Consider the Implications of Grandfathering Benefits – Ask #HR Bartender
As more organizations look to up their “employee experience” game, I can see the question of grandfathering benefits coming up a little more often. That’s why today’s reader question is so relevant.
Hi! I love your articles and subscribe. Question: Is it normal to grandfather benefits? Our small not-for-profit went through a reorganization where we moved from a CEO and EVP as senior managers to a CEO, CAO (me), CFO, and COO.
I just came across a severance policy that says while the EVP role was eliminated in 2011, ‘Jane Doe’, the former EVP now COO, would continue to receive a severance benefit should she leave. When I asked about it, my CEO said the ‘board’ didn’t want her to lose any benefits that she had in her former position. The other chief officers are not eligible for this benefit. Is this normal? (FYI – The COO also gets other benefits that the other chief officers do not get.)
Obviously, we don’t have all the information here, but I do think we can talk about benefit policies and best practices when changing benefits. To help us understand the nuances involved, I asked our friends at Foley & Lardner, LLP if they would assist and thankfully, they 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, what does it mean when an organization “grandfathers” a benefit?
[Hoffman]To ‘grandfather’ a benefit means that an employee is locked into a certain level of benefit accrual or type of benefit that is not being given to new employees.
For example, an employer might have a severance pay program that provides for a certain level of benefit that it wishes to eliminate as a cost-saving measure, but locks in or ‘grandfathers’ current employees in the current level of severance pay while new employees do not get severance pay or they get it at some lower rate.
The same concept can be applied to other benefits such as vacation, sick leave, health insurance, nonqualified deferred compensation, and qualified retirement benefit programs.
In your experience, is “grandfathering” a common practice? Also, is it something usually found only with senior level positions?
[Hoffman]Grandfathering is a fairly common practice, but it is not the general rule. Grandfathering can and does occur both at the senior level and at the rank-and-file level.
What are the pros/cons associated with “grandfathering” benefits?
[Hoffman] The ‘pros’ of grandfathering an employee or a group of employees in a particular benefit or level of benefit accruals is that you keep valuable employees happy by not having to take something away from them.
The potential ‘cons’ of grandfathering an employee or group of employees in a particular benefit or level of benefit accruals are:
- Increasing administrative complexity and the possibility for making mistakes,
- Creating nondiscrimination testing problems (such as with qualified retirement plans or self-funded health insurance programs) and,
- Engendering disgruntlement among the newly hired workforce that does not enjoy the benefits that have been grandfathered to the longer service employees.
In my experience the disgruntlement problem is most pronounced when a more junior employee is receiving a benefit that is more valuable than the benefit being received by the employee’s boss.
When should organizations consider “grandfathering” a benefit?
[Hoffman]There are two scenarios when anorganization should consider grandfathering a benefit.
- When an employer has a valuable employee who they believe would be disgruntled or perhaps leave if they lost a particular benefit or level of benefit accrual, or
- When the employer has a legal or contractual obligation to continue a certain level of benefits for the employee (such as an executive employment agreement, a collective bargaining agreement or with certain governmental employers that may have constitutional obligation to protect benefit levels for current employees etc.).
Except where grandfathering is legally required, an employer should carefully consider whether the ‘pros’ in employee retention or satisfaction for the employee or employees receiving the grandfathering outweighs the administrative and employee relations ‘cons’ of providing the grandfathered benefits.
Last question. This situation is focused on grandfathering benefits. But I’m curious, are there options that organizations can consider before they grandfather a benefit?
[Hoffman]Yes, before accepting the administrative, possible nondiscrimination testing and employee relations burdens associated with grandfathering a particular level of benefits for an employee or subset of employees, the employer should ask itself whether the valuable employee or employees that the employer wishes to keep happy could be satisfied with some other alternative to grandfathering.
For example, the employer could provide a one-time bonus payment to the employee or an alternative enhancement to other areas of benefits that the employer is prepared to offer to all employees generally. The employer should balance the potential cost savings of a change in benefits and the employee relations issues, both for the valuable continuing employee(s) and the valuable new employees, before embarking upon a commitment to grandfather a particular level of benefits.
I want to extend a huge thanks to Sam for helping us understand more about grandfathering benefits. This is one of those subjects that might appear so simple at face value but is really very complex. If you’re looking to stay on top of labor and employment law issues, be sure to sign up for Foley & Lardner’s electronic newsletter or follow one of their blogs. They’re on my must-read list.
Sam’s comments about weighing the pros and cons of making benefits changes are really spot-on. I totally understand that organizations want to offer the best benefits and compensation packages, but it should be done with careful consideration and a lot of research.
Image captured by Sharlyn Lauby after speaking at the SHRM Annual Conference in New Orleans, LA
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