Social Security provides (1) income for retirees, the disabled, and survivors of deceased workers and (2) health care for the aged through the Medicare program. Established by the Social Security Act in 1935, Social Security is funded through a payroll tax paid in equal amounts by the employer and the employee. The Social Security tax in 2014 was 7.65 percent of an employee’s annual earnings on the first $117,000 of income. This means that both the employer and employee pay a tax of 7.65 percent on the employee’s earnings. The Social Security tax actually has two components: a tax of 6.2 percent to fund the retirement, disability, and survivor benefits, and a tax of 1.45 percent to fund Medicare. Employees who earn more than $117,000 are taxed for Medicare at 1.45 percent of all their additional earnings. This 1.45 percent tax for Medicare is also matched by the employer.

To be eligible for full Social Security benefits, a person must have worked 40 quarter-year periods (which equals 10 years of total employment) and have earned a minimum of $1,200 per quarter. Figure 12.3 spells out the provisions of the four Social Security benefits—retirement income, disability income, Medicare, and survivor benefits—and who is eligible to receive them.

Workers’ compensation provides medical care, income continuation, and rehabilitation expenses for people who sustain job-related injuries or sickness. “Workers’ comp” also provides income to the survivors of an employee whose death is job related.

Workers’ compensation is designed to provide a no-fault remedy to workers who are injured on the job. This means that even workers who were wholly at fault for their accidents can still receive a benefit. Employers who provide workers’ compensation coverage cannot be sued by injured employees.

Workers’ compensation is administered by state governments and is required by 48 of 50 states for all employees, including part-time workers. In Texas and New Jersey, workers’ comp is elective. It is funded by a payroll tax, the proceeds of which go to a state workers’ compensation fund or to a private insurance company. Only the employer pays for workers’ compensation. Although the average workers’ compensation cost is only about 1 percent of total payroll expense, companies in accident-prone industries may pay more than 25 percent of their payroll in workers’ compensation taxes.15

The rates that employers pay for workers’ compensation are based on three factors: (1) the risk of injury for an occupation, (2) the frequency and severity of the injuries sustained by a company’s workforce (called the company’s injury experience rating), and (3) the level of benefits provided for specific injuries within the state where the company is located. Because the company’s experience rating is based on its own safety record, managers have an incentive to design and promote a safe work environment: A better safety record leads directly to a lower payroll tax rate. Some states offer greater benefits to injured workers, which leads to higher workers’ comp taxes assessed on employers in those states. States with the highest workers’ compensation costs are California, Oklahoma, Louisiana, Rhode Island, Texas, and Florida.16

Small businesses in industries such as construction and food service have had great difficulty dealing with cost increases in workers’ compensation taxes resulting from increasing claims. Consider the following examples:

• ▪ Workers’ compensation costs for William Solburg, the owner of a small construction company near Tallahassee, Florida, have skyrocketed. More than 25 percent of Solburg’s total payroll costs go to cover workers’ compensation insurance, and he foresees a significant increase in the near future. Solburg is uncertain whether his business can survive much longer with workers’ compensation costs rising so quickly.17

• ▪ At Olsten Corporation, a Westbury, New York, temporary employee service firm, workers’ compensation costs tripled in a recent four-year period. Some of these cost increases came about because certain Olsten employees filed fraudulent claims for alleged long-term disabilities. When Olsten hired a detective agency to monitor a worker out on disability for a back injury, the camera caught him changing a tire on his car, a job that required bending over and heavy lifting.18

Some small companies are fighting back by banding together to form self-insurance pools. L.E. Mason Company, a Boston maker of lighting fixtures and other construction materials, joined a self-insurance group because its rates were 40 percent below Mason’s other alternatives. Here’s how a self-insurance fund works: A fund’s member companies, often in the same industry, band together and hire an administrator. The administrator contracts with actuaries, investment managers, health care providers, and anyone else necessary to perform the functions of an insurance company. Fund members share one another’s risk, paying losses out of premiums and investment returns. A typical fund member has between 60 and 100 employees and pays between $50,000 and $100,000 a year for coverage. By 2005, 49 states allowed self-insurance funds, with North Dakota the exception.

Self-insurance funds are not the answer for all companies. In firms that go it alone, HR staff can help managers control workers’ compensation costs in several important ways:

• ▪ The HR department should stress safe work procedures by impressing upon employees the importance of safety (see Chapter 16). Many accidents are caused by carelessness, ignorance of safe work practices, personal problems, or the use of alcohol or drugs. HR staff should train managers and supervisors to communicate and enforce the company’s safety program. Employees who disregard safe work practices should be disciplined.19

• ▪ The HR department should audit workers’ compensation claims. The National Insurance Crime Bureau estimates that workers’ compensation fraud in the United States costs insurance companies $5 billion each year. These costs are then passed on to employers, who must pay higher premiums to insure their employees with workers’ compensation. Managers should challenge any claim they suspect is fraudulent or not job related. For example, a manager can ask an injured worker to submit to a drug test. A positive result from the drug test can be a reason for denying a claim. Or after a serious accident a safety specialist could conduct an investigation at the scene of the accident. Information gathered from the investigation may reveal inconsistencies in the story that may indicate the employee’s claim is fraudulent.20

  

• ▪ HR should manage how workers’ comp benefits work with employers’ health insurance benefits when workers sustain job-related injuries. HR should establish controls so that duplicate medical benefits are not paid out to employees.

• ▪ HR staff should design jobs and work assignments so that there are fewer risks of injuries such as back strain and repetitive motion injuries. For example, employees can have their video display terminals adjusted daily to avoid strain on the arms and wrists.21

  

• ▪ HR can encourage workers who are partially disabled to return to work under a modified duty plan. Under such a plan, a manager or HR staff member works with injured employees to develop modified tasks that they can perform until they are ready to handle their regular job. For instance, a maintenance worker with a back injury might be assigned to help schedule the work orders. Modified duty plans can save the company money on benefits that provide income continuation for employees who may be needlessly postponing their return to employment.

The Social Security Act of 1935 established unemployment insurance to provide temporary income for people during periods of involuntary unemployment. The program is part of a national wage stabilization policy designed to stabilize the economy during recessionary periods. The logic underlying this policy is fairly simple: If unemployed workers have enough income to maintain their consumption of basic goods and services, the demand for these products will be sustained, which ultimately will preserve the jobs of many people who might otherwise be added to the ranks of the unemployed.

Unemployment insurance is funded by a tax paid by employers on all employees’ earnings. The tax averages 6.2 percent on a set amount of annual earnings by each employee subject to the tax. Employee earnings subject to the tax range from $7,000 in Arizona to $39,800 in Washington.22 The proceeds of the tax are split between the state government and the federal government, which provide different services for the unemployed. The federal government levies a tax of 0.8 percent, a rate that does not change from employer to employer. In contrast, the states’ assessments range from at or near zero to more than 10 percent (the average is about 5.4%). All the states give employers an experience rating comparing the employer’s contributions to the unemployment insurance fund against the benefits drawn by the employer’s workers from the fund over a period of time. This system allows the state to lower the unemployment tax rate for employers that discharge only a small number of employees, and raise it for those that discharge large numbers of employees for any reason (including layoffs).

To be eligible for unemployment insurance, employees must meet several qualifications: First, they must be available for and actively seeking employment. Second, they must have worked a minimum of four quarter-year periods out of the last five quarter-year periods and have earned at least $1,000 during those four quarter-year periods combined. Finally, they must have left their job involuntarily.

Employees may be disqualified for unemployment insurance benefits for several reasons. The following people are not eligible for unemployment insurance:

• ▪ An employee who quits voluntarily.

• ▪ An employee who is discharged for gross misconduct (for example, for failing a drug test).

• ▪ An employee who refuses an offer of suitable work (that is, a job and pay level comparable to the employee’s previous position).

• ▪ An employee who participates in a strike (48 of 50 states deny benefits to strike participants).

• ▪ A person who is self-employed.23

Unemployment benefits were designed to cover an employee’s basic living expenses but not to be a disincentive against actively seeking employment. For this reason, unemployment benefits seldom cover more than 50 percent of lost earnings, and people discharged from high-paying jobs generally receive only a small fraction of their lost earnings. States have developed their own schedules for unemployment benefits and cap them at a maximum level that ranges from $230 per week in Mississippi to $942 per week in Massachusetts.24 Unemployment benefits last for 26 weeks, although in states with persistently high unemployment rates, extensions of benefits in 13-week periods may be given. In addition, some companies provide supplemental unemployment benefits (SUB) to their laid-off employees. These benefits are most often written into the union contract.

It is interesting to compare the level of replacement income and duration of benefits provided by unemployment insurance in the United States to the benefits provided to unemployed workers in other countries.25

• ▪ United States: 50 percent of salary for 6 months

• ▪ Italy: 80 percent of salary for 6 months

• ▪ Japan: 80 percent of salary for 10 months

• ▪ France: 75 percent of salary for 60 months

• ▪ Germany: 60 percent of salary for 12 months

• ▪ Sweden: 80 percent of salary for 15 months

The amount and duration of unemployment benefits in the United States are modest compared to benefits in other countries. In the United States, government policy is designed to encourage unemployed workers to actively seek employment, and it views generous benefits as suppressing an employee’s motivation to search for a new job.

Containing the costs of unemployment insurance is an important priority for management. The HR department can make significant contributions here by establishing practices that lower the firm’s experience rating. Here are some useful HR practices in this area:

• ▪ HR planning can tell management whether an increase in the company’s workload is due to short or long-term causes. Short-term increases in the workload should be handled by hiring temporary employees or consultants rather than by creating full-time positions. Because neither temporary employees nor consultants can claim unemployment benefits, it costs the company nothing to let them go when the workload decreases. If the increased workload appears to be long-term, however, the company may decide to hire more full-time employees.

• ▪ The employee benefits administrator should audit all unemployment claims filed by former employees. Employers have the right to appeal these claims, and in about half the cases they win.26

• ▪ Managers or members of the HR department should conduct exit interviews with all discharged employees to (1) come to a mutual understanding on the reason for termination and (2) advise them that the company will fight unemployment claims not made for good reason. For example, if an employee discharged for theft makes a claim for unemployment benefits, the company will contest the claim.

Employees occasionally need long periods of time off to take care of their families or their own health problems. Until recently, most employers refused to give workers unpaid leave for any reason other than the birth of a child. The Family and Medical Leave Act (FMLA) of 1993 , enacted under the Clinton administration, now requires most employers to provide up to 12 weeks’ unpaid leave to eligible employees for the following reasons:27

• ▪ The birth of a child

• ▪ The adoption of a child

• ▪ To care for a sick spouse, child, or parent

• ▪ To take care of the employee’s own serious health problems that interfere with effective job performance

The FMLA applies only to businesses with 50 or more employees and to employers with multiple facilities that have 50 workers within a 75-mile radius. The law requires employers to give employees returning from FMLA leave the same job they held before taking the leave or an equivalent job. Employers must maintain coverage of health insurance and other employee benefits while the employee is on FMLA leave.28 Employees are eligible to take FMLA leave after accumulating one year of service with their employer. “Highly compensated” employees—those at the top 10 percent of the pay scale and who tend to be the company’s top managers—are not eligible for FMLA leave because it may be a hardship for the employer to replace them for a 12-week period.

A 2008 amendment to the FMLA permits a spouse, son, daughter, parent, or next of kin to take up to 26 work weeks of leave to care for a member of the Armed Forces, including a member of the National Guard or Reserves, who is undergoing medical treatment, recuperation, or therapy, is otherwise in outpatient status, or is otherwise on the temporary disability retired list for a serious injury or illness.29

The FMLA forces companies to develop contingency plans to keep their operations running with a minimum of disruption and added cost when employees are on leave. Managers may want to consider (1) cross-training some workers to cover for employees on leave or (2) hiring temporary workers.30

Mandatory unpaid leave also forces companies to confront some troublesome issues, such as:

• ▪ Can employees substitute accrued sick days for unpaid leave?

• ▪ What sort of illnesses are serious enough to justify a leave?31

• ▪ How can FMLA leave be coordinated with other laws, such as the Americans with Disabilities Act?

• ▪ Just what constitutes an “equivalent” job when a leave-taker returns and finds his or her job filled?

The last question was the subject of a Wisconsin lawsuit filed well before the FMLA was passed. Elizabeth Marquardt returned from maternity leave to find that her Milwaukee-based employer, Kelley Company, had eliminated her job as credit manager during a restructuring. Kelley gave Marquardt a new job with the same pay and benefits. However, the new job involved supervising one employee instead of four, and unlike the old position, it included about 25 percent clerical work. Marquardt resigned the next day. Kelley claimed that the reassignment was intended to sidestep Marquardt’s longstanding problems with customers. But a Wisconsin appeals court ruled that the jobs were not equivalent because Marquardt’s “authority and responsibility were greatly reduced in the new position.” HR professionals and line managers will have to work together to avoid such court challenges.32 The Manager’s Notebook, “What to Do When an Employee Returns from FMLA Leave ,” specifies an employer’s duties and obligations.

Surveys that have examined how employees have used FMLA show that over 80 percent of the time, it was used by workers recovering from an illness or caring for a sick family member. More than 14 percent of eligible workers use FMLA every year, and 35 percent of leave-takers were off more than once, according to a survey by the Employment Policy Foundation. The method employers were most likely to use to cover for an employee taking FMLA leave was to assign the work temporarily to other employees; the second-most prevalent method was to hire an outside temporary replacement to do the work.33

MANAGER’S NOTEBOOK What to Do When an Employee Returns from FMLA Leave

Ethics/Social Responsibility

Employers have both duties and rights when an employee returns from FMLA leave. Here are some key points to consider:

1. Although an employer is not required to hold an employee’s specific position open for an indefinite period of time, the employee is entitled to an “equivalent” job when he or she returns. Under FMLA, an equivalent position is one that is virtually identical to the former position in terms of pay, benefits, and working conditions. The job must also have the same or substantially similar duties and responsibilities. An employee who returns from FMLA leave is entitled to an equivalent job even if the employee has been replaced or the position has been restructured while the employee was on leave.

2. On returning from FMLA, the employee must receive any unconditional pay raises, such as cost-of-living increases, given to other employees during the leave period. The employee must also be given all benefits accrued at the time his or her leave began, such as paid vacation, sick leave, or personal leave, unless this has been substituted for FMLA leave.

3. An employer is not required to apply the time taken for FMLA to seniority or length of service schedules that are used to determine pay increases, promotions, or other rewards unless the employer’s policy is to recognize all unpaid leave taken by employees as an input to seniority.

4. Employers are not required to provide an equivalent position to a returning employee who took FMLA leave if the employee is laid off during the leave period, or his or her work shift is eliminated. Similarly, if an employee would have been terminated because of misconduct or incompetence that occurred before the leave, the employer isn’t required to reinstate the employee after the leave.

Sources:Based on United States Department of Labor. (2013). Family and medical leave act advisor. www.webapps.dol.gov; Flynn, G. (1999, April). What to do after an FMLA leave. Workforce, 104–107; Kuhn, B. (2008). Rights and responsibilities under the FMLA. www.employment.findlaw.com .▪▪