how permanent the relationship is, and are the services performed those of the contracting company? While the IRS will place a significant degree of weight on the above, they will look at other factors as required.

Behavioral control focuses on the who, what, when, where, and how of the, however, this is often described in some detail within a “Scope of Services” or similar document(s). This document may contain technical drawings, work and materials specifications, timetables, compliance or building codes, and access requirements. Nevertheless, such documents should not dictate that a specific worker perform a specific task, although, the organization can certainly require that a person performing the work meet certain technical specifications, licensing or credentialing requirements. Depending on the nature of the work, the independent contractor may be required to perform all work onsite due to security or access control reasons.

Financial control addresses how supplies and equipment are purchased, compensation for the work, and the whether there is exposure to financial risk by the contractor. By reviewing the financial aspects of the work, the DOL or IRS can ascertain the degree of independence between the parties. A large expenditure by the contractor on separate facilities, supplies, tools, and equipment supports the independence of the contractor. If the contractor is paid, only once the work is complete and the work passes all required testing, certifications, and regulatory barriers; that reinforces the position of independence. If the work agreement contains provisions for late or performance penalties, again that reinforces the position of an independent contractor.

Type of relationship is focused on the business independence of the parties. Are there written contracts, how extensive are they, how well do they describe the work to be performed, were they approved by the organization’s owners or management? Who provides employee-type benefits to the persons performing the work? How permanent is the relationship between the parties? What businesses are the parties in and are they the same or similar businesses? How are the parties organized, are they single proprietors, partnerships, corporations, are they licensed and recognized as independent businesses by local, state, or federal regulatory bodies?

Organizations by asking these questions upfront, organizations can go a long way in ensuring their ability to meet and exceed to audit challenges raised by either the DOL or IRS.

As with any relationship with local, state or federal rules and regulations, organizations should seek credentialed professional advice and assistance from a credentialed professional legal counsel.

DOL to Revisit Independent Contractor Classifications

Friday, March 04, 2011

Under the current administration, the Department of Labor (DOL) plans to increase the number of auditors and audits directed at reviewing independent contractors and how organizations are classifying and reporting such positions. At issue are organizations, which have designated individuals as independent contractors when in fact those individuals are statutory employees. The drivers include lost employment taxes, benefit eligibility and coverage for health, welfare, retirement plans, and yes penalties. While small organizations may be lulled into a false sense of security due to their size, there are only so many Microsoft’s to go around. Smaller organizations may lack the legal and financial resources to manage independent contractors and to cope with a detailed DOL audit and therefore may be prone to penalties.

The DOL’s FY 2012 budget for the Wage And Hour Division includes the following language: “To support the Department’s theme of expanding efforts to deter and detect worker misclassification WHD proposes an increase of 107 FTE and $15,223,000 as part of an initiative to detect and deter the inappropriate misclassification of employees as independent contractors and strengthen and coordinate Federal and State efforts to enforce labor violations arising from misclassification. Individuals wrongly classified as independent contractors are denied access to critical benefits and protections -- such as family and medical leave, overtime, civil rights laws, and unemployment insurance -- to which they may be entitled as regular employees. Worker misclassification also generates substantial losses to the Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds. In its last comprehensive estimate of the scope of the misclassification problem for tax year 1984, the Internal Revenue Service estimated that 15 percent of all employers misclassified a total of 3.4 million employees as independent contractors, resulting in an estimated annual revenue loss of $1.6 billion (in 1984 dollars).” Page WHD 20.

In general, the IRS will look at:

Behavioral control.

Who has the right to control how work is done?

What and how work instructions are addressed?

When and where is work done?

What tools or equipment are used?

What workers are be hired to assist with the work and when?

Where, when, and how are supplies, tools, equipment, and services purchased?

What work must a specified individual perform?

In what order or sequence is work performed?

To whom and what training is provided?

Financial control:

Who has the right to control the financial aspects of the work?

What investment is there in facilities, supplies, tools, and equipment?

To what degree does the worker perform services for others?

How and when is the independent contractor compensated for work done?

To what degree can the independent contractor suffer a loss or realize a profit?

Type of relationship:

Are there written contracts describing the relationship?

Does the business provide the independent contractor with employee-type benefits?

What is the degree of permanency of the relationship?

What is the degree to which services performed are the regular business of the company?

The DOL will look at these factors and others in determining whether or not the “facts and circumstances” of the situation supports the organization’s position that the worker is an independent contractor. For any organization, it is essential that they be able to meet the preponderance of these tests. This especially true for small organizations, who may lack the infrastructure to oversee and manage independent contractors effectively.

As with any relationship with local, state or federal rules and regulations, organizations should seek credentialed professional advice and assistance from a credentialed professional legal counsel.