I Could Get in Trouble for That?! Important New Compensation Laws

Beth Carroll | PROSPERIO GROUP

It may come as a surprise that managers do not have complete freedom when it comes to how they pay their employees. Most everyone knows you must pay minimum wage for most positions, and now we are all more familiar with the overtime rules of the Fair Labor Standards Act (FLSA) than we ever wanted to be. But do you know there are other rules? These rules vary by state and even by city. You need to understand the local laws if you have employees in multiple states or you could find yourself in a heap of trouble.

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The Society for Human Resource Management (SHRM), one of the nation’s two top human resources associations (the other is World at Work) recently published an article about salary history bans. For the full article, see the March 2018 issue of SHRM’s HR Magazine.

Here are the highlights:

  • Puerto Rico – Effective March 8, 2017: Employers cannot ask about salary history unless an offer has been extended.
  • New York City – Effective October 1, 2017: Companies cannot ask about past pay history during any phase of the process, unless an applicant reveals info willingly. This law applies to all employers, even with just one employee. Penalties here are steep, with fines up to $250,000 per occurrence.
  • Delaware – Effective December 14, 2017: Companies cannot ask applicants or former employers for salary histories and cannot conduct salary-based screening of job applicants to check previous compensation alignment with job minimum and max.
  • California – Effective January 1, 2018: Employers and their agents, including temp agents and recruiters, are banned from seeking salary and benefit information from prospects.
  • Massachusetts – Effective July 1, 2018: Employers are banned from asking about an applicant’s past pay. Salary may be confirmed if offered voluntarily and after an offer with pay has been made.
  • Oregon – Effective January 1, 2019: Employers cannot take current or previous salary info for screening or salary determination. They may ask about history only after making an offer with pay.

These laws will make salary survey data one thousand times more important as employers will have no other way to accurately gauge the market pay level for a given position. They will know if they are underpaying because the employer will get no job acceptances, but how will they know if they are overpaying?

In addition to these laws, employers should also be aware that California carries special documentation requirements for commission plans. “Commission” in the technical and legal sense applies only to incentive compensation calculated as a percent of revenue or margin. All other forms are called “bonuses,” according to California law; however, compensation professionals prefer the blanket term “incentive compensation” to cover all forms of variable, performance-based pay.

There are laws in several states that may leave you owing an employee pay if they terminate employment (voluntarily or involuntarily) and you have not specified in a signed plan document the exact terms for when an incentive payment is payable.

There are laws in several states that may leave you owing an employee pay if they terminate employment (voluntarily or involuntarily) and you have not specified in a signed plan document the exact terms for when an incentive payment is payable. My company’s advice is always to have a signed plan document that states the employee must be employed on the day the incentive check is sent to payroll for them to receive payment. Even this may not fully protect you in your state, so you should have your plan document reviewed by your local labor attorney.

There is another common brokerage practice that, while not technically illegal, could raise some significant headaches for an organization later on. Namely, this would be the practice of allowing (or not prohibiting) your sales staff from paying cash bonuses to their assistants. As the employer of both parties, you are very likely still responsible for paying payroll taxes on the cash payment to the sales assistant. This may, or may not, be covered by the payroll taxes paid on the initial payment to the sales rep. You probably don’t want to take the chance that the IRS says it isn’t, as we all know they want their share whenever money changes hands. It also makes it difficult to calculate benefits for the sales assistant who does not have all of his or her pay available to use for the calculation; this could create challenges if the sales assistant claims unemployment.

Also, doing a compensation change becomes a nightmare because you, as the employer, don’t really know how much money any of your people are actually receiving or keeping. Could you reduce a sales reps’ commission and instead pay the assistant a higher bonus? Sure, the cash under the table is already doing that, but you don’t know by how much. On the other hand, it seems the far bigger risk here, especially in the #MeToo era, is a claim of discrimination or harassment. What kind of “good job” is being rewarded? And are you 100 percent sure your sales reps are being completely professional and fair in terms of how they decide which assistant gets what money? How will you defend yourself if a claim is made otherwise? And we all know a disgruntled employee isn’t going to just sue the sales rep. They will sue the company that employs the sales rep because it has ultimate responsibility for the employees’ actions – and deep pockets.

If you’ve not had a good sit down with your labor attorney recently, 2018 is probably a very good time to do so. Be sure you are aware of the changes, and have made sure you are not exposing yourself to undue risk.

Beth Carroll is owner of Prosperio Group, a compensation consulting firm located in New Lenox, IL. She may be reached at
beth.carroll@prosperiogroup.com or (815) 534-9204.