Employee

Benefits
Employee Benefits
Employee benefits, sometimes called fringe benefits, are those
rewards that employees receive for being members of the
organization and for their positions in the organization. Unlike
wages, salaries, and incentives, benefits are usually not related to
employee performance. The term fringe benefits was coined over
40 years ago by the War Labor Board. Reasoning that employer
provided benefits such as paid vacations, holidays, and pensions
were 'on the fringe of wages,' the agency exempted them from
pay controls. It has been argued that this action, more than any
single event, led to the dramatic expansion of employee benefits
that has since occurred. However, because of the significance of
benefits to total compensation, many employers have dropped the
word fringe for fear that it has a minimizing effect.
What Are Employee Benefits?

In general employee benefits can be grouped into five

major categories which are not all mutually exclusive:

– legally required
– retirement related
– insurance related
– payment for time not worked

Most benefits apply to all employees of the organization

however, some are reserved solely for executives.
Certain benefits, such as health insurance, are often
extended to include spouses. Some companies have
extended these coverage to include unmarried
heterosexual and homo­sexual partners of unmarried
employees.
Disability benefits

Pensions may be granted under social security to

eligible employees who have a disability that is
expected to last at least 12 months or to result in
death. To be eligible, a person must have worked in a
job covered by social security for at least 5 out of 10
years before becoming disabled. These pensions are
calculated with basically the same methods used for
calculating retirement benefits.
Unemployment compensation

Unemployment compensation is designed to provide funds to

employees who have lost their jobs through no fault of their own and
are seeking other jobs. Title IX of the Social Security Act of 1935
requires employers to pay taxes for unemployment compensation,
However, the law was written in such a manner as to encourage
individual states to establish their own unemployment system. ­If a
state established its own unemployment compensation system
according prescribed federal standards, the proceeds of the
unemployment taxes paid an employer go to the state.

To receive unemployment compensation, an individual must submit

an application through the state employment office and must meet
three eligibility .­requirements: The individual must (1) have been
covered by social security for ­a minimum number of weeks, (2) have
been laid off (in some states, discharge employees may qualify), and
(3) be willing to accept any suitable employment :­offered through the
state's unemployment compensation commission.
Workers' compensation

Workers' compensation is meant to protect

employees from loss of income and to cover extra
expenses associated with job related injuries or
illness. Since 1955, several states have allowed
workers' compensation payments for job‑related
cases of anxiety, depression, and certain mental
disorders. Although some form of workers'
compensation is available in all 50 states, specific
requirements, payments, and procedures vary among
states.
However, certain features are common to virtually all programs:

1. The laws generally provide for replacement of lost income, medical expense
payments, rehabilitation of some sort, death benefits to survivors, and
lump‑sum disability payments.

2. The employee does not have to sue the employer to get compensation;
in fact, covered employers are exempt from such lawsuits.

3. The compensation is normally paid through an insurance program

financed through premiums paid by employers.

4. Workers' compensation insurance premiums are based on the accident and

illness record of the organization. A large number of paid claims results in
higher premiums.

5. An element of coinsurance exists in the workers' compensation

coverage. Coinsurance is insurance under which the beneficiary of the
coverage absorbs part of the loss.

6. Medical expenses, on the other hand, are usually covered in full under
workers' compensation laws.

7. It is a no‑fault system; all job‑related injuries and illnesses are covered

regardless of where the fault for the disability is placed.
Retirement‑Related Benefits

In addition to the benefits required

by law under social security, many
organizations provide additional
retirement benefits. These
benefits are in the form of private
pension and retirement plans.
Pension plans

Pension and retirement plans, which provide a source of income

to people who have retired, represent money paid for past
services. Private pension plans can be funded entirely by the
organization or jointly by the organization and the employee
during the time of employment. Plans requiring employee
contributions are called contributory plans; those that do not are
called noncontributory plans. Funded pension plans are financed
by money that has been set aside previously for that specific
purpose. Non funded plans make payments to recipients out of
current contributions to the fund. One popular form of pension
plan is the defined‑benefit plan. Under a defined‑benefit plan, the
employee ­pledges to provide a benefit determined by a definite
formula at the employee’s retirement date. The other major type
of retirement plan is the defined‑contribution plan, which calls for
a fixed or known annual contribution instead of a known benefit.
Defined‑benefit plans

Defined‑benefit plans make up the majority of

pension plans and have a specified formula for
calculating benefits. Although there are numerous
such formulas, the most popular approach has been
the final‑average pay plan, in which the retirement
benefit is based on average earnings in the years,
generally two or five, immediately preceding
retirement. The actual benefit sum is then computed
as a function of the person's calculated average
earnings and years of service. In an­other common
approach, the flat‑benefit plan, all participants who
meet the eligibility requirements receive a fixed
benefit regardless of their earnings.
Insurance‑Related Benefits

Insurance programs of various types represent an

important part of any benefit package. For example, the
U.S. Chamber of Commerce reported that of 929
companies surveyed in 1994, 98 percent provided some
form of medical insurance. At the same time, however,
many employees of small companies (which are not
included in the U.S. Chamber of Commerce survey) are
not covered by company‑sponsored health insurance.
Company‑sponsored medical insurance programs are
designed so that the employer pays either the entire
premium or a portion of it, with the employee responsible
for the balance. The entire issue of health insurance has
been vigorously debated by the U.S. Congress over the
last several years. Although no major legislative changes
related to health insurance have been enacted, some may
be forthcoming.
Health insurance

In addition to normal hospitalization and outpatient

doctor bills, some plan, now cover prescription drugs
and dental, eye, and mental health care. Many health
care plans incorporate a deductible, which requires
the employee to pay a certain amount of medical
expenses each year (usually $50 or $150 per per­son)
before the insurance becomes effective. The health
insurance plan then pays the bulk of the remaining
expenses. Some plans pay the entire cost of health
insurance for both the employees and dependents,
some plans require the employee to pay part of the
cost for dependents only, and some plans re­quire the
employee to pay part of the cost for both.
Managed care

Due to rapidly escalating health care costs, many

organizations have turned to various forms of
managed care. The idea behind managed care
programs is for the provider of the heath care,
usually an insurance company, to organize and
manage the program in a manner that will control
costs. Managed care can be provided in a variety of
forms.
Life insurance

Life insurance is a benefit commonly available from

organizations. When pro­vided for all employees, it is
called group life insurance. Costs of this type of
insurance, based on the characteristics of the entire
group covered, are typically the same per dollar of
insurance for all employees. Generally, the employer
pro­vides a minimum coverage, usually $10,000 to
$20,000. Employees often have the option to purchase
more insurance at their own expense. A physical
examination is usually not required for coverage.
Accident and disability insurance

In addition to health, dental, and life insurance, many

organizations provide some form of accident or disability
insurance, or both. Most accident insurance is designed to
provide funds for a limited period of time, usually up to 16
weeks. The amount of benefit is often some percentage of the
accident victim's weekly salary. Disability insurance is
designed to protect the employee who experiences a
long‑term or permanent disability. Normally, a one‑ to
six‑month waiting period is required following the disability
before the employee becomes eligible for benefits. As with
accident insurance, disability insurance benefits are usually
calculated as a percentage of salary.
Payment for Time Not Worked

It is now standard practice for organizations to pay

employees for certain time­when they do not work.
Rest periods, lunch breaks, and wash‑up times
represent times not worked that are almost always
taken for granted as part of the job. Recognized
holidays, vacations, and days missed because of
sickness, jury duty, and funerals represent other
compensated times that are not worked.
Paid holidays and paid vacations

Christmas Day, New Year's Day, Thanksgiving Day,

Independence Day, Labor Day, and Memorial Day
are currently provided as paid holidays by most
companies. One relatively new concept is the
floating holiday, which is observed at the discretion
of the employee or the employer. The number of
paid holiday provided by most companies appears
to have stabilized at an average of 9 to 16 per
year.
Other Benefits

In addition to the previously discussed major

benefits, organizations may offer a wide range of
additional benefits, including food services, health
and first‑aid services, financial and legal advice,
counseling services, educational and recreational
programs, day care services, adoption assistance,
and purchase discounts.
Communicating the Benefit Package

Although most organizations provide some

form of benefits to their employees the
average employee often has little idea of what
he or she is receiving. An early 1990s survey
of 600 human resource managers found that
over 77 percent believed employees generally
did not understand the benefit programs pro­
vided by their respective companies. Why arc
employees often unaware of their benefits?
One explanation is that organizations do not
make much of an effort to communicate their
employee benefits.
Employee Preferences among Benefits

If an organization expects to get the maximum return

from its benefit package in terms of such factors as
motivation, satisfaction, low turnover, and good
relations with unions, the benefits should be those
most preferred by its employees. Ironically, however,
organizations traditionally have done little to ensure
that this is the case. Historically, they have offered
uniform benefit packages selected by the human
resource department and top management. Only on
rare occasions or when demanded by a union contract
are employees consulted concerning their benefit
preferences.
Flexible‑benefit plans

Because of the differences in employee preferences,

some companies began to offer flexible benefit plans in
the mid‑1970s. Under a flexible‑benefit plan, individual
employees have some choice as to specific benefits
each will actually receive; usually employees select
from among several options how they want their direct
compensation and benefits to be distributed. The idea
is to allow employees to select benefits most
appropriate to their individual needs and lifestyles. For
example, a middle‑aged employee with several children
in school might choose to take a set of benefits
different than those chosen by a young, single
employee.
Problems with flexible plans

Flexible plans are not without their difficulties. The

major problems are as follows:

˜ A flexible plan requires more effort to administer.

˜ Unions often oppose flexible plans because they are

required to give up control over the program details or
face losing some of their previously negotiated
benefit improvements.

˜ Employees may not choose those benefits that are in

their own best interests.

˜ Tax laws limit the amount of individual flexibility in

certain situations.