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hapter Wage and Salary Issues

Starbucks paid $18 million to settle an overtime dispute with its employees. The U.S. Department of Labor in 2010 reported a record number of class action lawsuits in which workers won millions of dollars in overtime wages.

Source: AP Images.

Men work for two reasons. One is for wages, and one is for fear of losing their jobs.

Henry Ford (Founder and President, Ford Motor Company)

Chapter Outline

7.1. Union Wage Concerns

7.2. Management Wage Concerns

7.3. Negotiated Wage Adjustments

7.4. Concession Bargaining

7.5. Wage Negotiation Issues

7.6. Wage Surveys

7.7. Costing Wage Proposals

Labor News Overtime Cases Won by Workers

Mark R. Thierman, a Reno, Nevada, attorney and Harvard Law School graduate was a “union buster” management labor attorney for 20 years. Not anymore! Today, he is called the “trailblazer” of what has become a hotbed of U.S. employment cases: the overtime provision of the Fair Labor Standards Act (FLSA). From 2001 to 2010, the number of cases filed in federal courts more than doubled. The U.S. Chamber of Commerce describes it as the “FLSA litigation explosion,” which has led to over $1 billion annually in settlements in recent years. The cases are usually filed against employers on behalf of a large group of employees and have included the following:

· Starbucks: $18 million settlement to store managers in California

· UPS: $87 million settlement to 23,000 drivers

· Walmart: $172 million jury award to California workers and $78.5 million jury award to Pennsylvania workers

· Sony: $8.5 million settlement to video-game employees

· Citigroup/Salomon Smith Barney: $98 million settlement to 20,000 stockbrokers

· IBM: $65 million settlement to 32,000 technical and support workers

· Unite Here: The labor union has been charged with failing to pay organizers overtime

· Abbott Laboratories: A federal judge ruled pharmaceutical reps are due overtime

The core issue of the cases is employers’ failure to pay workers time-and-a-half pay for hours worked over 40 per week as required by the federal law—overtime. About 86 percent of the U.S. workforce is entitled to overtime according to the U.S. Department of Labor, or 115 million workers. Only certain workers are exempt from the law: mostly supervisors, professionals, and executives.

Why the recent deluge of cases? In 2010 the U.S. Department of Labor cited the following as possible reasons for the increase in class action suits for overtime violations:

· Successful employees are receiving double damages plus attorney fees—making it worth their efforts.

· Some employers are unclear about new overtime guidelines.

· Workers are more informed of their rights and willing to file suits.

· Competitive economic forces are increasingly causing employers to seek ways of cutting costs.

Source: Adapted from Michael Orey, “Wage Wars: Workers from Truck Drivers to Stockbrokers Are Winning Huge Overtime Lawsuits,” Business Week (October 1, 2007), pp. 52–60; Tracy Staton, “Abbott Sales Reps Win Overtime Pay Lawsuit,” FiercePharma Newsletter (June 15, 2010); and Joanne Deschemaux, “Wage and Hour Class Actions on the Rise,” HR Magazine 55, no. 7 (July 2010), p. 11.

Wages and other economic benefits for employees are undoubtedly the “meat and potatoes” of collective bargaining in labor relations. To the employee, they represent not only their current income and standard of living but also potential for economic growth and the ability to live comfortably during retirement. Wages are often considered the most important and difficult collective bargaining issue. When newly negotiated settlements are reported to the public, often the first item specified is the percentage wage increase received by employees. In fact, in many cases that may be the only item employees consider critical or an absolute must as they vote to ratify a tentative agreement. They focus on “the number”—the percentage wage increase in the contract.

According to industrial research, historically pay level has been positively related to employee satisfaction.
 Employees consider their pay to be a primary indicator of the organization’s goodwill. Many individuals in our society consider the salary or income one receives a measure of one’s worth. Employees can get an exact measure of their salary, which can easily be compared with the salaries of fellow employees and those in other organizations and occupations. Therefore, most of us consciously or subconsciously compare our income levels not only with inflation and our cost of living but also with incomes of other individuals.

Wages and benefits are also a prime collective bargaining issue to the employer. They represent the largest single cost factor on their income statement. Although many management negotiators would like to pay higher wages to employees, the reality of competition and the knowledge that competitors may be able to secure less expensive labor can make it difficult for a business to survive. Unlike many costs, such as capital and land, wages constantly rise, and they are not as easy to predict. Wages paid to employers in an area are also key issues to governments because they often are the largest source of tax revenue to federal, state, and local governments and in general are a strong indicator of the economic vitality of a community.

The total economic package of wages and benefits may be negotiated as one item rather than individual items, enabling both sides to estimate accurately the total cost of the contract to the organization in terms of increases over current salary and benefits. In this chapter we discuss wage issues; employee benefits are covered in 
Chapter 8
. Wages and benefits are separated to draw a distinction between the two; however, negotiators consider both a part of the total economic package.

Labor and management negotiators normally define pay by either time worked or units of output. 
Pay for time worked
, or an hourly wage or annual salary, has become the predominant means of employee compensation in the United States. Most labor contracts contain specific job titles and associated wage scales agreed on by labor and management. 
Table 7-1
 shows an example.

Pay for time worked

Employee wage rate based on the time actually worked (hours, days, shifts, etc.).

Table 7-1

Job Classifications and Wage Rates

Hire Rate ($)





Die Repair








Cage Attendant

Material Handling

Head Loader


Crane Operator

Material Handling



Material Handler

Material Handling


Door and Window



Plant Truck Driver





Material Handling

Material Handler

Material Handling






Glass Cutter

Insulated Glass

Sample Builder


Glass Washer and Assembler

Insulated Glass

Spacer Assembly

Insulated Glass

Door Prehanger




Small Punch Press Operator




Window Wrapper





Material Handling



Equipment Operator

Paint Line



Assistant Equipment Operator

Paint Line

Source: Adapted from UAW-Chrysler Newsgra (October 2007). Available at www.uaw.org. Accessed February 23, 2007. Used by permission.

Pay for units produced, usually referred to as piecework, is still used in many industries as not only a means of wage determination but also a motivational technique. Many piecework systems today provide a guaranteed salary with an additional rate established for units of output above a certain production level.

Union Wage Concerns

“A fair day’s pay for a fair day’s work” is a commonly used phrase summing up the expectations of many employees. Employees expect and even demand to be treated fairly and honestly by the organization. Although most are reasonable in their pay expectations, a few often believe they are being underpaid. If employees perceive that they are unfairly treated by the organization, particularly in pay matters, they typically react by leaving the workplace either temporarily through absenteeism and tardiness or permanently through seeking employment at another organization, by reducing the quantity or quality of their production, or by filing a grievance or enacting a work stoppage through the union. Eventually their pay dissatisfaction will be brought to the bargaining table, leading to demands for higher wages. Or they may change their perceptions of pay inequity by simply accepting the inequity, although this response may become a permanent morale factor.

pay equity
 in the workplace is difficult. The slogan “equal pay for equal work” is a guide that union and management leaders follow and that employees expect to be maintained. Obviously not all jobs involve work of equal value to an organization. The first-year bookkeeper does not expect the same pay as a tax accountant; the same is true for a punch press operator and a maintenance attendant. Employees understand that the value of the work leads to different pay grades and classifications for different jobs. As shown in 
Table 7-1
, labor agreements commonly provide for different job classifications being assigned different pay grades according to level of skill and work demanded. As long as pay grades are fairly structured and evenly applied, employees usually have no trouble accepting differential pay based on job classification and internal wage levels, unless, as seen in Case 7-1, pay differentials are not based purely on job classifications.

Pay equity

A historic union doctrine of “equal pay for equal work” that provides one standard pay rate for each job and all employees who perform it.

CASE7-1 Wages: Extra Compensation

The company operated a centralized facility to provide public transportation. The bargaining unit consisted of the vehicle operators, excluding supervisors, substitutes, guards, and office personnel. The collective bargaining agreement (CBA) was in effect from October 1, 1996 to June 30, 1999.

The operation was decentralized in April 1997 when the company opened seven suburban service center locations. Because the company had acted before hiring the management supervisory personnel at each site, it decided to assign certain unit drivers to temporary positions titled “coordinator.” These persons had limited supervisory authority but functioned as leaders in each service center. These positions were opened to the company’s unit member drivers, who applied and filled the positions. The company paid a $1 an hour stipend in addition to the regular contract rates for drivers for the additional leader duties. The additional duties specified for such coordinators were listed as opening and closing the facility, coordinating the work and assignments of drivers, and overseeing that proper service was provided. Additionally, these persons dispatched drivers and handled answering the telephone. This move and the temporary assignments were negotiated with the union, but no agreement was reached, nor was any objection raised to the procedure.

By July 1998, the service centers had been staffed with managers, and the company acted to eliminate the leader duties previously done by coordinators. However, certain duties, such as dispatch and telephone answering, were still assigned to the classification now known as “service provider,” which was a change from the former “driver” title. This realignment of duties was not negotiated with the union. When the company made this realignment of duties, those who had previously served as coordinators were continued at the $1-per-hour stipend out of recognition of the commitment those people had made to help the company. It viewed this as a grandfathering of the wage for those individuals. However, the company did not apply the $1 stipend to other individuals who served thereafter as service providers.

Ultimately, the union grieved extra duties assigned to the former driver classification and that certain employees who were classified as service providers were entitled to the $1 stipend because of the duties that they were performing, particularly the dispatching. The union complained that the company violated the contract and the law by unilaterally establishing terms and conditions of a new classification. The effectuation of such terms and conditions, including the assignment of duties and the payment of additional wages, is clearly contrary to the contract. Employees who are assigned such duties as telephone and dispatch should be paid at the same rate as others who formerly performed as coordinators.

The company insisted that it has the management right to assign duties to the drivers that are not inconsistent with the classification and the general purpose of the operation. In establishing coordinators on a temporary basis, it did exactly that and, in addition, compensated them for certain leader/supervisory obligations. When the need for the performance of such duties ended, the company properly removed such assignments. The fact that such employees and others later performed the function of dispatch and telephone should not be considered leader/coordinator duties for which an additional $1 stipend was paid but rather normal assignments permitted the company under the contract. All employees are paid equally for the same work within the classification, including dispatching and telephone. The only distinction is that those employees who formerly served as coordinators had been granted a special continuing rate of pay in light of their willingness to make the previous commitment to assist. In no respect did the company ever commit to pay an additional $1 for all drivers performing such nonleader/supervisory duties. There is no disparity in pay.


A key to this dispute is the question of whether the company would have, in the past, prior to the new service centers, violated the contract by assigning to members of the unit such duties as dispatching and telephone as are now done by certain service providers.

Under the management rights clause, there is certain flexibility and discretion allowing the company to assign related duties. The contract does not have any clear limitation on the assignment of such additional work. As long as such tasks are not supervisory and are reasonably related to the purpose—providing customer transportation—they may be included. In setting up the service centers, the company acted in somewhat of a hurry, so it did not have the managers and, hence, had to make use of drivers by assigning them temporarily to additional duties of a leadership nature. There was no objection to the process of application and interview and placement, nor was there any objection to the fact that the company paid an extra $1-per-hour stipend. The company never indicated that this move was intended to be permanent. The company saw certain leadership duties as beyond the scope of the classification and was willing to pay, but that did not create an obligation to continue it indefinitely.

When the company put managers in place, it no longer required the coordinators to perform supervisory tasks. However, there still was a need for nonmanagerial duties, such as dispatch and telephone answering, to be done. The question is whether after the managers were in place it was improper for the company to assign such duties to unit members without the additional compensation.

The fact that some former coordinators continued to do such tasks and received the $1 stipend is not determinative of the company’s commitment because, as the company explained, it felt committed to those people who had helped in the transition. Payment to such former coordinators does not, under the circumstances, establish any right of others who are assigned such duties. The issue is whether the company was obligated to “pay equally” everyone within the classification who performs the same duties.


The court found that the company did not violate the contract by adding nonsupervisory duties to the service provider classification under its management rights clause because those duties are reasonably connected to the operation of transporting customers and therefore within the scope of the prior driver classification. Furthermore, when the company filled the management positions, the company rightfully discontinued the leader/supervisory duties of the employees designated as coordinators. However, the duties attributable to their status as service providers—dispatch, telephone, and so on—were not leader/supervisory duties and properly were retained within the scope of the service provider classification. Continuing assignment of such work to former coordinators with the $1 stipend and to others without such extra compensation did not create a new compensation level or disparate treatment of persons within the classification because the company had the right to continue to pay those individuals $1 more an hour in appreciation of their service.

Source: Adapted from The Mass Transportation Authority v. AFSCME Local 1223, 115 LA 521 (2000).

Worker/CEO Pay Gap

In recent years a new pay equity issue has emerged—the worker/CEO pay gap. The gap is growing, according to a study by the National Bureau of Economic Research. In 1970, the average full-time worker earned $32,522, whereas the average CEO or top corporate executive earned $1.25 million (adjusted to 1998 dollars). By 2007, the average worker’s pay increased by 24.2 percent to $40,409, while the average Standard & Poor’s 500 Company CEO pay increased by more than 3,720 percent to 15.06 million.
 The difference in CEO pay and worker pay can irritate all workers, but poor timing of pay decisions can further strain management–union relations. For example, in 2003, as American Airlines asked three unions to accept deep pay and benefit cuts of about $10,000 per year per worker, or almost 20 percent of their total compensation, American Airlines disclosed special payments to 45 top executives of about $100 million of the $1.8 billion in concessions gained from the workers. Six top executives received a bonus equal to twice their base salaries. One union member, Joseph Szubryt, who supported the pay cuts to save union jobs exclaimed, “This feels like a stab in the back. … On the day we voted for all this stuff (pay and benefit cuts) … they disclose this? How the heck could these guys do that?”

Some wage systems provide for higher wages to employees with more longevity. Thus, seniority helps employees not only in bidding for open jobs but also in receiving higher pay. Even though less senior employees perform the same work, everyone realizes that longevity pay serves as an incentive to stay with the organization. But pay inequities can develop for any number of reasons, as seen in the discussion of mergers in 
Profile 7-1

Union Wage Objectives

How have unions, as organizations, affected the wages of their workers through the collective bargaining process? What primary objectives have unions held when negotiating wages? An extensive review of the related research by Bruce Kaufman, Department of Economics and the W. T. Beebe Institute of Personnel and Employment Relations at Georgia State

Profile 7-1 Pay Equity In Company Mergers

Mergers and acquisitions are common in today’s malleable business climate and have a significant impact on a wide range of employee issues. One major area of concern, of course, is how merging two organizations’ compensation plans affect employees’ pay. Experts advise that companies need to see the issue as more than just coordinating two payroll systems. “You have to make sure that you’re doing it in a holistic way, not just nailing one company to the other,” said Ken Ransby, a principal in the San Francisco office of Towers Perrin. Ransby went on to suggest that although it might be ideal to use the best aspects of each organization’s pay systems, such an approach might be too costly.

Before deciding how to approach compensation issues, the merged company should examine the underlying business reasons for the merger. If full integration of the two or more organizations was the goal, then the compensation systems must be aligned. Aligning pay systems requires a detailed analysis of the pay systems, consideration of how the organizations define pay, and recognition of geographic factors that cause pay disparities.

When Pfizer Animal Health Group acquired SmithKline Beecham Animal Health Business, the two compensation systems offered comparable pay, but Pfizer relied more on base pay whereas SmithKline offered incentive pay. The merged company wanted a single pay system, so it needed to integrate the SmithKline system into Pfizer’s without having the SmithKline workers feel they were losing out. The solution was to fold into those former SmithKline workers’ base pay an average annual incentive payout based on the three years prior to the merger.

Source: Adapted from “Company Mergers and Acquisitions Present New Pay Equity Considerations for Employers,” Labor Relations Reporter, 158 LRR 393 (July 27, 1998).

University, produced eight dimensions of the effects union wage negotiations have caused in the past 56 years:

1. Union goals in wage bargaining. Lynn Williams, former president of the United Steelworkers Union, summarized union wage goals as (1) “achieving the maximum level of wages and benefits for its members” and (2) “maintain[ing] all the jobs it could within as viable an industry as possible.”

2. The union–nonunion wage differential. In the United States the size of the union versus nonunion wage differential, on average, is currently about 19 percent. Thus compared to nonunion workers on similar jobs, union workers receive more pay. However exceptions exist. Some nonunion workers at Delta Air Lines, for example, before the merger with Northwestern airlines, were paid more than the union workers at Northwestern.

3. Union wage differentials over time. From the end of World War II to the early 1980s, the union–nonunion wage differential in the United States continued to increase, but since the early 1980s, it has had a modest decline.

4. Union wage rigidity and wage concessions. Unions have historically tried to hold to the principle of no “givebacks” or “backward steps” in wages, even to the point of letting a company go out of business rather than accept a cut in wages.

5. Wage structure. Unions have also affected the structure of wage scales among workers within one employer or industry, negotiating for differences in working conditions, skills, seniority, age, and job classification. They have typically “flattened” or “compressed” the wage structure among workers in a plant or company and between skilled and unskilled workers.

6. The form of compensation. Unions in most cases have bargained for wages based on time or hours worked. They have opposed pay systems based on output, such as a merit or piece-rate systems or merit evaluations by supervisors. They have also bargained for additional forms of compensation that are awarded across the board, such as bonuses based on seniority, overtime, and pensions.

When Pfizer acquired Smithkline, Pfizer found it needed to align the two pay systems both accomplish its goals for the merger and to be fair to employees.

Source: Mark Lennihan/AP Images.

7. Employment effects. Unions have in general negotiated for practices and work rules that create or maintain more jobs. Examples include restrictive work rules limiting what duties persons can perform in their job description and “make-work” or “featherbedding” jobs.

8. Pattern bargaining. Unions have generally strived to pattern bargain or obtain similar wage gains from separate employers within the same industry or sometimes within similar industries or a community. The extent of pattern bargaining has declined somewhat since the 1980s.

Industrial Differentials

Industrial wage differentials also provide a logical basis for differences in pay among employers in the same labor market. Employees recognize that the relationship between labor and total production costs affects their wage levels. Organizations in highly labor-intensive industries are usually less able to provide wage increases than organizations that are in more capital-intensive industries. For example, if a specialized chemical processing plant that has few competitors increased its wage rates by 10 percent, it would need to raise prices by only 0.6 percent to absorb the wage increase because only 6 percent of its total production costs would be attributable to labor. However, if a southern textile firm raised its wages by 10 percent, it would need to raise prices by 7 percent because its labor costs would equal 70 percent of total production costs. A 7 percent price increase could be disastrous to the highly competitive textile organization. Employees accept and understand that not all employers, because of their profitability or current competitive position within the marketplace, can be the highest-paying organization in the industry. If profits decrease so much that the organization suffers losses, wage demands usually reflect the reality of the economic times.

Management Wage Concerns

Wage and benefit changes have an impact on the cost of the production of goods and services. Management must consider how a change in wages will affect its pricing policy and ability to compete in the marketplace. It is often mistakenly inferred that management wants to minimize its labor costs for no particular reason or because employees are not appreciated. The reality is that management needs to maintain competitive labor costs to produce and price their products successfully within their industry. Thus, maintaining a competitive industry position is a primary aim of management in negotiations.

This practice, known as 
pattern bargaining
, can be highly successful for both management and labor.

Pattern Bargaining

A collective bargaining practice in which a national industry or union strives to establish equal wages and benefits from several unions or employers in the same industry.

The steel and auto industries, airline, petroleum, meatpacking and food industries, among others, have used pattern bargaining. Typically, the union leaders choose what they perceive as the weakest company—the one m