Legal requirements for employee benefits
As we discussed earlier in this chapter, some benefits are required by law. This requirement adds to the cost of compensating employees. Organizations looking for ways to control staffing costs may look for ways to structure the workforce so as to minimize the expense of benefits. They may require overtime rather than adding new employee, hire part-time rather than full-time workers(because part-time employees generally receive much smaller benefits packages),and use independent contractors rather than hire employees. Some of these choices are limited by legal
requirements, however. For example ,the Fair Labor Standards Act requires overtime pay for nonexempt workers, as discussed in chapter 11.Also,the Internal Revenue Service strictly limits the definition of "independent contractors,“
so that employees cannot avoid legal obligations by classifying workers as self-employed when the
organization receives the benefits of a permanent employee .Other legal requirements involve tax treatment of benefits ,antidiscrimination laws, and accounting for benefits.
Tax treatment of benefits
A modern, flexible benefit plan provides a number of potential tax advantages to employees and employers. Employees
A flexible benefit plan allows employees to choose to swap some of their existing benefits or purchase benefits from a menu of options. Payments in excess of the employees spending allowance are normally collected via a gross salary adjustment. If employees exchange salary for tax exempt benefits (pensions, life cover, childcare vouchers, mobile phones, etc.), they do not pay tax or National Insurance on the amount exchanged. This gives a basic rate tax payer earning less than the National Insurance (NI) Upper Earnings Limit (UEL) a saving of 33% compared to receiving the money as salary. For example, an employee that exchanges £200 per month of their salary for childcare vouchers and additional pension payments will save £792 in tax and NI compared to taking the money as salary.
Even if the benefits are not tax exempt, employees can still exchange salary for employer provided benefits and, whilst they will be charged income tax, they save NI as their salaries have been reduced by the value of the benefit. This gives employees earning under the UEL an 11% saving.
Employers participating in a flexible benefit plan do not pay employer's NI on payments on payments to exempt benefits. If these payments have been exchanged from salary by employees then the employer will save 12.8% employers NI on the amounts. For example, an employee that exchanges £200 per month of their salary for childcare vouchers and additional pension payments will deliver an annual NI saving to the employer of £307.
Legal treatment of men and woman includes equal access to benefits, so the organization may not use the employee’s gender as the basic for providing more limited benefits. That is the rationale for the Pregnancy Discrimination Act, which requires that employers treat pregnancy or childbirth, the employee needs time off for conditions related to pregnancy or childbirth, the employee would receive whatever disability benefits the organization offers to employees who take disability leave for other reasons. Another area of concern in the treatment of male and female employees is pension benefits. On average, woman live longer than men, so on average, pension benefits for female employees are more expensive (because the organization pays the pension longer), other things being equal. Some organizations have used this difference as a basis for requiring that female employees contribute more than male employees as a basis for requiring that female employees contribute more than male employees to defined benefit plans. The Supreme Court in 1978 determined that such a requirement...
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