Small businesses are bracing for another year of costly compliance change and complexity from Washington, D.C. While expecting a cascade of regulations, focus is on three priorities—the Affordable Care Act, Fair Labor Standards Act overtime regulations and mandatory paid family and medical leave.
Affordable Care Act
Play-or-Pay Mandate Casts A Wider Reach
New for 2016, organizations that employ between 50 and 99 full-time employees or equivalents are now subject to ACA section 4980H Employer Shared Responsibility, also known as the employer “play-or-pay” mandate. For 2015, these provisions applied only to employers with 100 or more full-time employees.
Beginning in 2016, therefore, the law requires all “applicable large employers,” (those that employ 50 or more full-time employees) to offer health coverage that is “affordable” and provides “minimum value” or face hefty federal penalties. The law generally defines a full-time employee as someone who works an average of 30 hours per week.
Smaller Employers Are Spared “Cadillac Tax,” But Not Mandatory Health Coverage Reporting
Notwithstanding the play-or-pay mandate, year-end 2015 brought good news on two compliance issues that will reverberate into 2016: the 40 percent “Cadillac Tax” on high-value health plans and the due dates for mandatory employer health coverage reporting.
Congress voted to push the Cadillac Tax effective date back two years, from 2018 to 2020. The vote effectively kills this 40 percent excise tax and raises the question of whether Congress will consider a substitute to replace the projected 10-year revenue loss of $90 billion. Smaller employers welcomed the vote as they would likely have faced the heaviest compliance burden.
Mandatory health coverage reporting has been shaping up to be a compliance nightmare and, for small business in particular, perhaps the most onerous requirement of the Affordable Care Act. Due to a legislative quirk, the law exempted employers with between 50 and 99 full-time employees from the Employer Shared Responsibility mandate for 2015, but not from the Forms 1094 and 1095 information reporting mandate. Employers face fines of $250 per return for failure to file or for an incorrect return, up to a maximum noncompliance penalty of $3 million.
The extension of due dates for information reporting, including to June 30, 2016 for Form 1095-C electronic filers, is a much-needed reprieve for all employers. But the question for 2016 is, will more time solve the problem? Or is the IRS compliance design, with complicated indicator codes, far too complex for far too many employers? And if that’s the case, why not go back to the drawing board, including with Congress, and come up with a Plan B?
Fair Labor Standards Act Overtime Rules
Doubling The Overtime Salary Threshold Would Impose Burden On Smaller Employers
In March 2014, President Obama directed the Secretary of Labor to “modernize and streamline” federal rules to extend overtime protections to millions more workers.
In July 2015, the Department of Labor proposed new rules that would entitle over 5 million additional workers to overtime pay under the Fair Labor Standards Act (FLSA). Most significant is that this legislation more than doubles the salary level threshold, below which employees are eligible for overtime pay, from the present $23,660 per year to $50,440 in 2016. This change could impose significantly higher costs on employers.
According to the National Federation of Independent Business (NFIB), because they have employees that will be newly eligible for time-and-a-half overtime pay, small businesses will find it more difficult to promote workers to management levels and will need to move some managers from salaried positions to hourly jobs not exceeding 40 hours a week.
The NFIB says this will be especially difficult for small businesses in small markets where the cost of living is lower than in major metropolitan areas. And, of course, a doubling of the overtime salary threshold will impose a huge new expense on small restaurants and retailers.
Employers are also concerned about an issue hinted at in the proposed rules: a change in the “duties tests” for exempt executive, administrative and professional employees. In the final rulemaking, the Labor Department could require that employees perform exempt duties for a specific amount of their time, further complicating FLSA compliance.
The Expected Impact Of Final Regulations In 2016
What should employers expect in 2016? With some 250,000 comments during the public comment period, the Department of Labor was unable to finalize regulations in 2015. The Obama Administration is expected to announce final regulations in 2016, which poses two problems for employers:
First, publication of a final rule during the presidential election campaign could turn overtime pay, like too many HR policy issues today, into a political football. Politicizing the issue of overtime pay could undermine consensus-building at the expense of employers.
Second, final regulations issued late in 2016 will risk narrowing the window between publication and effective date. Rather than having the usual four to six months to implement complicated new overtime rules, employers may have only 30 to 60 days, making timely compliance difficult for smaller employers.
The issue of federal overtime rules is too important for both workers and employers to become a presidential campaign talking point. Hopefully Democrats and Republicans will agree to postpone final rules until 2017 and the next administration.
Mandatory Paid and Unpaid Sick Leave
Proposed Legislation Means Smaller Businesses Would Be Required to Provide Unpaid Sick Leave Similar to The Family and Medical Leave Act
If one word could explain in a single word the sentiments of employers toward federal paid leave legislation, that word would be “mandatory.” Most employers, including small business, try to tailor paid sick and family leave benefits to their workforce and business conditions.
However, in addition to many states considering paid sick leave, they are concerned about federal legislation that would require employers to provide a specific paid leave formula, subject to federal oversight, enforcement and penalties, as well as potential employee lawsuits in federal courts.
President Obama and a number of lawmakers have endorsed the Healthy Families Act, HR 932, legislation that imposes a federal mandate on almost all employers to provide employees up to 56 hours or 7 days of paid sick leave per year.
Under the bill, employees would accrue one hour of paid leave for every 30 hours worked and would be entitled to use earned paid leave beginning on the 60th calendar day after their start date. A “Covered Employer” would be any employer that employs 15 or more employees.
Even the smallest of businesses would not be exempt; the proposed legislation mandates that employers with fewer than 15 employees “may” provide paid sick time, but if they do not, they must provide no less than 56 hours of unpaid sick time to each employee per year—essentially gutting the existing small business exemption in the Family and Medical Leave Act by requiring small employers to provide unpaid sick leave time each year.
A number of employer organizations have gone on record in opposition to the proposal, with the Society for Human Resources asserting it was “the wrong approach” and would “limit employer flexibility” and “stifle workplace innovation.”
To the relief of most employers, particularly smaller businesses, congressional Republicans have said they have no plans to bring up mandatory paid leave legislation this year. Indeed, House Speaker Paul Ryan (R-WI) recently characterized the legislation as “another federal entitlement” and made clear the bill would not be approved in 2016.
Meanwhile, a number of states and localities have enacted or are considering mandatory paid leave laws. These include California, New Jersey and Rhode Island, as well as cities like San Francisco, Seattle and New York. Washington, D.C. is considering a 16-week paid family and medical leave entitlement that would provide 100 percent of pay for employees making up to $52,000 a year, financed by a new payroll tax on employers.
Upcoming Elections Renews Focus on These Issues
Election 2016 has begun to focus on the Affordable Care Act, new FLSA overtime regulations and mandatory paid family and sick leave. Meanwhile the U.S. economy seems to be slowing, as fourth-quarter GDP expanded at only a 0.7 percent annual rate and 2015 registered growth of just 2.4 percent. Employers need to keep an eye on both the economy and the costly burden of regulatory compliance. They can only hope political candidates do the same.