The Affordable Care Act and Your Flexible Workforce
While we have always known that the Patient Protection and Affordable Care Act (aka: PPACA, ACA, AHA, Obamacare) would impact the temporary staffing industry and its customers, the regulatory information that has been surfacing over the last several months is starting to reveal the impact of some of the details embedded in the law.
We are finding both good and bad news in the newly published regulations—new requirements that will increase the costs of temporary and contract workers; nuances in those requirements that will make flexible workforce strategies an even more attractive model for driving down operating costs. While the law is still very confusing, the reality is that most of the regulations that will be written, have been written to the point where more and more cost conscious employers are starting to re-think how they get work done—what types of employees to put to work when, where, and how.
The following information is being provided to PACE customers as a way to lay out the facts of the ACA and its regs, prepare you for what lies ahead, and offer some ideas for not only staying compliant, but mitigating some of the cost increases we are all anticipating. Our comments will focus primarily on the impact of the ACA on our client’s non-W2 workforce, which includes not only your temporary and contract workers but any workers performing work on your behalf through the services of a third party employer.
Under the ACA, all “large” employers are required to do three things to stay in compliance with the law as of January 1st, 2014.
- Offer “minimum acceptable” healthcare insurance to 95% of their eligible fulltime employees (leaving a 5% margin of error).
- Ensure that the cost of the plan they offer is “affordable” (i.e. will not require any employee to pay more than 9.5% of their annual pay towards the costs of an individual plan), and
- Ensure that the plans(s) offered and the employer’s contribution to these plans is not set up to favorably treat highly compensated employees.
Large employers will be required to pay the costs for meeting these three requirements (what is often called the “play” option) or face substantial penalties for non-compliance (what is often called the “pay” option).
The definition of a “large” employer applies to any employer with fifty or more fulltime employees. A fulltime employee is someone working 30 hours a week or 1560 hours per year.
The Bad News for Staffing Companies and Their Customers
Some clients have asked “does PACE have to be compliant with the law?” The answer is a resounding yes. And for PACE, like most staffing providers, our bad news is that the types of healthcare benefit packages typically available to the staffing industry will no longer meet the new federal standards for “minimum essential coverage.” Most staffing companies are making decisions now to either “play” (pay the additional costs associated with compliant coverage), or “pay” (pay the penalties for non-compliance, i.e. $2000/year per uncovered employee).
Both options mean that as of January 1st, 2014, the direct costs associated with using third party staffing services will increase. We are anticipating that the costs to become fully compliant with the law will require most staffing companies to ask for a 2-4% increase in client bill rates, just to break even; anywhere from $.16 to $.35 cents per hour.
Cost increases for all types of staffing – core and non-core—represent the bad news that is part of the ACA and will impact all “large” employers on or about January 1, 2014.
Some Good News for Users of Staffing Services—the Variable Worker and Look Backs!
All of the news embedded in the ACA is not bad! While an employer’s requirement to provide coverage applies to all full-time employees (individuals who work 30 hours a week, 1560 hours a year), there are special rules that apply specifically to the types of “variable” workers who work for temporary and contract staffing companies. We believe these rules will create new opportunities for cost savings for PACE customers.
As the ACA regulations have rolled out, we now know an employer can stay in compliance with the law and still delay offering the mandated benefit packages to some employees who can be legitimately classified as a “variable” worker. A variable worker is someone working in a job that is subject to change, or with an uncertain duration or end date—a condition that is pretty much a given in most temporary or contract staffing environments. The period of time between when the variable worker starts work and the date when they are evaluated for benefit eligibility is called the “look back period” , and can be 3, 6, or 12 months—each employer gets to decide.
Staffing companies who go through the administrative process to confirm their workers are “variable” and therefore subject to the “look back” provisions in the law, will be able to generate significant cost savings for their customers. While most of our client’s W2 employees will not qualify for variable worker status, and must, therefore, be offered the mandated benefits within an administrative period that cannot exceed three months, most temporary or contract workers will be considered “variable” and not eligible for insurance coverage until they have reached the required 1560 hours (9 months or more).
This variable worker “look back” provision in the ACA creates considerable opportunity for companies like PACE to offer our clients “variable” workers at significantly less cost than would be required for the client to hire an employee directly. The differentials in the direct costs of these two types of employees will be dramatic—creating compelling reasons to rethink their use of third party employers in the early stages of a new hire.
The Impact of New Anti-Discriminatory Regulations on Our Clients Benefit Costs
One of the more significant impacts of the ACA, not often discussed, are provisions in the law that tighten up opportunities to treat different types of employees differently. Consultants to our industry are advising us that the anti-discrimination components of the ACA will obsolete any plan that differentiates coverage or costs in favor of highly compensated employees.
For the staffing industry, this means that whatever benefit programs offered to our temporary employees needs to be offered to our regular employees. For our customers this means that whatever healthcare benefit package offered to their highest paid employees must be offered to their lowest paid employees.
To be compliant with the “affordability provision” of the ACA, no benefit eligible employee in your workforce can be asked to pay more than 9.5% of their gross pay for the cost of your plan’s individual coverage. For a worker earning 20K in a year, this means they cannot contribute more than $1900 a year or $158.33/month in order for the plan offered by their employer to be compliant. How this compliance benchmark is achieved is what will get tricky for many employers.
When the compliance calculations are based on what the employer can legally pay for the lowest paid employees, it limits the amount of employer contribution that can be applied to the highest paid employees. If the amount contributed to all employees is based on the amounts of the employer contribution made available to higher paid employees, overall costs of benefit coverage will skyrocket.
This is the dilemma the law intends. Employers will be challenged to create benefit programs that will be equally appealing and affordable for all employees. We are already talking to some employers who will elect to outsource their W2 relationships simply to avoid the risks of discrimination.
Employer of Record Services—Minimizing the Impact of the ACA!
The following are some ideas for PACE customers who are open to looking at new staffing strategies built around the special provisions in the law designed specifically for staffing providers. You will notice that we have laid out these ideas from the perspective of a third party employer service provider, not just a temporary or contract labor provider.
The PACE Staffing Network has recently added a new “employer only” service, what we call an Employer of Record Service, partly in anticipation of the service needs of our clients following the implementation of the ACA in January. Employer of Record Services are particularly attractive to employers with strong internal recruiting capabilities because they offer highly discounted bill rates that carve out all extra costs (for recruiting, screening, etc.) to include only those costs associated with providing W2 employer services.
Employer of Record Service packages are customized to the unique needs of each client, but the following represents a few ideas of how these services might be applied to your workplace as a way to shave workforce costs.
1. Employers can use a third party employer solution to avoid compliance requirements. For employers who need to add staff, but also want to remain below the 50 FTE (fulltime equivalent) threshold that exempts them from the ACA regulations, using a third party employer solution to channel employees to another employer can delay the point when they must become compliant with the law.
The Employer of Record Service option is ideal for employers who have located an employee they want to hire, but don’t want to absorb the costs or administrative hassles of employing that worker directly. Employer of Record Services is especially ideal for companies who want to either avoid or delay the compliance requirements of the ACA.
We are encouraging our smaller clients to plan now for what lies ahead. We’ve heard stories of regulatory agencies getting ready to target companies who have been sending large numbers of already existing employees to a third party employer as a way to avoid ACA regulation. We do not recommend this strategy.
But for employers who haven’t yet reached that 50 FTE benchmark, a third party employer solution applied to your near term hires can successfully delay when your company falls under the ACA.
Word of caution: using a third party employer solution is considered a short term (one-two year) solution. The administrative rules of the ACA dictate that after one year, all workers in your facility, regardless of who employs them, will be counted as part of your FTE.
2. Employers Can Use a Third Party Employer Solution to Mitigate the Costs of Adding Staff. If you’re an employer who needs to hire but is reeling from the high costs currently associated with each new hire (and targeted to increase after January 2014), it may be time to seriously consider using a third party employer solution as an extended (6-12 month) onboarding strategy.
While you may have already reviewed and walked away from the more traditional temp-to-hire staffing models, the lower cost, Employer of Record Service model offers all the cost savings advantages of categorizing employees as variable, while providing a very behind-the-scenes model of W2 employment.
Whether you use the full service temp-to-hire service model, or the considerably streamlined Employer of Record Service model, the opportunity to onboard a large number of workers at substantially lowered worker costs compared to the costs of hiring directly is the outcome of either choice.
3. Employers Can Use a Third Party Employer Solution to Avoid Administrative Hassles. The ACA is not just a regulation that adds additional direct costs, but is a regulation rich in administrative detail and reporting requirements. Administering healthcare benefits where you have to apply definitions of variable workers, calculate look back, measurement and stability periods, and do e “affordability” testing, is going to be a daunting task for whoever takes it on.
And the penalties for not doing the right administration correctly will be significant.
As a staffing company with a large “third party employer” workforce, one of our core competencies is our ability to manage all federal and state staffing regulations, including the ACA. We are getting ready now to be fully compliant with all regulations by January 1st, 2014 and will be ready to help our customers manage through the transition.
For a better understanding of how the ACA will impact your company and what you need to know about the options available for you to mitigate the costs associated with the new mandates, contact email@example.com to arrange for a personal consultation. Our approach to the ACA is not only to be fully compliant by January 1st, 2014, but to help our customers take full advantage of all aspects of ACA provisions that can drive down staffing costs.
This article was prepared by Jeanne Knutzen, Founder and CEO of the PACE Staffing Network using information from a variety of legal, staffing, and other professional sources.