Structural changes in the economic environment, changes in economic conditions and changes in legislation and regulation affect all organizations, large or small, for-profit or not-for-profit, privately held or publicly traded, albeit in different ways. Such changes typically trigger the evaluation and ultimately the implementation of corporate restructuring. Corporate restructuring is directly linked to decisions regarding workforce, and it frequently will lead to changes in the size and composition of the workforce, in job titles and responsibilities, and the classification of employees between part-time and full-time, permanent and temporary, and exempt and non-exempt.
The Patient Protection and Affordable Care Act (PPACA), recently upheld by the U.S. Supreme Court, brings into the marketplace many significant changes affecting individuals and organizations, both of which will be required to comply with the changes established by this new legislation. While some of the initial requirements established by the PPACA were implemented in 2011 and 2012, the most significant changes will become effective as of January 2014.
Specifically, the PPACA directives referred to as the Individual Mandate and the Employer Mandate will be the ones to generate the most significant effects. In particular, the Employer Mandate requires that all “large employers” – defined in the PPACA as organizations that employ “50 or more full-time equivalent (FTE) employees” – provide reasonable coverage at a reasonable cost to the employee. For organizations that may fall at the borderline of being classified as “large employers," or that may have a higher rate of turnover in their workforce, or whose operations are highly driven by seasonality, the Employer Mandate may bring about extensive evaluations of the size, structure and composition of the workforce.
While the Employer Mandate will have to play an important role in the decision-making processes of all organizations, those that may fall at the borderline of the “large employer” definition will likely be the ones most affected by this new set of rules and the accompanying penalty structure for non-compliance. Because such changes will become effective as of January 2014, workforce data for year 2013 will be utilized in the determination of the number of FTE-equivalent employees who are part of an organization.
As organizations enter this period of analysis and evaluation of the size and composition of their workforce, the inevitable question is whether any changes to the size of the workforce should be considered. In many instances, this consideration may lead to the evaluation and implementation of a Reduction in Force (RIF). Many organizations at the borderline of the “large employer” classification will likely consider whether a RIF may result in significant cost savings, thereby enhancing the bottom line while at the same time circumventing compliance with the Employer Mandate.
Two significant issues will need to be considered:
1) Organizations must understand the type and amount of documentation they will have to maintain in order to properly report to pertinent government authorities. The determination of the number of FTE employees will have to be based on workforce data for a reasonable period of time. This will require that organizations maintain, at a minimum and beginning in January 2013, the following:
a. Accurate data regarding the number of hours worked by each employee;
b. Accurate data reflective of the typical workweek of the organization;
c. Accurate data reflective of employee status, i.e. permanent or temporary (including interns), full-time or part-time, salaried or hourly, and
d. Accurate and detailed corporate documentation regarding the policies and practices applicable to the classification of employees between part-time and full-time, permanent and temporary (including interns).
The need for recordkeeping will inevitably have an impact on the organization’s administrative costs. In addition, the determination of the number of FTE employees will involve potentially significant computations that may require analytical resources not readily available or readily structured within the organization.
2) When considering a RIF, organizations will have to take into account the actual business reasons that lead to the RIF, business reasons related to the enhancement of workforce synergies or enhanced training opportunities. Two key issues will have to be addressed by corporate management:
a. Whether the evaluation and implementation of a RIF is brought to the forefront of management discussions, or whether changes in the workforce were already a pre-existing business consideration because of financial distress or the need for efficiency and synergy enhancement.
b. Whether potential employment litigation claims may arise as a result of implementing a RIF. While a RIF may result in a short-term cost savings by means of enhancing the synergies of the workforce and by means of avoiding the Employer Mandate compliance rules, the organization may place itself in a position of exposure to potentially significant employment disputes, which could be presented as employment discrimination claims. In the long term, this may result in significant legal expenses that may more than offset the initial cost savings.
As a result of these two key issues, organizations will have to
Josefina V. Tranfa-Abboud, PhD, is a Director in the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP.