Federal law (Title 13, Part 121 of the Code of Federal Regulations) sets forth in detail the criteria to be used by the Small Business Administration (SBA) in determining the definition of a “Small Business.” This criterion includes items such as sales volume and number of employees. For instance, in most general and heavy construction industries, up to $27.5 million per year in sales receipts qualifies a business as “small,” and in manufacturing, up to 500 employees qualifies a business as “small.”
It’s important to note that this SBA designation doesn’t apply to the Patient Protection and Affordable Care Act (PPACA) – also known as Healthcare Reform. Healthcare Reform mandates that “large” employers will have to offer health insurance to their employees or face fines. To determine if this mandate applies to your business, you are required to look past your SBA designation and understand the rules that are specific to the PPACA.
The PPACA identifies a “large” employer as having 50 full-time employees. Furthermore, while the Fair Labor Standards Act (FLSA) sets 40 hours per week as a standard work week, PPACA sets “full time” at an average of 30 hours per week, per month.
Starting in 2014, employers with more than 50 full-time equivalent (FTE) employees will be fined $2,000 per full-time employee (excluding the first 30 employees), if they do not offer health insurance to employees who average 30-or-more hours per week.
All of this is certainly a lot to consider for that “small business” but “large employer.”
Full Time vs. Full-Time Equivalent
The number of full-time employees at your business determines your health insurance coverage requirements. First, you have to determine the number of employees who work at least 30 hours per week and add them together. Then, for employees who work less than 30 hours per week, take the number of hours they work during the month and divide that by 130 (number of hours worked per month to determine a FTE). Example: If you have 30 employees who each work 30-or-more hours per week, and 26 employees who each work 25 hours per week, the calculation would look like this:
In this example, you have a total of 50 full-time equivalent employees, and you’re expected to provide health insurance even though you don’t have 50 employees working 30 or more hours per week.
Additionally, your number of full-time equivalent employees determines your tax credit qualification. For purposes of figuring out your FTEs, you would use a similar calculation as above, but you would use a 40-hour week as your base. An employee who works 40 hours per week for 52 weeks, works 2,080 hours per year. For employees working less than 40 hours per week, add the estimated number of hours worked and divide that number by 2,080. In the example below, this business has 15 full-time employees working a traditional 40-hour week, 15 full-time employees working a 30-hour week and 25 part-time employees working a 25-hour week.
You will note how the calculations change from “month” to “year” (120 hours/month * 12 months), is not the same calculation as (30 hours/week * 52 weeks), further complicating the math.
Other Reform Considerations
Under the law, healthcare also has to be affordable, which is defined as not more than 9.5% of your employee’s household income. If insurance costs more than that, employees will be able to purchase insurance through an Exchange, which has penalty ramifications for your business. However, large employers typically do not maintain (and would find it difficult to obtain) the “household incomes” of their full-time employees. As a result, the proposed regulations permit employers to use a safe harbor, including an employee’s W-2 wages in lieu of “household” wages to determine affordability.
Implications for Your Managers
Outside of the additional financial considerations placed on businesses as a result of Healthcare Reform, there are some real administrative concerns to face. Managers have always been responsible for managing the number of hours their employees work, but now, failing to control the number of hours has ramifications beyond exceeding operational budgets.
Because of the ramifications of increasing FTE counts, businesses likely will employ a greater number of contingent and seasonal employees who do not need to be included in these counts. The manager’s job, in these situations, becomes more complicated, because shifts have to be planned more efficiently to avoid any unnecessary hours. Specific attention has to be focused on those employees who regularly work close to 30 hours, to avoid unintentionally exceeding the 30-hour mark and therefore, increasing expenses. The U.S. Department of Labor has not yet issued guidance on how long an employee has to work an average of 30 hours per week before it would consider that employee full-time, although it does appear it is making two considerations—one concerning newly hired employees and one concerning established employees.
Additionally, there is a heightened emphasis on employee performance management to get the most efficient use of employee time. This new reality also will force managers to pay more attention to their own schedules, and to accept the likelihood that they’ll be working more hours.
The role of the manager is about to get a lot more complicated. Scheduling has to be well-managed and documented, performance management has to become more rigorous and effective and managers will have to be comfortable communicating these concepts to their employees.
While accurate time-keeping records have always been a requirement under the FLSA, the accuracy of those records now takes on greater importance given the fact that the number of hours employees work drives so much of the eligibility and potential liability under Healthcare Reform.
| Author: Patrick Carey |
| Professional Employer Consultant |
| Oasis Outsourcing |
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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at info@buysellflbiz.com or 239.738.6227. Also, visit our Florida Business Exchange website at www.fbxbrokers.com and my personal website at www.buysellflbiz.com.
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