Introduction
Overview of Requirements
Clarifying Definitions
Narrative
Audit Requirements
Related Links
Related Information Memorandums, Program Instructions, and Appeals Board Decisions

Introduction

To establish and maintain high quality program operations and services Head Start and Early Head Start grantee agencies must attract and retain qualified personnel. An important component of the program’s ability to maintain a skilled and motivated work force is employee compensation. This discussion explores the major elements of employee compensation, the regulations that underlie them, suggestions for developing fair, equitable, and affordable wage and salary administration plans, and questions which frequently arise in the development and implementation of employee compensation systems.

Overview of Requirements

Although there are no prescriptive requirements for Head Start wage and salary plans, regulatory guidance exists regarding employee compensation in Head Start and Early Head Start programs.

Head Start Act

• Head Start Act Section 653 requires that Head Start programs pay at least “the minimum wage rate prescribed in section 6(a) (1) of the Fair Labor Standards Act of 1938" and encourages “Head Start agencies to provide compensation according to salary scales that are based on training and experience.”

• Head Start Act Section 653, titled Comparability of Wages, also prohibits Head Start programs from paying their employees more than individuals in comparable positions in the communities they serve.

Head Start Regulations

The “1300 Series,” regulations governing Head Start operations, discusses employee compensation only indirectly:

• 45 CFR 1301.2 sets forth definitions related to the 15% administrative costs limitation.

• 45 CFR 1301.32(b) clarifies development and administrative costs and provides guidance regarding the allocation of salaries and benefits of individuals engaged in Head Start administrative activities.

• 45 CFR 1301.31(a)(1) indicates that written policies of Head Start grantee and delegate agencies must include descriptions of each staff position, addressing, as appropriate, roles and responsibilities, relevant qualifications, salary range, and employee benefits.

OMB Circulars

The following Office of Management and Budget (OMB) Circulars discuss employee compensation from a number of perspectives:

• 2 CFR 230 Appendix B(8)(a) offers a definition of employee compensation. “Compensation for personal services includes all compensation paid currently or accrued by the organization for services of employees rendered during the period of the award (except as otherwise provided in subparagraph h). It includes, but is not limited to, salaries, wages, director's and executive committee member's fees, incentive awards, fringe benefits, pension plan costs, allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost of living differentials.”

• 2 CFR 230 Appendix B(8)(b)(1) - Allowability requires that “total compensation to individual employees is reasonable for the services rendered and conforms to the established policy of the organization consistently applied to both Federal and non-Federal activities.”

• 2 CFR 230 Appendix B(49) - Training and Education Costs limits the amount of time for which employees can be paid to attend classes during working hours. These limitations apply to non-profit organizations but do not exist in A-87, the cost principles applicable to public grantees.

• A-133, Supplement: Part 3B – Allowable Cost/Cost Principles requires that all costs, including salaries and benefits, be reasonable, necessary and allocable to the program to which they are charged. Apply regardless of whether the awards are received directly by the funded grantee or indirectly through a pass-through entity.

• 2 CFR 220 Appendix A(J)(10)(f), 2 CFR 225 Appendix C(3)(d), and 2 CFR 230 Appendix B(8)(g), all address fringe benefits.

Fair Labor Standards Act (FLSA)

ACYF-PI-HS-01-01 makes it clear that Head Start and Early Head Start programs are covered by the provisions of the Fair Labor Standards Act of 1938, noting, “After consultation with the U.S. Department of Labor (U.S. DOL), we have now established that private non-profit and for-profit agencies operating Head Start or Early Head Start programs are subject to the requirements of the FLSA by virtue of being engaged in the operation of a ‘pre-school.’ In addition, we have learned that over the past year, several private, non-profit Head Start grantees have been found out of compliance with FLSA standards and have been required to take corrective action, including payment of back wages to employees.”

This Program Instruction goes on to note specific requirements of the FLSA that relate to Head Start and Early Head Start grantees:

• All employees are covered except executive, administrative, and professional employees who are defined as exempt by the FLSA and applicable regulations;

• Covered employees are entitled to not less than the current minimum wage;

• There are specific recordkeeping requirements, especially for non-exempt employees;

• Covered employees must be paid overtime at a rate of not less than one and one-half times their regular rate of pay after 40 hours of work in a workweek;

• Training which is not voluntary is considered work time.

When the ACYF Program Instruction talks about “covered employees,” they are referring to those who are covered by or not exempt from (i.e., non-exempt employees) the overtime and/or minimum wage provisions of the FLSA.

Department of Labor FairPay Overtime Initiative

The Department of Labor enacted new provisions of the Fair Labor Standards Act (FLSA) related to overtime pay on August 23, 2004 (29 CFR 541). These provisions redefine specific job duties and minimum salaries when determining exempt and non-exempt employees. They also clarify the circumstances in which the employer may make deductions from pay.

Program Instructions

ACYF-PI-HS-00-01, provides instructions for increasing the hourly pay rates and/or improving fringe benefits for staff in conjunction with cost-of-living adjustments (COLA) and quality improvement funds.

ACYF-PI-HS-05-01, provides instruction on the compensation cap at a rate not to exceed a Level II Executive Schedule under section 5135 Section 205 of title 5. In January [2009]6, the rate of compensation was [$177,000] per year. The Program Instruction also clarifies the terms compensation and benefits.

Clarifying Definitions

For the purposes of this discussion several terms are defined below:

Compensation - salaries, wages, incentive awards, fringe benefits, pension plan costs, allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost of living differentials (2 CFR 230 Appendix B(8)(a)).

Employee - any individual engaged by the agency to perform personal services under agency direction on a full-time, part-time, temporary or permanent basis in exchange for a specified salary or wage; classifications of employees should be included in each agency’s Personnel Policies and Procedures.

Exempt employee - an employee who is not subject to the minimum wage and/or overtime provisions of the Fair Labor Standards Act.

Head Start or Early Head Start employee - any employee paid directly in full or “primarily” with Head Start or Early Head Start funds; the employment of these individuals must be approved by the Head Start or Early Head Start Policy Council or Policy Committee.

Non-exempt employee - employee who is covered by the overtime and/or minimum wage provisions of the Fair Labor Standards Act; also known as a covered employee (see above).

Narrative

Employee compensation should be guided by three factors: comparability, equity, and affordability. Head Start and Early Head Start grantees should design compensation strategies which are internally equitable. In other words, they should pay employees with similar levels of responsibility, education and experience similarly. Finally, each grantee should develop compensation systems which are within the means of the agency; that is, wage, salary and benefits plans must be affordable. Every agency should be able to design a wage and salary administration plan that is both equitable and affordable. Whether or not wages, salaries and benefits are comparable to those offered in the broader community is a function of funding level, priorities, and other resources.

Position Classifications

The position or job (e.g., director, teacher, secretary, bus driver) is the basis of an employee classification system. Programs should have some table, system or schedule of employee job classifications which group jobs with similar levels of responsibility and qualifications. For example, one classification or grade might include cook, custodian, and bus monitor while another higher grade includes literacy specialist, executive assistant, and accountant. Although the positions differ greatly from each other within each grade in terms of job duties, they are determined to have similar levels of responsibility and like qualifications (e.g., the literacy specialist, executive assistant and accountant all have bachelor’s degrees in job-relevant fields and at least five years of experience, while no formal education requirement exists for the cook, custodian or bus monitor). These position classifications show the relative worth of one job to another and form the foundation for internal equity in the compensation plan.

Some position classification systems divide positions based on particular qualifications. For example, Teacher I may be a teacher with a job-related bachelor’s degree; Teacher II, a teacher with an associate’s degree; and Teacher III, a teacher with a Child Development Associate (CDA) credential. In this case, these positions would be placed in different classes, levels, or grades. Other classification systems may lump all teachers together in the same grade, but include in related policies a formula to compensate individuals differently based on their levels of education. For example, the wage for the entry level teacher with a CDA forms the anchor for the lower pay band or entry level step, while a teacher with an Associate Degree (AA) begins at 5% or two steps higher or in the middle pay band, and the bachelor’s level teacher earns 10% more or is placed four steps higher or in the high pay band.

In addition to classification into grades or levels by position, agencies must determine whether each position is exempt or non-exempt with regard to the overtime requirements of the Fair Labor Standards Act (FLSA). Some of each grantee agency’s higher level positions will typically be exempt under the executive, administrative, or professional exemption, but most employees in most programs will not be exempt from the minimum wage and overtime provisions of the FLSA. The Act provides guidance to help agencies analyze positions to determine whether they meet the requirements for classification under one of the three main categories of exemption. It is important to take great care in classifying positions as exempt or non-exempt since improper classification of an employee as exempt can result in the grantee agency’s liability for back pay for up to two years, or three years if the error in classification was determined to be intentional.

Comparability of Wages

Once employees are classified by position into grades or levels, benchmark positions can be chosen from each grade to serve as a standard or point of reference for use in evaluating the hourly wages of the organization. By choosing benchmark positions to establish wage comparability, grantees are able to collect wage and other descriptive data on a circumscribed group of positions, rather than on every position in the agency (including some for which comparable positions in other agencies would be difficult to determine). A wage comparability study can then be performed, using the benchmark positions as reference points.

A good wage comparability study will provide a grantee with information about how its wages compare to others in the broader community. In determining comparability of wages, Head Start and Early Head Start grantees should examine the wages of other employers in their communities who offer similar services or employ individuals in similar positions.

It is important that comparability measures include as much information as possible to guide comparability determinations. For example, having information only about a position is less valuable than also knowing something about the tenure and qualifications of the individual(s) who fills the position. If a grantee agency determines that teachers in another preschool program earn $25 an hour, it is useful to know that those teachers all possess at least bachelor degrees in Early Childhood Education, are state certified, and have an average of six years of experience. The agency could use this knowledge to understand that using those particular positions to establish benchmark comparisons for beginning Head Start teachers with Child Development Associate (CDA) credentials would be inappropriate.

Wage comparability studies should include the following information to ensure that “apples are compared with apples”: position, level of education, experience, applicable credentials (e.g., certification, licensure, etc.), and hourly wage. Another strategy is to gather information about entry level wages and qualifications for each position. Simply obtaining data by position and hourly wage provides little useful information to establish comparability since, like in the example of teacher above, the job title alone provides only limited information about the nature of and qualifications for the position. A useful rule in considering issues of wage comparability is, “Without mobility, there is no comparability.” In other words, if an individual does not have the qualifications to move into a position, then it is not appropriate to use that position for comparison.

It is useful to ask for all dollar amounts based on hourly wage to ensure that accurate comparisons are made. For example, some agencies consider full-time to be 40 hours a week, while others consider it 35 or 37.5 hours a week. Some employers treat 260 days as a full year; others consider it 240 days and so on. If it is important to know the annual salary for a given position; it is also useful to find out the number of hours worked per year. With the hourly wage and the number of hours worked per year, it is easy to calculate the annual salary (i.e., hourly wage x hours worked per year = annual salary/wages).

Although no regulation exists requiring Head Start or Early Head Start programs to conduct wage comparability surveys at specific intervals, it is good practice to conduct these studies about every three years. Information can be updated each intervening year using the percentage increase from the Consumer Price Index (CPI) to reflect inflation.

Salary Schedule

Salary schedules prescribe wage and salary rates for the various position classifications. The Head Start Act encourages grantee agencies to pay employees “according to salary scales that are based on training and experience.” (Head Start Act Section 653) Information from the wage comparability survey overlaid with the agency’s position classification system should be used to develop a salary schedule or salary scale. The salary schedule should also reflect the philosophies of the grantee agency regarding compensation. For example, if the agency believes that no individual should earn as little as minimum wage, the entry level wage at the lowest grade should be above minimum wage. If the grantee agency believes that formal education should be encouraged and rewarded, the salary scale should be designed so that employees can earn more as they move up the career ladder when they complete particular educational milestones.

Some salary schedules include a number of “steps” which can correspond to experience, level of education or to reward performance. In this type of salary schedule, an employee would be classified, for example, in Grade 6, Step 4.

Other salary schedules include “pay bands” for each classification. These bands provide ranges which give supervisors some latitude in determining the salary or wage of an individual based on his/her experience, qualifications, and/or performance. The employee would be classified in Grade 6, like in the previous example, but would be paid somewhere in the range of a high, middle or low pay band.

A well constructed salary schedule provides a formal wage and salary structure that ensures that employees at the same organizational level, in similar positions, with similar qualifications and levels of responsibility are paid similarly. A good position classification system and salary schedule will contribute measurably to equity in compensation within the agency or program.

Performance-Based Compensation and Incentive Pay

The Head Start Act directs that salary scales be based on training and experience yet increasingly organizations recognize exemplary performance with increased pay. To successfully implement a performance-based compensation system the grantee agency must have a behavior-based performance appraisal system that adequately and accurately differentiates among excellent, average and poor performers. Once that system is in place and supervisors are trained to use it properly, grantee agencies can link compensation not only to training and experience, but also to performance.

A performance-based compensation system works in much the same way as a system which rewards training and education. If an employee’s performance is judged superior, s/he may receive an additional step in a step-based salary schedule, a percentage or stipend increase in a pay-banded system, or simply an additional one-time amount. It is the grantee agency’s decision, based on its personnel policies and procedures, how this recognition is administered. Grantee agencies should recognize that awards which become part of base pay will also increase the amount of any percentage-based fringe benefits (e.g., FICA, retirement plans).

Additional pay may be awarded to employees to reward factors other than superior performance. For example, an employee may receive an ongoing pay increase or a one-time payment for accomplishing some milestone deemed valuable by the grantee agency.

Another reason to offer incentive pay might be to reward an employee who contributes measurably to the success of the program. Incentive pay could be granted to a staff member who comes up with a suggestion to save substantial amounts of money or which results in exceptional levels of parent involvement. In these instances, the agency identifies accomplishments that it values and offers financial incentives to employees to fulfill particular requirements.

Performance-based and incentive pay programs must be included and explained in the agency personnel policies and procedures. These compensation strategies must be clearly defined, included as common organizational practice, and thoroughly documented.

Other Payments and Allowances

Employees may be compensated for other job related factors, including hardship assignments, hazardous working conditions, job location, and cost of living differentials. Grantee agencies should evaluate their positions, locations, and working conditions to determine whether or not it is appropriate to grant additional compensation to employees in some situations. In documented instances of unusual circumstances, hardship, hazardous duty, location or cost of living differentials may be granted. Policies should be clear that such additional pay ceases when the factor changes or is removed.

Fringe Benefits

Part of an employee’s compensation is the fringe benefits s/he receives in addition to his/her salary or wages. Fringe benefits generally are calculated either as a flat rate (e.g., health insurance, life insurance) or as a percentage of salary or wages (e.g., FICA, pension plans). It is important to recognize fringe benefits as a part of employee compensation for two major reasons:

1) Salaries or wages and benefits together represent the full investment of the agency in the employee. Employees should understand that benefits are a key element of compensation just as salaries and wages are.

2) Fringe benefits are clearly impacted by changes in salaries and wages. As salaries and wages increase, so do percentage-based fringe benefits. Failure to plan for increases in benefits in conjunction with increases in wages is likely to place grantee agencies in financial difficulty.

It is useful for grantee agencies to provide employees with information regarding the value of their fringe benefits, just as they provide them with information about their monthly or annual salaries or wages.

Personnel policies and procedures should include an explanation of fringe benefits and which groups of employees receive which benefits. Equity in benefits is equally important as equity in wages. Agency policies should also clearly state whether certain types of increases in salaries and wages are one-time awards or part of ongoing base pay. In the former instance, future percentage increases and often percentage-based benefits are calculated excluding these amounts. When increases become part of an employee’s base pay, all future pay increases and benefits include these amounts as a basis for calculation.

Non-Cash Compensation

Employee compensation is generally limited to the definition of compensation noted above; that is, pay and benefits in exchange for work performed. However, it is useful for grantee agencies to consider non-cash compensation. This is particularly true when an agency wants to reward an employee but funding is not available.

Examples of non-cash compensation include: opportunities for travel or training; formal recognition; job flexibility; flexible hours or work location; greater latitude in making decisions and choices; additional time off; opportunities to participate in professional activities; and receiving favored assignments. Grantee agencies are encouraged to identify other non-cash ways to reward employees, as well as to consider how some of these examples might be implemented in their organizations.

Research on employee motivation has long held that salary and benefits are only part of what motivates an individual to perform his or her job. Responsibility, recognition and other non-cash incentives and rewards are also important elements of employee compensation.

Audit Requirements

The following are some important elements in an auditor’s check of employee compensation issues:

• Employees are actually paid what is reported;

• Time sheets are signed by employee and supervisor and are consistent with actual pay;

• Fringe benefits are applied consistently to all employees in a particular classification;

• Salaries and wages paid are consistent with what the grantee agency proposed and was approved in its grant application;

• Salaries and wages paid are consistent with the grantee agency’s salary scale;

• Salaries and wages are not higher than those paid to similarly qualified individuals in similar positions in the community (i.e., a thorough, up-to-date wage comparability survey supports the grantee agency’s wage and salary structure);

• Required salary increases have been implemented (e.g., cost of living adjustments are granted to all employees) or documentation exists regarding why the requirement was not addressed;

• Non-exempt employees receive properly calculated overtime pay; and

• All employees receive at least minimum wage.

Related Links

29 CFR Part 785 Chapter V, Wage and Hour Division, Department of Labor; Hours Worked

Related Information Memorandums, Program Instructions and Appeals Board Decisions

• ACYF-PI-HS-01-01 - Applicability of the Fair Labor Standards Act (FLSA) to Head Start and Early Head Start Grantees
• ACYF-PI-HS-05-01 - Employee Compensation Cap