Did you know your company could unknowingly be guilty of price fixing and monopolization if you collude with other companies on compensation levels and practices?  Labor costs have been determined to be a component of a company’s pricing for products and services.  Use of an independent party and sources for compensation data is critical.  We help every business in America 

Understanding Federal and State Laws That Apply to Compensation

Compensation is one of the most critical areas of Human Resources management. It directly affects employee satisfaction, retention, and organizational compliance with labor regulations. In the United States, employers must navigate a complex landscape of federal and state laws governing compensation. These laws aim to ensure fairness, transparency, and accountability in how employees are paid.

Failure to comply with compensation laws can result in lawsuits, fines, damaged reputations, and even criminal charges. Therefore, employers must understand the major federal laws governing compensation, be aware of how state laws may differ or expand on these protections, and implement strong policies to ensure ongoing compliance.

This article provides an in-depth overview of the primary federal laws that govern employee compensation, explores how state laws vary, and highlights best practices for managing these regulatory requirements.

1. Federal Laws Governing Compensation

The United States Department of Labor (DOL) and the Equal Employment Opportunity Commission (EEOC) are primarily responsible for enforcing federal compensation laws. Below are the key statutes:

1. Fair Labor Standards Act (FLSA)

The FLSA, passed in 1938, is the most influential piece of federal legislation related to compensation. It governs:

• Minimum Wage: Establishes a federal minimum wage, currently $7.25 per hour (as of June 2025).
• Overtime Pay: Requires that most employees receive overtime pay at 1.5 times their regular rate for hours worked over 40 in a workweek.
• Exempt vs. Nonexempt Status: Defines the criteria under which employees are exempt from overtime, such as executive, administrative, and professional roles meeting salary thresholds and job duty requirements.
• Child Labor: Restricts the employment of minors in certain jobs and limits their working hours.
• Recordkeeping Requirements: Mandates that employers maintain accurate records of hours worked and wages paid.

Violations of the FLSA can result in back pay awards, liquidated damages, and penalties.

2. Equal Pay Act of 1963 (EPA)

The EPA prohibits wage discrimination based on sex. It requires that men and women in the same workplace be paid equally for performing substantially equal work in terms of skill, effort, responsibility, and working conditions.

Employers may justify pay differentials based on:

• Seniority
• Merit
• Quantity or quality of production
• Any factor other than sex (e.g., experience, education)

This law is enforced by the EEOC and is often cited in pay equity lawsuits.

3. Title VII of the Civil Rights Act of 1964

While primarily an anti-discrimination statute, Title VII has compensation implications. It prohibits compensation discrimination based on:

• Race
• Color
• Religion
• Sex (including pregnancy, gender identity, and sexual orientation)
• National origin

Employers must ensure that pay practices do not perpetuate unlawful disparities between protected groups.

4. Americans with Disabilities Act (ADA)

The ADA prohibits compensation discrimination against individuals with disabilities. Employers must pay qualified individuals with disabilities the same as others doing similar work and provide reasonable accommodations unless doing so imposes an undue hardship.

5. Age Discrimination in Employment Act (ADEA)

The ADEA protects employees age 40 and older from discrimination in compensation and other terms of employment. Employers cannot pay older workers less simply due to age, and pay differences must be based on legitimate, nondiscriminatory factors.

6. Family and Medical Leave Act (FMLA)

While the FMLA primarily governs leave, it has compensation-related provisions. For instance:

• Employers must maintain group health benefits during leave.
• Employees returning from leave must be restored to the same or equivalent pay and position.

7. Davis-Bacon Act and Related Acts

Applicable to federal construction contracts, this law requires contractors and subcontractors to pay laborers and mechanics the prevailing wage rates and fringe benefits as determined by the U.S. Department of Labor.

8. McNamara-O’Hara Service Contract Act (SCA)

This law applies to federal service contracts and mandates that contractors pay employees minimum wages and benefits specified in DOL wage determinations.

9. Portal-to-Portal Act

An amendment to the FLSA, this law clarifies what time is compensable. Generally, time spent on activities like commuting or waiting before a shift is not paid unless specifically required by the employer.

10. Sherman Antitrust Act of 1890

A federal law designed to promote free competition in the marketplace by prohibiting monopolies and other anti-competitive practices. It essentially aims to prevent businesses from forming trusts, engaging in price-fixing, or otherwise restraining trade.  Courts have ruled that labor costs are part of a company’s pricing models and for companies to collude on compensation practices outside of using a 3^rd party, they could be afoul of this law.

1. State Compensation Laws

While federal laws provide a baseline, state laws can expand employee protections and frequently establish higher standards. Employers must comply with whichever law—federal or state—offers greater benefits to the employee.

1. Minimum Wage Variations

Many states and cities have enacted minimum wages higher than the federal minimum.

Employers must follow the highest applicable rate.

2. Overtime Rules

Some states, like California, impose stricter overtime requirements than the FLSA.  Other states may define “regular rate of pay” differently or expand eligibility for overtime exemptions.

3. Pay Frequency and Method

States often regulate:

• How frequently employees must be paid (e.g., weekly, biweekly)
• Acceptable methods of payment (e.g., direct deposit, check, payroll card)
• Timing of final paychecks upon separation

For example, Massachusetts requires immediate final pay if the employee is terminated, while Texas allows up to six days.

4. Wage Theft Prevention

Some states and cities require employers to provide written notice of wages and pay policies. For instance:

• New York’s Wage Theft Prevention Act mandates wage notices in multiple languages.
• California requires a written notice at hiring that outlines pay rate, payday, and employer information.

Many jurisdictions have also criminalized wage theft.

5. Pay Equity and Salary History Laws

Numerous states have adopted pay equity laws that go beyond the federal EPA. For example:

• Oregon and Massachusetts prohibit pay discrimination for “comparable work” even if job titles differ.
• States like Colorado, Illinois, and California require employers to disclose salary ranges in job postings.

Additionally, over 20 states and localities (e.g., California, New York City, Illinois) ban employers from asking about salary history to prevent perpetuating past wage discrimination.

6. Rest Break and Meal Period Requirements

While not directly tied to pay rates, these laws affect compensable time:

• In California, missed meal/rest breaks may require an additional hour of pay per violation.
• Washington State mandates rest periods and meal breaks with specific timing.

7. Wage Deductions and Tip Laws

States regulate:

• What deductions can be made from wages (e.g., for uniforms or tools)
• How tips and service charges are distributed
• Whether tip pooling is allowed

Some states (like Nevada) have strict protections for tipped workers, while others allow more flexibility.

8. Compensation for Remote Work

As remote work has increased, state labor departments are updating compensation guidance, including:

• Tracking remote employee hours
• Reimbursement for necessary business expenses (e.g., internet, phone)

California Labor Code Section 2802 requires reimbursement for all necessary work expenses, which often applies to remote employees.

III. Best Practices for Employers

Given the complex and overlapping requirements at the federal and state level, employers must adopt proactive strategies to ensure compliance.

1. Conduct Regular Compensation Audits

Audit pay practices annually to:

• Identify pay disparities
• Ensure proper classification of exempt vs. nonexempt employees
• Verify overtime and minimum wage compliance
• Review job postings for salary transparency compliance

2. Stay Current with Legislative Changes

Labor laws change frequently, especially at the state and local levels. Employers should:

• Subscribe to legal update services
• Join industry associations
• Work with employment law attorneys or HR consultants

3. Invest in Payroll and HR Technology

Modern HRIS and payroll systems can:

• Automate wage calculations
• Track hours worked
• Alert users to compliance issues
• Support recordkeeping and audit trails

4. Train Managers and HR Staff

Ensure managers understand:

• The difference between exempt and nonexempt roles
• The rules around off-the-clock work
• Anti-retaliation protections
• Requirements for time tracking, breaks, and wage notices

5. Implement Clear Pay Policies

Written compensation policies should cover:

• Overtime eligibility
• Pay frequency
• Deductions
• Timekeeping procedures
• How pay raises and bonuses are determined

Policies should be clearly communicated and accessible to all employees.

Conclusion

Federal and state compensation laws create a layered framework designed to protect workers and promote fairness in the workplace. While the FLSA, EPA, and Title VII form the bedrock of federal wage regulation, states often go further—enacting stricter minimum wages, broader pay equity laws, and specific requirements around pay transparency, frequency, and recordkeeping.

To stay compliant and competitive, employers must go beyond simply knowing the laws. They must adopt a comprehensive compensation strategy that accounts for jurisdictional differences, reflects organizational values, and evolves with the legal landscape. Doing so not only reduces legal risk—it builds trust with employees, improves retention, and reinforces a strong, ethical workplace culture.