Tricky Moves

Changing regulations and confusing compliance metrics have HR managers tied up in knots

Back Longreads Feb 14, 2017 By Jeff Wilser

Did you know that California law AB 2886 extends the appeal time for disability benefits from 20 to 30 days, effective March 1, 2018?  (Plan accordingly.) Or did you know that, as the California Chamber of Commerce explains, “AB 908 increases the amount of paid family leave (PFL) benefits an employee can receive from 55 percent of earnings to either 60 percent or 70 percent of earnings, depending on the employee’s income,” effective Jan. 1, 2018? (Mark your calendars.)

When it comes to the regulation of California’s employee benefits, the sheer volume is enough to bring even the most cheerful HR manager to tears. It’s tough to keep up. Whether these changes are good or bad, right or wrong, job-savers or job-killers, one thing is certain: The red tape is confusing, and it appears to stretch to infinity. Companies have scrambled — and continue to scramble — to comply to regulations in three key areas: 1) employee compensation; 2) the Affordable Care Act; and 3) well … everything else.

Employee Compensation

On Jan. 1, California nudged the minimum wage from $10 to $10.50 per hour, the first rung of a 5-year ladder that culminates in $15 by 2022. (Companies with 25 or fewer employees have an extra year to comply.)

That’s the easy part. The trickier concept is the treatment of exempt vs. non-exempt employees. Prior to 2016, if an employee made $23,660 annually and could plausibly be considered a manager, they were exempt from federal overtime rules. On Dec. 1, 2016, that was scheduled to double to $47,476. This meant companies needed to do one of two things: Boost all exempt salaries to at least $47,476 or start paying those employees overtime.

This was, to put it mildly, a material change. According to the National Federation of Independent Businesses, 44 percent of small businesses employ at least one person who would be impacted, so for much of 2016, companies braced for impact and doled out pay raises. Bonus wrinkle: If you reclassify an employee from exempt to non-exempt, that means you need to start tracking their time cards, which could trigger additional costs.

Enter Texas. On Nov. 22, just 10 days before the new rules were to go into effect, U.S. District Court Judge Amos Mazzant III issued an injunction against the new regulations, postponing them indefinitely. The reactions were polarized. “This injunction comes as a major relief,” said Tom Scott, California state executive director of National Federation of Independent Business in a statement. “Had this ruling gone into effect … many small businesses across the state would have been forced to reduce hiring, cut hours and in some cases permanently close their doors.”

“The [Affordable Care Act's] ‘play or pay’ rules became effective in 2015 and even now, many employers still don’t have it right, either from getting poor advice or from misundertanding of the rules.” Jennifer Chung, Senior Compliance Officer, Woodruff-Sawyer

Others saw it differently. “The employees who will be hurt the most and the economies that will suffer the most are in the American heartland, where wages are already low,” David Levine, CEO of the American Sustainable Business Council, said in a statement. “We supported the rule because it was designed to help increase incomes for workers — especially those in the middle class. When implemented, it will boost consumer spending, which drives economic growth.”

It’s worth noting that the change to California employers, in one key sense, is less dramatic than for the bulk of the nation. California already had the “double minimum wage” rule in place, meaning that for an employee to be classified as exempt, their salary needed to be twice the minimum wage (on an annualized basis), which means they needed to be paid $41,600. In other words, before the injunction, California employers needed to bump exempt employees’ salaries by $5,000 annually — which is still an 11 percent spike and nothing to sneeze at. Yet even with the injunction, California employers still need to bump exempt salaries from $41,600 to $43,700, reflecting the 5 percent increase in minimum wage. [Phew. Easy, right?]

So, now what? The rule change is in limbo. “The injunction basically buys the government time to get rid of the change,” says Jennifer Chung, senior compliance officer at Woodruff-Sawyer and on the board of directors of Sacramento Area Human Resource Association. “It’s pure speculation at this point, but with a Trump administration, it’s likely that it will never go into effect.” That said, she still advises her clients to stay the course, as “it would be really bad for morale to have announced a pay-raise and then take it away.”

More Fun with the ACA

Are you sick of reading about the Affordable Care Act? Just imagine how HR managers feel. When it comes to the nuts and bolts of compliance, there’s little debate that implementation has been a headache. “The ACA is the No. 1 pain-point for all of our clients, by far,” Chung says. “Some things have really caught employers by surprise.”

For starters, exactly how many employees does your company employ? “The ACA says that there’s no such thing as a ‘temporary employee,’ and for anyone who works an average of 30 hours a week, then they’re your employee — and you have to offer them full benefits, or pay a penalty,” Chung says. The calculation of that magical 30 hours has mystified employers, as it can involve tracking time cards over 12 months to determine if the average is 30. “It’s called the ‘look-back’ measurement, and it has been really confusing.”

The devil, as always, is in the details, and the details abound. (Let’s not forget that the ACA clocks in at 2,700 pages, or about twice the length of War and Peace.) “The ‘play or pay’ rules became effective in 2015 and even now, many employers still don’t have it right, either from getting poor advice or from a misunderstanding of the rules,” Chung says. Take the issue of reporting: Every employer needs to issue a statement to its employees saying they were offered coverage and how much that coverage costs, and Chung estimates that “nine times out of 10, there were errors with those reports.”   

That’s because the fine print gets pretty confusing. “For example, if an employer has a Union employee, they’re supposed to be coded as 1H in Line 14 and 2E in Line 16, which means that no coverage was offered, because the employee was part of a multi-employer plan,” says Chung, and then ticks off similar codes and exceptions from memory. “The reporting system is really hard. It’s extremely cryptic.” The IRS, in tacit acknowledgement of this reporting nightmare, granted a “reasonable effort” criteria, so as long as you tried to get it done on time, they would not swing the hammer of a penalty.

The Kitchen Sink

 

An exhaustive rundown of all recent and impending regulatory changes would gobble up every page of this magazine. Paid sick leave, workers comp, requirements for nail salons, notices for the rights of janitors — it’s a long list, and the challenges of even summarizing all the changes, much less adhering to them, is precisely the point.

Yet another complication: Companies must dance to the music of federal, state and city regulations. Let’s pretend the company Widgets-R-Us has their headquarters on L Street in downtown Sacramento, but Judy works remotely from San Francisco, Bob works out of Oakland and Cindy works in San Diego. All three employees might need different benefit packages, since some cities have also set their own parental and sick leave policies. Chung points out that while the state sets the minimum requirements, several cities including San Francisco, L.A. and San Diego have higher requirements for sick leave.

These complexities seem endless. “There was a case called Flores vs. the City of San Gabriel,” says Chung, rattling off the details like an obsessive Kings fan reciting the career stats of Chris Webber and Vlade Divac. “If you’re the kind of employer that offers employees cash if they decline benefits, the circuit court says that the cash needs to be calculated in the overtime pay,” meaning that it’s considered part of the base salary and needs to be factored in when determining the employee’s overtime rate of time-and-a-half. “That was a groundbreaking, earth-shattering rule that had never been seen before. Even now some employers are not aware of this.”

It’s easy to miss the nuance. “It’s almost impossible for us to stay on top of all the changing laws,” says Adam Lovern, vice president of Borges Architectural Group in Roseville. “We need the [HR] consultants. We depend on them heavily.”

Lovern’s company has 35 employees and was named one of the best places to work by the Sacramento Business Journal. He actually goes above and beyond, creating more paperwork for himself by doing things like offering flex-time to both his exempt and non-exempt employees.

“The paperwork is intensive; staff thinks it’s a pain; management hates having to ask for it,” Lovern says. “But it allows for the flexibility people need and us to maintain compliance with the regulations.”

“California is already more progressive when it comes to family leave issues. Because California is on the generous side, it might be that businesses are not affected by what happens on the federal level.” Tom Spiggle, owner, The Spiggle Law Firm

Even if you don’t want to go above and beyond new requirements, it’s still critical that HR policies stay up to date. Chung recommends getting daily updates and breaking news alerts, like those offerend at BenefitsLink.com or via the ThinkHR.com newsletter.  Additionally, Chung recommends partnering with an insurance broker that offers a bundled package with employee benefits. “Not all brokers are created the same,” she advises. “You want to get a broker that has a dedicated compliance resource — most of the time that could be free.” In other words, instead of paying $600 an hour for compliance attorney fees, you could get compliance advice bundled into your insurance broker.

So What’s Next?

As much of the nation wonders what will happen under a Trump administration, California, in some ways, might be less affected than the average state. “California is already more progressive when it comes to family leave issues,” says Tom Spiggle, an attorney who specializes in employee benefits. “Because California is on the generous side, it might be that businesses are not affected by what happens on the federal level — they certainly would have been if Hillary Clinton was elected; she supported paid leave of 12 weeks.” During his campaign, President Donald Trump promised six weeks of paid maternity leave and to incentivize employers who provide childcare. (As of now, California grants up to 12 weeks of unpaid time off and six weeks of partially-paid time off, or technically 55 percent of your wages, with a weekly cap of $1,173.)

What about Trump’s plan to “repeal and replace” Obamacare? “There’s a very good indication that Congress will pass a budget reconciliation bill, which will repeal certain financial aspects of the ACA,” Chung says. Even if Congress lacks the super-majority to completely repeal Obamacare, this budget reconciliation bill (requiring only a simple majority) would remove the penalties for non-compliance … making all of that paperwork and tracking of codes 1H and 2E null and void.

Lovern says diligence is key, and it’s better to be safe than sorry. “We’re very above board — we err on the side of being conservative with every regulation,” he says, as the risk of non-compliance (or a lawsuit) is simply too high. And in a twist that should hearten reformers, he says that his insurance and HR consulting costs have not materially risen in the past two years. “It’s only a very small percentage of the business,” he says.

And yet. When companies reach the size of 50 employees, they are suddenly no longer a “small business” and now play by a new set of rules. More reporting, more forms, more costs. Borges has 35 employees. “I think we want to stay under 50,” he says, laughing, as if it’s not even a question worth debating seriously. This is not some theoretical issue. “It’s concrete. It’s a real barrier.”

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