Employee Benefits

AuthorLawrence Kleiman, Tim Barnett

Page 223

Employee benefits, sometimes called fringe benefits, are indirect forms of compensation provided to employees as part of an employment relationship. To compete for quality employees in today's marketplace, employers must do more than offer a "fair day's pay." Workers also want a good benefits package. In fact, employees have grown accustomed to generous benefits programs, and have come to expect them.

Employee benefits exist in companies worldwide, but the types and levels of benefits vary greatly from country to country. Generally speaking, companies in industrialized countries in Europe and North America offer employees the most generous benefit packages. Even within the industrialized world, however, employee benefits can vary significantly. For example, employees in Germany and other European countries receive more vacation days than the average U.S. employee. Conversely, most employers in the U.S. offer some form of medical/health insurance to employees. But most companies in European countries don't offer this employee benefit, because it is provided through government-sponsored socialized medicine programs.


Employee benefits were not a significant part of most employees' compensation packages until the mid-twentieth century. In the U.S., for example, benefits comprised only about 3 percent of total payroll costs for companies in 1929. According to U.S. Chamber of Commerce, however, employee benefits in the U.S. now comprise approximately 42 percent of total payroll costs. Several things account for the tremendous increase in the importance of employee benefits in the U.S. In the 1930s, the Wagner Act significantly increased the ability of labor unions to organize workers and bargain for better wages, benefits, and working conditions. Labor unions from the 1930s to 1950s took advantage of the favorable legal climate and negotiated for new employee benefits that have since become common in both unionized and non-union companies. Federal and state legislation requires companies to offer certain benefits to employees. Finally, employers may find themselves at a disadvantage in the labor market if they do not offer competitive benefit packages.


In the U.S., legislation requires almost all employers to offer the social security benefit, unemployment insurance, and workers' compensation insurance. Larger companies (those with 50 or more employees) are also required to offer employees an unpaid family and medical leave benefit. Each of these legally required benefits is discussed briefly below.


The Social Security Act of 1935, as amended, provides monthly benefits to retired workers who are at least 62 years of age, disabled workers, and their eligible spouses and dependents. Social Security is financed by contributions made by the employee and matched by the employer, computed as a percentage of the employee's earnings. As of 2005, the combined contribution of employer and employee for retirement, survivors', and disability benefits was 12.4 percent of the first $90,000 of employee income. Monthly benefits are based on a worker's earnings, which are adjusted to account for wage inflation. The Social Security Act also provides Medicare health insurance coverage for anyone who is entitled to retirement benefits. Medicare is funded by a tax paid by the employer and employee. The tax rate for Medicare is a combined 2.9 percent of the employee's total wage or salary income.


Unemployment compensation provides income to unemployed individuals who lose a job through no fault of their own. Eligible workers receive weekly stipends for 26 weeks. The specific amount of the stipend is determined by the wages the claimant was paid during the previous year. Unemployment compensation laws in most states disqualify workers...

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