Protect Yourself Legally When Cutting Employee Benefits
A strong employment benefits program is one of the most effective ways to attract and retain valuable workers. Benefits are also one of the most costly line items on the small business budget.
During tough economic times, small businesses might be tempted to cut employee benefits rather than lay off workers. After all, the reasoning goes, at least they’ll still have jobs.
While it may seem less heartbreaking, consider the legal ramifications of cutting benefits. Fairly strict government regulations dictate which benefits can, and cannot, be reduced, as well as how and when they can be reduced. One important element of reducing benefits is to make sure you do so fairly without any hint of discrimination and communicate the changes to your employees in a legally acceptable manner.
Accrued Benefits
A general rule of thumb is that employee benefits that have been earned must be paid. Those benefits are treated like regular wages. Examples include earned vacation days, earned sick days, and certain retirement and pension plans. Before reducing or eliminating these benefits, do a survey of what accrued benefits you may be responsible for. Different benefits have different accrual dates, such as employment anniversary, calendar years worked, or trigger date. Until such a survey is conducted, you won’t really know your legal and financial liabilities.
Retirement and pension plans are particularly touchy accruals. ERISA, or the Earned Retirement Income Security Act, protects pension plans, where employees accrue an amount each year and then are vested at the end of a certain period of employment. Different sections of ERISA govern different areas of pension administration, so an employer should not cut pension plans without consulting legal help.
Age Discrimination
An employer can legally reduce benefits to older workers if the new cost equals that of providing benefits to younger workers. You cannot, however, randomly reduce benefits based on age.
Notification
ERISA has strict mandates about how employees should be notified about benefit reductions related to their disability, pension, and other retirement plans. If you don’t follow those rules, you can be vulnerable to a lawsuit. Additionally, it’s just good business to explain to your employees what’s happening to their benefits and why.
Fees
It never hurts to ask if you can renegotiate your health insurance plan or pension administration fees. Administration fees for retirement plans can be expensive, but there is also a lot of competition among providers. Tell your current provider that you would like to discuss a better cost structure, and see what it comes up with.
Four Steps
To protect yourself legally if you must reduce or eliminate benefits, follow these four steps:
- Take inventory of all benefits, their costs, and their value to employees. You don’t have to pay 70 percent of your employees’ health premiums, but will reducing your contribution cause your key players to find a more generous employer?
- Pay attention to accrued benefits, particularly what you may owe even if you cancel the program. It may not be worth the legal hassle.
- Provide as much advance notice, in writing, signed by each employee, as possible.
- Consult with a benefits or legal advisor.
Reduction or elimination of benefits may seem like an easy way to save money, but it can be legally tricky. Proceed with caution and care to avoid lawsuits.
Emily Esterson is a contract writer, editor, and publisher specializing in small business topics.
