March 10, 2009
Experience with the Darker Side of Employment
You may have noticed that my posting has been sporadic, of late. I've been going through the sort of experience that all government meddlers ought to have, and it's proven not only time consuming, but apt to scuttle deeper thoughts.
I read, somewhere, that new regulations are set to take effect that will help the unemployed to afford COBRA health insurance. To now, the way it has worked has been that laid-off employees could keep their health insurance, but they've had to pay their entire premiums (plus an administrative fee). The new (temporary) system will leave them paying 35%, with the employer covering 65%, which he will get back as a tax credit. In other words, it doesn't cost the employer, but he has to front the money for a year (during a down economy).
Well, let me tell you that a certain type of employer, already reluctant to lay people off for unemployment insurance reasons, now has even more incentive to get employees to quit than was previously the case. There's a subjective line at which an employer's behavior amounts to "constructive discharge" — meaning that no reasonable person could be expected to endure the work environment — but that's a hefty gamble when unemployment insurance and continued healthcare are on the line.
Its worse than you imagine. If you have a small business - still large enough to require COBRA (20 employees) - and hard times requires laying off half the staff, then it may very well require out of pocket payments by the employer. If 65% of the total COBRA cost is greater than 100% of the remaining payroll tax (Social Security), then its out of pocket to the business owner. It can contribute to changing a survivable downturn into a business ending event. Keep it in place and it is also a brake on new hiring when things do turn around.
Lets run some annual basis numbers for 20 employees:
total payroll of $600000
total payroll tax of $75000
total medical insurance of $200000
(say its split 50/50 employer/employee)
amount employer pays for medical insurance $100000
hard times and 10 employees get laid off:
total payroll of $300000
total payroll tax of $37500
total medical insurance of $200000
(assuming everyone picks up COBRA)
amount to be paid by employer for COBRA is 65% of $100000 or $65000
amount of payroll tax that can be used as an offset $37500
out of pocket to business owner $27500
amount business owner pays for medical insurance including COBRA $77500 or per employee medical benefits costs have increased by more than half and have done so in tough economic times
actions taken by business owner out of self interest
1)drop medical coverage
2)delay rehiring
3)as Justin notes, get people to quit voluntarily
you can quibble about the numbers, you can rightfully ask how many businesses will be affected but I don't think you can assert that business owners won't factor this into their staffing plans
Posted by: chuckR at March 11, 2009 10:33 AM