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62) What are the advantages for employers of claiming that someone doing work for them is an
independent contractor rather than an employee? What generally makes a worker classified as an
"independent contractor"?
Answer: There are many advantages to organizations. The Fair Labor Standards Act does not
apply to independent contractors. The employer does not have to pay unemployment
compensation, payroll taxes, Social Security taxes, or city, state, and federal income taxes.
In general, an individual is an independent contractor if the payer has the right to control or
direct only the result of the work and not what will be done and how it will be done. However,
there is no single rule or test. Instead, the courts will look at the total situation. The major
consideration is this: The more the employer controls what the worker does and how he or she
does it, the more likely it is that the courts will find the worker to be an employee, not an
independent contractor.
Difficulty: Moderate
Chapter: 11
Objective: 1
AACSB: Analytical Thinking
Learning Outcome: 11.1 List the basic factors determining pay rates.
63) What are your compensation options if you are an employer who needs to transfer an
employee from a low cost-of-living area to a high cost-of-living area?
Answer: Employers have different ways of handling cost-of-living differentials. One is to give
the transferred person a nonrecurring payment in a lump sum amount. Another is to pay a
differential for ongoing costs in addition to a one-time allocation. Others simply raise the
employee's base salary.
For international transfers, companies can go with a home-based or host-based salary plan.
With a home-based salary plan, an international transferee's base salary reflects his or her home
country's salary. The employer then adds allowances for cost-of-living differences–housing and
schooling costs, for instance. This is a reasonable approach for short-term assignments, and
avoids the problem of having to change the employee's base salary every time he or she moves.
In the host-based plan, the firm ties the international transferee's base salary to the host country's
salary structure. In other words, the manager from New York who is sent to France would have
his or her base salary changed to the prevailing base salary for that position in France, rather than
keep the New York base salary. The firm usually tacks on cost-of-living, housing, schooling, and
other allowances here as well.
Most multinational enterprises set expatriates' salaries according to the home-based salary plan.
Difficulty: Moderate
Chapter: 11
Objective: 1
AACSB: Analytical Thinking
Learning Outcome: 11.1 List the basic factors determining pay rates.