Considerations When Eliminating Employee Benefits – Ask #HR Bartender
A couple of months ago, I published an
interview with Samuel Hoffman with
Foley & Lardner, LLP about what
organizations need to consider when grandfathering employee benefits.
In response, I received this reader comment.
Hi. Thanks for the helpful article. I recently started at a small company that has some grandfathered plans for a few of the first employees of the company. As we’re growing, it’s becoming more of a burden to have grandfathered plans for a small handful of employees. Any thoughts on eliminating grandfathered benefits that a company isn’t legally or contractually obligated to provide?
While we
can’t talk specifics, especially because we don’t know the benefits involved, I
do think we can talk about benefit policies and best practices when eliminating
and/or changing benefits. And since Sam did such a fantastic job sharing his
experience when it comes to grandfathering benefits, I asked if he would help
us again and am thrilled that he said yes.
Samuel Hoffman is a partner and business
lawyer in Foley’s California office. He represents health care providers and government
entities in employee benefit matters such as pension plans, compensation, and
bonus programs.
Please
remember that Sam has a regular full-time job as a lawyer and he’s doing this
to give back to the profession. His comments should not be construed as legal
advice or as pertaining to any specific factual situations. If you have
detailed questions, you should address them directly with your friendly
neighborhood labor and employment attorney.
Sam, I know
we’re talking about eliminating benefits, but just to set the baseline for our
conversation, what are the benefits that employers are legally required to
provide. You don’t have to list them all here, but maybe there’s a resource?
[Hoffman] Generally,
the only ‘benefits’ that an employer is required to offer are:
Social SecurityWorkers’ CompensationIn some states and cities, sick leave and/or
a state mandated disability leave program for non-work-related disabilities. Generally, employers are also required to
contribute towards the state unemployment insurance program. Employers with more than 50 employees within
a 15-mile radius are required to offer leave under the Family and Medical Leave Act (FMLA). And in some states, a comparable program
for employers with fewer employees, which is unpaid, but for which health
insurance that was provided to the employee before the leave must continue to
be made available on an active employee basis. Employers with 50 or more employees will be
subject to a substantial fine under the Affordable
Care Act (ACA) if
they do not offer affordable minimum essential health insurance coverage to
their employees.
Employers can
generally find out what benefits are absolutely required by Googling (or using
the search engine of their choice) the question and looking at various relevant
publications for their state and city.
With
the today’s challenges in recruiting and retaining talent, companies are
thinking about adding benefits all the time. That being said, companies can’t
simply continue to add benefits. Every once in a while, they might need to
phase out or eliminate a benefit to put a new one in its place or because it
doesn’t align with the company’s compensation philosophies. From a legal
perspective, what should organizations be aware of when it comes to the
elimination of an employee benefit?
[Hoffman] For
all benefits that are voluntarily provided by the employer, the employer should
be able to terminate them prospectively. The first thing that employers should
think about before eliminating voluntarily provided benefits is what sort of
notice requirements there are for such termination, arising either by statute
or regulation, and/or by the terms of the plan document.
The best
approach is to start by looking at your plan document and determining what it
says about termination and notice. For health insurance benefits, you will
generally need to give 60 days’ advance notice if you have more than 50
employees and are subject to the Affordable Care Act’s summary of benefits and
coverage requirement. For other types of benefits, advance notice is advisable,
but not required, and will be governed on a contractual basis by what the plan
document says.
The employer
should also consider the employee rights to previously accrued benefits, which
in many instances are legally required to be grandfathered, such as vested
retirement benefits or even unvested retirement benefits which the employer
will be required to allow the employee to continue accumulating time toward
vesting, even after the retirement plan is frozen.
Also, many
states require that any vacation or paid-time-off (PTO) that has accrued be
preserved, even if the benefit is discontinued going forward.
As a general
rule, my advice would be that if you are going to eliminate any benefit
prospectively, that you preserve any previously accrued unused benefits under
the program. This is advisable from both a legal and an employee relations
perspective. You should also consider whether eliminating any particular
benefit will have an adverse impact on your employee relations that will
outweigh the savings, both in administrative time and money.
Another
time that I’ve seen companies consider eliminating a benefit is when employees
don’t use it very much. But it’s hard to say to employees, “You’re not
using this benefit, so we’re going to take it away.” Are there some best
practices that employers might want to consider when it comes to underutilized
benefits?
[Hoffman] As
a general employee relations proposition, I find that it is generally a good
idea to offer some new benefit when you are eliminating one that is
underutilized. If that is not possible, then it is recommended that you, in
communicating with employees about the change, let them know that the money you
are saving by discontinuing this underutilized benefit will be used to either
preserve the remaining benefits or perhaps enhance some of them; such as you
could offer more PTO or sick leave if you eliminated another benefit, etc.
I
assume it would be better to give employees notice that a benefit is going
away, versus just saying “This benefit stops effective immediately.”
Is there a good time frame for this? And if the answer is “it
depends”, how can organizations figure out that good time frame?
[Hoffman] As
noted above, other than the few instances where there is a legal notice
requirement, such as eliminating health insurance coverage for employers
subject to the Affordable Care Act, or where the plan document itself requires
advance notice, it is generally just using good judgment for how much advance
notice is given. I tend to agree with you that advance notice is always the
best policy. As far as a rule of thumb, I would suggest that between 30 or 60
days’ notice is good policy from an employee relations perspective.
Similar
to a benefit, companies offer employees perks. What are perks and should
companies follow the same thought process when it comes to eliminating them?
[Hoffman] The
generic term ‘benefits’ refers to items of compensation other than wages. There
is no legal definition for something called ‘perks’, but generally, that term
is used for non-wage benefits that do not involve cash paid to the employees;
i.e., income of a non-cash variety. This can include such things as employee
discounts for employer products, snacks or lunchroom facilities, a company park
for employees to use with their families, discounted movie or amusement park
tickets, special parking spaces for employee of the month, etc. Whenever these
perks are found not to be of much continuing value, and the employer wants to
terminate them, the same sorts of considerations that are discussed above
should be taken into account.
Although
there will generally not be a legal requirement, some form of advance notice is
appropriate and, as I suggested above, some rationale would ideally be given
that includes reference to either new perks or increased existing remaining
perks that are being offered as a result of eliminating the perk in question.
Last
question. If employees complain once the company makes the announcement to
eliminate a benefit, what are the pros and cons of changing your mind?
[Hoffman] Whenever
an employer decides to eliminate a benefit, there is a calculus that the
employer will perform where it weighs the savings from eliminating the benefit
against the cost in employee relations and legal risk. If, after a decision to
eliminate a particular benefit has been announced, the amount of negative
feedback the employer receives is greater than it anticipated, there is nothing
wrong with reversing the decision and turning that reversal into a virtue by
saying that, “We listened to you,” and heard that this is really an important
benefit to you, and therefore decided to retain it after all.
If, on the
other hand, the number of complaints are isolated, then it is perfectly
reasonable to go to those employees and tell them that while you understand
that the benefit was important to them, on a broader employer-wide basis, it
was not particularly valuable and it was better for the employees in general to
offer the new benefit or the newly-enhanced existing benefit in place of the
existing one that is being eliminated. If you can find some way to work with
the employee to transition them through whatever hardship is occasioned by
eliminating the benefit, that is to be explored; otherwise, you simply express
sympathy and continue to move forward with your decision.
I want to
extend a huge thanks to Sam (again!) for sharing his knowledge with us. If you’re looking to stay on top of labor and employment law
issues (and I know you are), be sure to follow their Labor
& Employment Law Perspectives blog – it’s on my must-read list.
Benefits are a tricky and sometimes emotional subject. They represent value to employees, so organizations need to handle them with care.
Image captured by Sharlyn Lauby while exploring San Diego, CA
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