A couple of months ago, I published an interview with Samuel Hoffman with Foley & Lardner, LLP about what organizations need to consider when grandfathering employee benefits. In response, I received this reader comment.
Hi. Thanks for the helpful article. I recently started at a small company that has some grandfathered plans for a few of the first employees of the company. As we’re growing, it’s becoming more of a burden to have grandfathered plans for a small handful of employees. Any thoughts on eliminating grandfathered benefits that a company isn’t legally or contractually obligated to provide?
While we can’t talk specifics, especially because we don’t know the benefits involved, I do think we can talk about benefit policies and best practices when eliminating and/or changing benefits. And since Sam did such a fantastic job sharing his experience when it comes to grandfathering benefits, I asked if he would help us again and am thrilled that he said yes.
Samuel Hoffman is a partner and business lawyer in Foley’s California office. He represents health care providers and government entities in employee benefit matters such as pension plans, compensation, and bonus programs.
Please remember that Sam has a regular full-time job as a lawyer and he’s doing this to give back to the profession. His comments should not be construed as legal advice or as pertaining to any specific factual situations. If you have detailed questions, you should address them directly with your friendly neighborhood labor and employment attorney.
Sam, I know we’re talking about eliminating benefits, but just to set the baseline for our conversation, what are the benefits that employers are legally required to provide. You don’t have to list them all here, but maybe there’s a resource?
[Hoffman] Generally, the only ‘benefits’ that an employer is required to offer are:
- Social Security
- Workers’ Compensation
- In some states and cities, sick leave and/or a
state mandateddisability leave program for non-work-related disabilities.
- Generally, employers are also required to contribute towards the state unemployment insurance program.
- Employers with more than 50 employees within a 75-mile radius are required to offer leave under the Family and Medical Leave Act (FMLA). And in some states, a comparable program for employers with fewer employees, which is unpaid, but for which health insurance that was provided to the employee before the leave must continue to be made available on an active employee basis.
- Employers with 50 or more employees will be subject to a substantial fine under the Affordable Care Act (ACA) if they do not offer affordable minimum essential health insurance coverage to their employees.
Employers can generally find out what benefits are absolutely required by Googling (or using the search engine of their choice) the question and looking at various relevant publications for their state and city.
With the today’s challenges in recruiting and retaining talent, companies are thinking about adding benefits all the time. That being said, companies can’t simply continue to add benefits. Every once in a while, they might need to phase out or eliminate a benefit to put a new one in its place or because it doesn’t align with the company’s compensation philosophies. From a legal perspective, what should organizations be aware of when it comes to the elimination of an employee benefit?
[Hoffman] For all benefits that are voluntarily provided by the employer, the employer should be able to terminate them prospectively. The first thing that employers should think about before eliminating voluntarily provided benefits is what sort of notice requirements there are for such termination, arising either by statute or regulation, and/or by the terms of the plan document.
The best approach is to start by looking at your plan document and determining what it says about termination and notice. For health insurance benefits, you will generally need to give 60 days’ advance notice if you have more than 50 employees and are subject to the Affordable Care Act’s summary of benefits and coverage requirement. For other types of benefits, advance notice is advisable, but not required, and will be governed on a contractual basis by what the plan document says.
The employer should also consider the employee rights to previously accrued benefits, which in many instances are legally required to be grandfathered, such as vested retirement benefits or even unvested retirement benefits which the employer will be required to allow the employee to continue accumulating time toward vesting, even after the retirement plan is frozen.
Also, many states require that any vacation or paid-time-off (PTO) that has accrued be preserved, even if the benefit is discontinued going forward.
As a general rule, my advice would be that if you are going to eliminate any benefit prospectively, that you preserve any previously accrued unused benefits under the program. This is advisable from both a legal and an employee relations perspective. You should also consider whether eliminating any particular benefit will have an adverse impact on your employee relations that will outweigh the savings, both in administrative time and money.
Another time that I’ve seen companies consider eliminating a benefit is when employees don’t use it very much. But it’s hard to say to employees, “You’re not using this benefit, so we’re going to take it away.” Are there some best practices that employers might want to consider when it comes to underutilized benefits?
[Hoffman] As a general employee relations proposition, I find that it is generally a good idea to offer some new benefit when you are eliminating one that is underutilized. If that is not possible, then it is recommended that you, in communicating with employees about the change, let them know that the money you are saving by discontinuing this underutilized benefit will be used to either preserve the remaining benefits or perhaps enhance some of them; such as you could offer more PTO or sick leave if you eliminated another benefit, etc.
I assume it would be better to give employees notice that a benefit is going away, versus just saying “This benefit stops effective immediately.” Is there a good time frame for this? And if the answer is “it depends”, how can organizations figure out that good time frame?
[Hoffman] As noted above, other than the few instances where there is a legal notice requirement, such as eliminating health insurance coverage for employers subject to the Affordable Care Act, or where the plan document itself requires advance notice, it is generally just using good judgment for how much advance notice is given. I tend to agree with you that advance notice is always the best policy. As far as a rule of thumb, I would suggest that between 30 or 60 days’ notice is good policy from an employee relations perspective.
Similar to a benefit, companies offer employees perks. What are perks and should companies follow the same thought process when it comes to eliminating them?
[Hoffman] The generic term ‘benefits’ refers to items of compensation other than wages. There is no legal definition for something called ‘perks’, but generally, that term is used for non-wage benefits that do not involve cash paid to the employees; i.e., income of a non-cash variety. This can include such things as employee discounts for employer products, snacks or lunchroom facilities, a company park for employees to use with their families, discounted movie or amusement park tickets, special parking spaces for employee of the month, etc. Whenever these perks are found not to be of much continuing value, and the employer wants to terminate them, the same sorts of considerations that are discussed above should be taken into account.
Although there will generally not be a legal requirement, some form of advance notice is appropriate and, as I suggested above, some rationale would ideally be given that includes reference to either new perks or increased existing remaining perks that are being offered as a result of eliminating the perk in question.
Last question. If employees complain once the company makes the announcement to eliminate a benefit, what are the pros and cons of changing your mind?
[Hoffman] Whenever an employer decides to eliminate a benefit, there is a calculus that the employer will perform where it weighs the savings from eliminating the benefit against the cost in employee relations and legal risk. If, after a decision to eliminate a particular benefit has been announced, the amount of negative feedback the employer receives is greater than it anticipated, there is nothing wrong with reversing the decision and turning that reversal into a virtue by saying that, “We listened to you,” and heard that this is really an important benefit to you, and therefore decided to retain it after all.
If, on the other hand, the number of complaints are isolated, then it is perfectly reasonable to go to those employees and tell them that while you understand that the benefit was important to them, on a broader employer-wide basis, it was not particularly valuable and it was better for the employees in general to offer the new benefit or the newly-enhanced existing benefit in place of the existing one that is being eliminated. If you can find some way to work with the employee to transition them through whatever hardship is occasioned by eliminating the benefit, that is to be explored; otherwise, you simply express sympathy and continue to move forward with your decision.
I want to extend a huge thanks to Sam (again!) for sharing his knowledge with us. If you’re looking to stay on top of labor and employment law issues (and I know you are), be sure to follow their Labor & Employment Law Perspectives blog – it’s on my must-read list.
Benefits are a tricky and sometimes emotional subject. They represent value to employees, so organizations need to handle them with care.
Image captured by Sharlyn Lauby while exploring San Diego, CA19