The Law of Compensation: What Lawyers Need To Know

Updated January 22, 2024
9 min read
The Law of Compensation: What Lawyers Need To Know


The U.S. Department of Labor's Wage and Hour Division (WHD) data reveals a concerning reality: many employees are underpaid. In the past five years, $1.4 billion in back wages was recovered due to employers violating federal labor laws. 

This shows that non-compliance with compensation and benefits laws prevents workers from earning their due wages rightfully. As such, lawyers must thoroughly understand state and federal employee compensation and benefits laws.

Freedom To Contract and Regulation of Compensation and Benefits

Traditionally, the liberty to contract principle, which allows employers and employees freedom to negotiate terms including compensation and benefits, governed the payment from employers to employees. This established the foundation for determining employment conditions.

The Federal Supreme Court, however, has long recognized the power of the government to regulate the liberty of contract, starting with the 1937 landmark case of West Coast Hotel Co. v. Parrish. Therefore, Congress and the state legislatures have enacted various legislation that aim to protect prospective employees. 

What Is the Law of Compensation?

There is no single universal law, federal or state, that can be referred to as the law of compensation in the U.S. In reality, the laws of compensation in the U.S. are a set of distinct federal and state laws. Each regulates and provides rules and standards for specific compensation and benefits, usually part of standard employment contracts. 

The following types of legal compensation and benefits are among those which are regulated, to a certain extent, by existing universal law of compensation:

  1. Minimum wage and overtime pay;

  2. Leave benefits;

  3. Retirement benefits;

  4. Compensation for injuries.

Minimum Wage and Overtime Pay

The Fair Labor Standards Act of 1938 (FLSA) is the primary source of federal rules on minimum wage and overtime pay.

Minimum wage

Under the FLSA compensation law, employers are required to pay employees at least a basic minimum wage.

The current federal minimum wage is $7.25 per hour. Nonetheless, some state laws also provide minimum wage rates applicable within the respective state. In case such state compensation laws require a higher amount of minimum wage compared to that mandated under the FLSA, employers in that state must pay the higher amount.

However, not all employees are entitled to the federal minimum wage under FLSA. A few examples of these include farm workers employed in small farms and employees employed by certain seasonal and recreational establishments.

Overtime pay

Under the FLSA, employers are required to pay overtime pay to their employees. The overtime pay is based on the number of hours worked more than 40 hours in a single workweek at a rate of at least 1.5 times the regular rate of pay, wherein the normal pay rate must not be less than the minimum wage. 

Note that FLSA does not impose any limit on the number of hours employees aged 16 and older may work in any work week. However, the FLSA does not require overtime pay for work rendered during weekends (i.e., Saturdays and Sundays), holidays, or regular days of rest.

Moreover, similar to the rules on minimum wage, certain employees are also not entitled to receive overtime pay, such as:

  • Commissioned sales employees of retail or service establishments and

  • Those who work as drivers, loaders, and mechanics whose primary duties affect the safety of operation of vehicles in the transportation of passengers or property in interstate or foreign commerce.

Leave Benefits

One shortcoming of the FLSA or any other existing federal law is that they do not create nor regulate leave benefits such as vacation, holiday, and sick leaves, which are typical in standard employment contracts. Hence, such leave benefits are, more often than not, merely subject to agreement between the employer and the employee.

As an exception, federal law requires employers to grant their employees medical and family leave. Under the Family and Medical Leave Act of 1993, eligible employees are entitled to a maximum of 12 weeks of unpaid, job-protected leave per year to allow said employees to attend to family and medical matters, including:

  1. Attending to and taking care of a newborn child;

  2. Taking care of an immediate family member with a serious medical condition; and

  3. When the person or employee needs to stop working to recover from a serious medical condition. 

Retirement Benefits

Employees who pay Social Security taxes and earn the necessary credits of ten (10) years of service are entitled to retirement benefits under the Social Security Act of 1935 (SSA), as amended. The amount of retirement benefits is tied to a number of factors, such as:

  • The amount that an employee has earned during his or her working career. The higher the amount earned, the higher the retirement benefit.

  • The retiring age. If an employee retires early (the minimum retirement age is 62), the retirement benefit will be lower.

On the other hand, a number of employers have also voluntarily established private retirement plans for their employees. These are regulated by the Employee Retirement Income Security Act of 1974 (ERISA). 

ERISA provides the minimum standards that retirement plans in private companies must comply with in order to provide protection for employees who are participants in the plan. Take note, though, that ERISA does not compel private companies to establish retirement plans for their employees.

Such minimum standards as mandated by ERISA include:

  • Participants must be duly informed of the features of the plan and the type and manner of funding and must be given the right to sue for benefits and breaches of fiduciary duty.

  • The retirement plan must comply with the minimum standards under ERISA for participation, vesting, benefit accrual, and funding.

  • Plan sponsors must ensure that the retirement plan will be adequately funded.

  • Plan fiduciaries must comply with principles of conduct and should be accountable for losses to the plan.

Compensation for Injuries

Within many states, workers’ compensation programs have been established through state laws and implemented through state agencies. A common feature of these various state workers’ compensation programs is the entitlement of eligible employees to medical, disability, vocational, and death benefits whenever they suffer work-related injuries or diseases. However, the amount of benefits and the timing of payment will vary from state to state. These benefits will normally include the following:

  • Medical expenses and supplies;

  • Temporary disability benefits;

  • Permanent disability benefits;

  • Funeral benefits;

  • Dependency benefits; and

  • Vocational rehabilitation benefits.

At the federal level, a number of federal statutes have been passed to provide workers’ compensation in law programs for specific types of workers or employees, such as maritime employees, employees of the Department of Energy and its contractors and subcontractors, and coal miners.


Full compliance by employers with federal and state laws regulating the compensation of employees must be at least the minimum ideal goal of every client organization and by lawyers who advise them. This not only ensures that clients are protected from potential litigation; it also improves the plight of employees who deserve to receive whatever is due to them under the law compensation.

Article by
Yevheniia Savchenko

Yevheniia Savchenko is a Product Content Manager at Lawrina. Yevheniia creates user interface copies for Lawrina products, writes release notes, and helps customers get the best user experience from all Lawrina products. Also, Yevheniia is in charge of creating helpful content on legal template pages (Lawrina Templates) and up-to-date information on US law (Lawrina Guides). In her spare time, Yevheniia takes up swimming, travels, and goes for a walk in her home city.

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