Do you know the history of payroll, employer-employee relationships, and work environments?
The nature of employment and wages has changed drastically over the course of the last two hundred years, and as an accountant, you can learn a great deal about modern payroll by studying its history.
Gusto, along with our partners at CPA Academy, presented a fascinating webinar all about the history of work. We presented our webinar titled, “The History of Payroll & Benefits: How Did We Get Here?” and you can watch the entire webinar here.
Greg Kyte, founder of Comedy CPE, and Caleb Newquist, Gusto’s Editor-at-Large, hosted the presentation and delivered fascinating insights. They discussed the workplace and its history, including pre-Industrial Revolution self-employment, the Industrial Revolution, and government regulations in the 20th century.
Pre-Industrial Revolution employment
Greg and Caleb went into great detail discussing the evolution of employment, payroll, and benefits. They began by covering little-known details about pre-Industrial Revolution employment. One early example of employment was the relationship between kingdoms and their soldiers:
“Going back to peasants and fiefdom, there were people who were kings or rulers who would be like, ‘Hey, you there, you’re now in the army, and what I’m going to do for you is make sure you have food and maybe a tent,’ and that would be your compensation.”– Greg Kyte
Soldiers often received compensation in food and shelter rather than money. Before the middle ages, the Roman Empire often provided soldiers payment in commodities:
“The origin of the phrase ‘You’re worth your salt’ comes from the Roman Empire, where they actually paid their soldiers with salt because that was a valuable commodity.”– Greg Kyte
Outside of the military, pre-industrial workers were largely self-employed, and the majority of the population worked in agriculture:
“The vast majority of the other people prior to the Industrial Revolution were self-employed, meaning people like blacksmiths [and] people like farmers. [Over] 90% of people before the Industrial Revolution were farmers.”– Greg Kyte
Before the Industrial Revolution, the vast majority of workers didn’t receive a form of payroll or benefits because they were self-employed.
Greg also noted that people often entered their self-employment trade through apprenticeship programs, where young people received compensation in room, board, and education:
“Prior to the Industrial Revolution in terms of craftsmen, … there was the apprenticeship program. [This is] where there would be a craftsman [who] needed someone to help him in his shop, so a teen or a preteen would sign up for an apprenticeship with that person, and their compensation was not payroll. It was typically room and board and an education on how to [master] that craft. … There wasn’t a whole lot outside of that prior to the Industrial Revolution.”– Greg Kyte
Although people worked before the Industrial Revolution, the working landscape was vastly different from what we’re familiar with today. Later, the Industrial Revolution brought a paradigm shift to how society viewed work.
Wage labor in the Industrial Revolution
The Industrial Revolution began in 1760, and it created the type of employer-employee relationship that we’re more accustomed to in contemporary industries.
“There was a lot of innovation that happened at that time, where so much of the work that had been done manually by craftsmen was starting to become automated, at least automated to the point where there were machines that could do it a lot faster than people could do it by hand.”– Greg Kyte
New technologies replaced the need for skilled artisans, and the employed population began shifting from agricultural work to factory labor:
“The population prior to the Industrial Revolution worked on farms [and] … were more or less self-sustaining [and] self-employed, … but now we’ve got all these machines that are in these factories that need humans to tend them and keep them going as they speed up production, so factories needed workers. That’s when you see a huge shift from primarily agriculture into factory work because of the Industrial Revolution.”– Greg Kyte
There was now a need for work regulations and labor laws because of the professional relationship between factory owners and workers.
Unfortunately, businesses mistreated workers during the Industrial Revolution. People worked long hours and there were no regulations preventing child labor or hazardous work environments. Serious injuries and even death were too common among workers with few other financial options than to continue working. Society needed new laws and regulations to protect workers from exploitation.
In response. governments created new labor laws and regulations in the 20th century, and with it, came new taxes:
“We had labor laws that [came] into effect, [and] we [had] payroll taxes. Now, we have massive amounts of payroll, so the government is like, ‘Now we’ve got something that we can tax.’ Before that, you couldn’t tax it because there wasn’t a lot of it.”– Greg Kyte
In addition to payroll and taxes, the Industrial Revolution also eventually led to the creation of employee benefits:
“This is further away from when the Industrial Revolution happened, … but benefits … happened as a result of the Industrial Revolution bringing people from more of a self-employed situation into an employer-employee relationship.”– Greg Kyte
Although employees were mistreated during the Industrial Revolution, the historic movement laid the foundation for how we understand employer-employee relationships today, and the movement eventually led to payroll taxes, employee benefits, and critical pieces of legislation.
Wage and hour laws in the Fair Labor Standard Act of 1938
Throughout the late 19th century and the first half of the 20th century, the United States enacted important legislation that shaped the modern workplace. The U.S. government enacted many labor laws in the 1930s to respond to the Great Depression.
“Much of the legislation playing a major role in the history of payroll happened in the 1930s, and it happened as a result of … the country trying to dig itself out of the Great Depression. The Great Depression was the impetus for making a lot of this [change]happen.”– Greg Kyte
Perhaps the most important piece of legislation was the Fair Labor Standards Act of 1938. The legislation enacted a minimum wage, which was 25 cents an hour, and it also established crucial laws to prevent worker abuse, such as time-and-a-half overtime.
Although the Fair Labor Standards Act heavily shaped the modern workplace, it didn’t create the 40-hour workweek. The idea of the 40-work week actually came about in the 1910s because of the automaker Henry Ford. Henry Ford conducted detailed productivity research, and he found that productivity plateaued after working for 40 hours in a given week:
“According to [Henry Ford’s] research that he conducted, if you have employees and they’re working more than 40 hours a week, … he found that the productivity just fell off a cliff after 40 hours. So he was like, ‘You know what? We’re just going to keep you here for 40 hours a week, and then we’re going to cut you loose because I don’t get enough work done out of you if you’re working more than 40 hours a week.’”– Greg Kyte
More businesses implemented this standard throughout the 1910s and 1920s. Finally, the Fair Labor Standards Act solidified the 40-work week by requiring companies to pay overtime if employees work more than 40 hours.
Unfortunately, many accountants work well beyond 40 hours a week during tax season. This often seems necessary, but Caleb Newquist noted that accountant productivity is marginal after a certain number of hours:
“There are multiple accounts of productivity pretty much topping out between 40 and 45 hours. There’s nothing to be gained by working between 50 and 60 and certainly not beyond 60 hours.”– Caleb Newquist
The 40-work week isn’t just ideal for employees—it’s also the most practical amount of time for maintaining productivity.
Finally, the Fair Labor Standards Act of 1938 also established crucial rules for protecting the most vulnerable members of our society: children.
“The Fair Labor Standards Act of 1938 also prohibited child labor. … [I remember in] my history classes seeing the old black and white films of children who looked like they were eight and covered in grease, and [they were] having to climb through a machine that very clearly could murder them.”– Greg Kyte
Child labor is incredibly inhumane, and, fortunately, the Fair Labor Standards Act made it illegal.
The first half of the 20th century saw critical workplace innovations and laws that developed our modern conception of payroll, working hours, and overtime.
Learn more about the history of payroll
The way we view payroll and employer-employee relationships largely began with the Industrial Revolution, when the workforce shifted from agriculture to factory work. The new workplace needed new laws and regulations to protect workers. Although we may take certain workplace luxuries for granted, like minimum wage and the standard 40-hour workweek, many of these innovations are not even a century old.
We’re incredibly grateful to Greg Kyte and Caleb Newquist for hosting this fascinating webinar on the history of the workplace and payroll. Read Part Two and Part Three of this webinar article series if you’re ready to learn more. You can also watch the entire webinar here.
If you’re interested in helping businesses with payroll and other people-based operations such as HR and benefits, consider becoming a people advisor! Your clients need more than an accountant. They need an advisor. As a people advisor, you combine your financial expertise with people-focused advising. Gusto has the tools to help you do just that. Learn more about People Advisory.