Understanding Employee Benefits Required by Law

The Definition of Employee Benefits: compensation in forms other than cash.

Companies will use benefits to attract, retain, and motivate employees. The variety of possible benefits offered also helps employers’ custom tailor their compensation to the kinds of employees they need.

Benefits are more complex than pay structures and some benefits like social security are required by law. Employees have come to expect that benefits will help them to maintain economic security. For example, social security contributions, retirement savings, and pensions help employees prepare for retirement in the coming years.
Today’s article will cover 4 different types of benefits your employer is required to provide you by law.

Benefits Required by Law

The federal and state governments require various forms of social insurance to protect you, the fellow worker, from the financial hardships if you were to get laid off or be out of work.

  1. Social security provides support for retired workers
  2. Unemployment insurance assists laid-off workers
  3. Worker’s compensation insurance provides benefits and services to workers injured on the job
  4. Unpaid leave for medical and family needs

Social Security

Starting with the history of social security, in 1935 the Social Security Act established “old-age insurance” and unemployment insurance. Later in 1939 and 1956, Congress added survivor’s insurance and disability insurance respectively to the package. Then in 1965, hospital insurance (Medicare A) was created as well as supplementary medical insurance (Medicare B) for the elderly.

Social security covers 90% of U.S. employees with railroad workers, federal and state government workers being exempt due to having their own plans.

Social Security Compensation:

  • Benefits are paid to eligible recipients
  • Age and earnings history are taken into consideration for pay outs
  • You can start receiving full benefits at age 62
  • Spouses of covered earners receive compensation also
  • Spouses can receive payment based on their earnings history or ½ of their covered spouse’s earnings, whichever is greater
  • Benefits may be reduced if the person is still working and earning wages above the “Exempt Amount” which is $15,720 for 2016.
  • Reductions are $1 for every $2 the person earns above the exempt amount

An example: Sarah earns $17,720 and the exempt amount is $15,720 so she earns $2,000 above the exemption. This results in her benefits being reduced $1,000.

Cost of Social Security:
Employers and employees share the cost of social security through payroll tax. Employers paid 6.2% and employees paid 4.2% on the first $113,700 (2014) of the employee’s earnings.

For employees with earnings above $113,700, only a 2.9% tax for Medicare is assessed, with half paid by the employer (1.45%) and half paid by the employee (1.45%).

Unemployment Insurance

This program has 4 objectives to minimize employee hardships:

  1. Providing payments to employees to offset lost income during involuntary unemployment
  2. It helps employees find new jobs as the employer wants to stop paying the tax as soon as possible to preserve cash flow and is willing to help the employee out in getting another job
  3. It helps motivate employers to stabilize employment or else pay the tax for unemployment insurance
  4. Paying employees during short-term layoffs can help them afford to wait out the layoff and return to work, thus the payments help preserve investments in worker skills & training

Most of the funding for unemployment insurance comes from federal and state tax on employers.

The federal tax is 0.8% currently of the first $7,000 of each employees wages. The state tax varies from less than 1% to more than 15%, and the taxable wage base ranges from $7,000 to $38,800 (2012).

States impose tax based on experience rating – the number of employees a company has laid off in the past and the cost of providing them with unemployment benefits. So a company with a large share of layoffs will pay higher taxes than a company with a lower share of layoffs.

How to Receive Benefits:

To receive benefits; workers must meet four conditions:

  • Meet requirements that they had been employed (often 52 weeks or 4 quarters)
  • They are available for work
  • They are actively seeking work (they’ve registered at the local unemployment office)
  • They weren’t discharged for cause, did not quit voluntarily, and are not out of work because of a labor dispute (union members)

Wages will typically be half of the worker’s previous earnings – for a period of 26 weeks. All states have minimum and maximum weekly benefit levels.

Workers Compensation

Laws have been passed to help workers with the expenses resulting for job-related accidents and illnesses. These laws operate under “no fault liability.” Basically, an employer is protected from lawsuits but must pay workers comp. The only way they can lose protection is if they contributed to the dangerous work environment.
Employees cannot receive compensation if it is the result of self-infliction or a result of being intoxicated.

4 Major Categories of Benefits:

  • Disability Income
  • Medical Care
  • Death Benefits
  • Rehabilitative Services

The amount of income will vary but it is typically 2/3 of the wages the worker was earning before the disability. The benefits are Tax Free.

Unpaid Family and Medical Leave

The Family and Medical Leave Act of 1993 requires organizations with 50+ employees within a 75 mile radius to provide as much as 12 weeks of unpaid leave to employees for:

  • Childbirth
  • Adoption
  • Care of a seriously ill child, spouse, or parent
  • Employee’s own serious illness
  • Needs relating to a child, spouse, or parent called into the National Guard or Reserve

The law does not cover:

  • Employees with less than 1 year of service
  • Employees that work less than 25 hours per week
  • Employees that are among the organizations top 10% highest paid

Most employees do not take more than 40 days leave even though they get 90 days by law. This may be because they can’t afford to be on unpaid leave for a full 12 weeks or because the issue was resolved within 40 days.

Netflix and LinkedIn recently started giving employees unlimited unpaid leave as part of their compensation package. The tech companies have been competing for top talent for years and this new policy is another way to win over potential employees from competitor firms as well as ensure they retain their top talent they currently have.

Unpaid leave can gives families a better work life balance allowing Mom’s and Dad’s to take better care of their kids and spend more time with them. A lot of American families in today’s time put work before family and the work life balance has gotten really disproportionate.

Parents end up coming home to a second shift of taking care of the house chores and tending to their kids needs before finally getting to rest late at night.

What are your thoughts on the companies moving to unlimited unpaid leave?

Talk soon,


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