The IRS Is Handing Out ACA Penalties: Is Your Company Prepared?

In 2015 alone, the IRS issued nearly $4.5 billion in penalties to employers who did not comply with the Affordable Care Act (“ACA”) employer mandate. That number is expected to grow to $228 billion by 2026. Despite the 2019 repeal of the individual mandate, larger employers are still required to comply with the employer mandate and failure to comply can be costly. For employers receiving the dreaded Letter 226J (a proposed assessment of ACA Employer Shared Responsibility Payments (ESRP)), panic may set in at the sight of the often substantial fines the IRS proposes. However, a timely and appropriate response to the IRS can drastically reduce, if not eliminate, the proposed assessment.

A.    The Nature of the Employer Penalties

Under the ACA’s employer mandate, an Applicable Large Employer (ALE) is an employer with 50 or more employees, including full-time equivalent employees. ALEs are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce. Coverage provided by ALEs must meet Minimum Value (MV) and be affordable for the employee. ALEs that fail to offer coverage that is both affordable and provides MEC may be subject to an IRS penalty known as an Employer Shared Responsibility Payment (ESRP).

ALEs may be subject to one of two types of penalties for their failure to offer minimum essential coverage (MEC) or failing to offer MEC that provides minimum value (MV). An employer subject to one type of ESRP will not be subject to the other type of ESRP.

 

  1. Employer Shared Responsibility Payment for Failure to Offer Minimum Essential Coverage (4980H(a) penalty)

An ALE may owe an ESRP if, for any calendar month, MEC is not offered to at least 95% of its full-time employees and, as a result, at least one employee receives a premium tax credit for purchasing individual coverage via the Health Insurance Marketplace. Part-time and full-time equivalent employees are not included in the payment calculation. If an ALE is subject to this type of ESRP, the fine will be $2,000 per full-time employee (calculated on a month-by-month basis), minus the first 30 employees. The $2,000 fine is indexed annually for inflation to the following amounts:

For calendar year 2018, the adjusted $2,000 amount is $2,320

For calendar year 2019, the adjusted $2,000 amount is $2,500

For calendar year 2020, the adjusted $2,000 amount is $2,570

This penalty is commonly referred to as the “sledgehammer” penalty, because it is usually the larger of the two potential penalties.

  1. Employer Shared Responsibility Payment for Failure to Offer Affordable Minimum Essential Coverage that Provides Minimum Value.  (4980H(b) penalty)

 Even if an ALE offers MEC and is not determined to be liable for the ESRP described above, the employer may still owe an ESRP should an employee receive the premium tax credit for purchasing coverage through the Health Insurance Marketplace. This penalty is calculated for each full-time employee who qualifies for a subsidy because the coverage offered by the ALE was not affordable or did not provide minimum value. 

If an ALE owes this type of ESRP, the annual penalty will be $3,000 (calculated on a month-by-month basis) for each full-time employee who received the premium tax credit. Again, the penalty is indexed annually for inflation to the following amounts:

For calendar year 2018, the adjusted $3,000 amount is $3,480

For calendar year 2019, the adjusted $3,000 amount is $3,750

For calendar year 2020, the adjusted $3,000 amount is $3,860

This penalty is known as the “tack hammer” penalty, as it is usually much less than the penalty for failing to offer minimum essential coverage.

To ensure it is not subject to the “tack hammer” penalty, an offer coverage to at least 95% of full-time employees that meets both the Affordability Test and Minimum Value (MV) Requirement. The affordability test is met if coverage does not exceed 9.86% (for 2019) of the employee’s household income. As employers typically do not know their employees’ household incomes, ACA regulations allow employers to judge affordability using one of the following “safe harbors” instead of household income:

  1. W-2 Method: The employee’s W-2 (Box 1) income from the employer for the current year.
  2. Rate of Pay Method: 130 x the lower of the employee’s hourly rate of pay as of the first day of the plan year or the hourly rate during any subsequent month. For salaried employees, employers should use the monthly earnings as of the first day of the plan year, not multiplied by 130. As a “best practice,” Employers should perform this safe harbor test for each full-time employee, every month.
  3. Federal Poverty Line: 100% of the Federal Poverty Line (FPL) for an individual. For 2019, the FPL is $12,490 for a household size of 1. To meet the FPL Safe Harbor, an employer must show that the full-time employees were offered self-only coverage that did not exceed the product of the FPL multiplied by 9.86% and then divided by 12 ($12,490 x 9.86% / 12 = $102.63). If the employee contribution for self-only coverage meets or is below this amount, then the FPL safe harbor is met.

The Minimum Value (MV) requirement is met if the plan covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan. This includes employee cost-sharing, deductibles, coinsurance, co-payments, and out-of-pocket maximums.

B.    Avoiding and Mitigating ACA Penalties

 Obviously, avoiding the above penalties is the goal for all ALE’s.  There are some practical steps ALE’s can undertake throughout the year to avoid or reduce ACA penalties:

  • Ensure the health plan offers minimum essential coverage;
  • Confirm that the coverage offered provides minimum value;
  • Take into consideration the lowest-paid employees to determine if coverage is affordable under one of the safe-harbor methods; and
  • Track employee’s hours of service to determine who are considered full-time employees or full-time equivalents.

But what happens if you’ve already received a Letter 226J from the IRS? How do you respond?  First, review the letter carefully to determine the response date. Time is of the essence, as a response is typically due within thirty (30) days of receiving the letter. If an ALE fails to timely respond, the IRS may issue a Notice and Demand for the ESRP payment that was proposed, and the IRS may begin enforcement actions (including liens) to collect the penalty. If the ALE cannot respond within the IRS’ stated timeframe, then the ALE should immediately request a 30-day extension to provide its response.

The next step when responding to a Letter 226J is to determine why your company received the ESRP in the first place. It’s possible that the IRS is correct in its penalty assessment. In that case, the company need only complete and sign the ESRP Response form and return it to the IRS along with the requested penalty payment. On the other hand, if your company disagree with the assessment, it’s important to identify the specific inaccuracies and submit the corrected information to the IRS as part of your response. Accurate record-keeping throughout the year can be a great help in providing relevant, supporting documentation to bolster the company’s position. Be prepared for the penalty assessment and dispute process to last several months.  The IRS often requests additional information and the agency is notoriously slow to respond.  But being patient can pay dividends, as the IRS will reduce or eliminate penalties if the ALE can demonstrate that all or a portion of the proposed penalty is unwarranted.

C.    Conclusion

 Much remains unresolved about enforcement of the ACA and its accompanying penalties.  Several federal lawsuits are still pending that could invalidate all or at least some portions of the law.  But so long as the ACA’s employer penalty provisions remain intact, ALE’s will still need to comply with its requirements and the IRS will continue to enforce the penalties. On the front end, ALE’s should do their best to provide employees with minimum essential coverage that meets the ACA’s affordability and minimum value criteria.  Doing so will alleviate the need to haggle with the IRS about penalties on the back end. Yet, even if your company receives an ESRP penalty letter from the IRS, don’t automatically assume the IRS is correct (they often are not).  Take the time to evaluate the basis for the penalty and, where appropriate, challenge the IRS’ determination. While you may not always be successful in getting the IRS to eliminate the entire penalty, diligent communication with the agency and appropriate supporting documentation will help in getting them significantly reduced.  

 

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.

New Maryland Law Restricts Use of Non-Competes

C2’s federal contracting clients often have employees working on contracts all around the country. One issue that frequently arises is how can clients effectively administer post-employment restrictive covenants (e.g., non-compete and non-solicitation agreements) across their entire workforce. This can be a challenge, since laws surrounding non-compete agreements are currently driven by state law. Many state legislatures have been active in this area over the past few years. In particular, Maryland recently joined a growing chorus of states that are restricting the use of a non-compete agreement for low wage employees.

A. The New Maryland Law

Generally speaking, “non-compete” agreements prohibit employees from going to work for a direct competitor of the former employer for a certain length of time after their employment ends. As of October 1, 2019, non-compete agreements under Maryland law now apply only to employees that earn more than $15 per hour or $31,200 annually. The law is not intended to apply to higher-paid employees. Put another way, the new law forbids employers from forcing employees who earn less than $31,200 per year or $15 an hour from agreeing to not work for a competitor after their employment ends.

Any agreements that violate this new Maryland law, even if freely entered into between an employer and the employee, will be null and void. The law applies to all employees working in Maryland — even if the agreement was executed outside of the state.
Also, the law is not limited to the post-employment conduct of an employee. This means the law would conceivably prohibit an employer from preventing a current employee from “moonlighting” for a competitor.

B. Maryland Employers Still Have Some Recourse

Even though the new law restricts which Maryland employees may now be subject to non-compete agreements, the law leaves open the possibility for other restrictions. For example, the law clearly states that it does not apply to agreements that restrict the taking of client lists or proprietary company information. This means that employers can still execute confidentiality agreements with any employee (regardless of their wage rate) that restricts their ability to take or use company proprietary information post-employment. In addition, the law does not appear to prevent employers from prohibiting former employees from soliciting their clients or employees via non-solicitation agreements.

Interestingly, the law does not provide an employee with the ability to sue his employer for making him enter into a prohibited non-compete agreement. There are no prescribed damages or penalties against employers. Accordingly, if the employer pursues a lawsuit to enforce the prohibited agreement, the employee’s only remedy will be to raise the new law as a defense to prohibit enforcement of those unlawful post-employment restrictions.

C. Other States are Enacting Similar Restrictions

Maryland is not the only state to try and limit the scope of enforceable non-compete agreements. On June 28, 2019, Maine enacted a new law making non-compete agreements null and void for any employee earning less than 400% of the federal poverty line – nearly $50,000 in 2019. Similarly, on July 10, 2019, New Hampshire enacted a non-compete restriction for low-wage employees who earn less than $24,280 annually. And Rhode Island also joined the chorus in 2019, passing a law that restricts non-compete agreements for employees whose annual earnings are less than 250% of the federal poverty level. Other states such as Utah, Idaho, California, and Illinois already have laws restricting to various degrees the use of non-compete agreements. And other states’ legislatures have made similar attempts to limit non-compete agreements, including Virginia and New Jersey. But as of yet, they have not been able to get anything passed into law.

D. Indecisive Action at the Federal Level

Currently, no federal law addresses the use of non-compete agreements among private employers. While laws restricting such agreements have gained traction at the state level, similar legislative attempts by the U.S. Congress have been unsuccessful. For example, in January 2019, Senator Marco Rubio (R-FL) proposed the Federal Freedom to Compete Act, which would prohibit employers from forcing entry-level, low wage workers to sign non-compete agreements and would void any non-compete agreements created prior to the bill’s enactment. In addition, in October the 2019 Workforce Mobility Act was introduced in the U.S. Senate by Senators Christopher Murphy (D-CONN) and Todd Young (R-IN). The proposed law would ban all non-compete agreements in the private sector, with limited exceptions regarding the sale of a business or dissolution of a partnership. On November 14, 2019, the Senate Committee on Small Business and Entrepreneurship reviewed both of the 2019 non-compete bills at a hearing entitled “Noncompete Agreements and American Workers.” Although many of the Senators in attendance appeared to support restricting the use of non-compete agreements to some degree, it seems highly unlikely that either measure will get passed into law before the conclusion of Congress’ 2019 term. While federal action in this area is certainly worth monitoring, it appears that, for now, Congress is content to let the states’ legislatures continue to impose their own non-compete restrictions.

E. Conclusion

An important aspect of the new Maryland law is that it does not grandfather existing non-compete agreements with employees whose earnings are low enough to bring them within the purview of the new law. This means agreements that may been lawfully executed months or even years ago, will now be unenforceable under the new law. Accordingly, those employers with Maryland employees should review their current non-compete restrictions to ensure they are enforceable under the new Maryland law and, where necessary, revise their agreements to bring them into compliance.

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.

 

[1] Some employers have handbook policies that completely prohibit employees from engaging in outside employment.  It is unclear how these policies may be impacted by the new Maryland law.
[2] This same bill was also introduced by senator Murphy in 2018.

DOL Publishes Long-Awaited Final Overtime Rule

On September 24, 2019, a C2 government contracting client e-mailed to ask if we had heard any update on when the Department of Labor (“DOL”) might publish its new overtime rule. For those of you who have followed this topic, you know that an update to the Fair Labor Standards Act’s (“FLSA”) overtime exempt salary threshold has been a long time in the making. Ironically, that very same day the DOL published its new overtime rule, announcing that effective January 1, 2020, the overtime exempt salary threshold (also called the “salary basis test”), which is used to determine employees’ overtime exempt status, would increase to $684 per week ($35,568 per year) for a full-time worker. The forthcoming increase to the overtime exempt salary threshold is the first such boost in over a decade and represents a 34% increase over the current $455 per week ($23,600 annually). In addition, the minimum salary threshold for exempt “highly compensated employees” will also increase from $100k annually to $107,432.

A. A Little Background

The FLSA originated as part of President Franklin D. Roosevelt’s “New Deal” legislation. The FLSA was passed in 1938 after the Great Depression, when many employers took advantage of the tight labor market to subject workers to horrible conditions and long hours. In its day, it was a landmark piece of legislation that had a significant impact on the labor movement in the United States. The FLSA set various nationwide wage and hour requirements for almost all employees, including defining the “workweek”, setting a national minimum hourly wage, setting overtime requirements, and setting child labor restrictions. Still a cornerstone of wage and hour law today, the FLSA affects millions of full and part-time workers in the private sector as well as federal, state, and local government employees. Over twenty amendments have been made to the FLSA since its inception, including the Equal Pay Act that was designed to equalize wages between men and women. Most notably today, the FLSA still regulates the federal minimum wage and overtime pay requirements for most workers (although states can dictate higher thresholds).

B. What Should Employers do to Prepare for the Changes?

As of January 1, 2020, employers who have exempt, salaried employees making less than the new minimum, must either increase those employees’ salaries to $684 per week ($35,568 annually) or change those employees’ FLSA status to non-exempt and pay them on an hourly basis. There are “pros” and “cons” to each option.

Changing employees’ FLSA status to non-exempt is always permissible (i.e., you could pay your CEO on an hourly basis). However, converting employees to non-exempt means that employers would have to pay overtime (i.e., 1.5 times their hourly rate) to those employees for all hours worked over forty (40) in a workweek. Be advised that there are certain jurisdictions, such as California, Alaska, Colorado, and Nevada that may require employers to pay employees overtime based on their daily, instead of weekly hours. And some jurisdictions have already or are now considering raising the overtime exempt salary threshold to a higher level than even the new DOL rule will require.

On the other hand, automatically raising exempt employees’ salaries to meet the new minimum requirement might result in a significant rise in an employer’s overall labor expense (depending on the number of affected employees). Whereas, simply converting those employees to non-exempt, hourly would not necessarily increase overall labor expense – assuming those employees do not regularly work overtime for which they would not have to be paid 1.5 times their hourly wage.

At a minimum, prior to January 1st, employers should complete a review of their exempt employees’ salaries to identify those who would not meet the new annual salary, and decide on the best path forward for those employees. Note: the analysis need not be an “all or nothing” approach. Employers may have the flexibility to convert some employees to non-exempt status, while raising other exempt employees’ salaries to meet the DOL’s new increased minimum salary. Although the DOL disfavors classifying employees solely to avoid paying overtime, employers may legitimately decide that some current salaried job classifications (e.g., administrative professionals who regularly work over 40 hours) would be best left as exempt, while deciding that different job classifications would be best converted to hourly, non-exempt status.

C. Other Considerations Beyond Salary: The Duties Test

The “salary basis test” discussed above is very straightforward — does the employee’s annual salary meet the minimum threshold or not? If no, then they ‘fail’ the test and cannot be classified as an exempt, salaried employee. If the employee passes the “salary basis test,” then their job duties must be examined to make sure that they fall within one of the recognized FLSA exemptions.

The four most commonly used exemptions include the following:

• Executive
• Professional
• Administrative
• Computer Professionals

The FLSA’s “Executive” exemption is reserved for those employees who perform a relatively high-level of work, requiring the employee to perform important jobs relate to the overall management of the company.

Some areas of consideration when performing the executive duties test include the following:
• Does the employee regularly supervise two or more other employees?
• Does the position have management as the primary duty of the position?
• Does the position have some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments)?

To qualify for the “Professional” exemption under the FLSA, employees must perform work that is predominantly intellectual, that requires advanced education, and involves the exercise of discretion and independent judgment. Employees who qualify for this exemption must have education beyond high school, and usually beyond college. Advanced degrees are commonly used to satisfy the education requirement (e.g., doctors, lawyers, CPA’s, architects), but are not absolutely necessary if an employee has attained a similar level of advanced education through prolonged work experience.

The “Administrative” exemption is the most difficult to apply consistently. The administrative exemption is designed for employees whose main job is to “keep the business running.” Specifically, “the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.” And the employee’s primary duty must include “the exercise of discretion and independent judgment with respect to matters of significance.”

Typically, Administrative employees provide “support” to the operational or production employees. They are “staff” rather than “line” employees. Examples of administrative functions could include labor relations and personnel (human resources employees), payroll and finance (including budgeting and benefits management), records maintenance, accounting and tax, marketing and advertising, quality control, public relations (including shareholder or investment relations, and government relations), and regulatory compliance.

To be an exempt “Computer Professional,” the employee must be a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field. An employee who utilizes a computer to perform a majority of their tasks usually will not meet this exemption on that basis alone. In addition, employees whose job entails “troubleshooting” or repairing computers or solving “glitches” or equipment malfunctions will generally not meet this exemption. Interestingly, the “Computer Professional” is the only class of exempt employee that can be paid on an hourly basis of not less than $27.63, instead of a salary basis, and still be “exempt” from the FLSA’s overtime requirements.

D. Takeaway for Employers

The DOL’s new minimum salary threshold for its overtime exemptions is estimated to make an additional 1.3 million workers eligible for overtime. The new year will arrive before you know it. Employers should act now to identify any exempt employees in their organization that may be affected by the new rule and to decide how best to compensate those employees given the increased salary threshold. But as we discussed above, salary is only one component of determining whether an employee is “exempt” from overtime. Smart employers will use this intervening few months before the new salary level takes effect to also review the employees’ job duties to make sure all their employees are paid appropriately and classified correctly as exempt or non-exempt under the FLSA, as well as any applicable state laws that might set requirements higher than the FLSA.

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.

[1] The DOL’s informational Fact Sheet #17A is available online and provides further analysis of the most common overtime exemptions:  https://www.dol.gov/whd/overtime/fs17a_overview.pdf

Don’t Get “Cyber-Scrooged”: Take Precautions When Holiday Shopping Online

As a provider of outsourced HR services, C2 often communicates with or transmits information between clients and vendors. We take great care to ensure that our electronic communications, online portals, websites, software, etc. are extremely secure. C2 is certainly not alone. Many businesses today implore robust software to scan their servers and computers for malware and viruses, utilize Virtual Private Networks (VPN’s), use encrypted messaging, and other security protocols to help ensure that their business and their clients’ activities remain secure – and yet online hackers still sometimes get around those measures. As individuals, when we shop online, we are often too quick to give out credit card information, names and addresses, and even birthdates or bank account numbers without much security – certainly not the same robust security utilized by much of the business community.

The holidays are the perfect season for scammers and hackers to try and steal credit card, bank account, or personal identifying information. While not everybody may be able to afford “state of the art” security protocols for every internet purchase this holiday season, there are some easy, inexpensive steps that you can utilize to help ensure that their online holiday shopping doesn’t lead to fraudulent purchases or identity theft by online hackers looking for easy victims.

A. For Individual Online Shoppers

Here are several practical tips that to help protect your personal information and online shopping transactions:

Use Credit, not Debit Cards – Although they may look the same, credit and debit cards are vastly different. Debit cards are linked to your personal checking account, and all purchases using debit cards come directly out of your bank account. Credit cards are not tied to your personal checking account, but rather to a “line of credit” of a certain amount that you can use to make purchases and pay for later. Credit cards have better built in fraud protections and do not allow hackers access to your personal bank accounts. Using a credit card with a small limit for your online purchases can also help limit your financial exposure in the event your account information is stolen.

Avoid Using Public Wi-Fi – Online shopping or banking activity should never be conducted over a publicly available Wi-Fi network. In other words, don’t do your online shopping or banking while sitting at Starbucks or in the waiting room of your doctor’s office. Use a private network that is also password protected (e.g., your home wi-fi network). Connecting to the internet using a personal VPN is also a good idea, even when logged in at home. The VPN allows you to browse the web almost anonymously, hiding your true location and protecting you from snooping by potential hackers.

Update Passwords Regularly – These days, it seems almost every website requires a username and password. Resist the temptation to utilize a default password (or some derivative of that root password) for most of the shopping sites that you frequent. Instead, create unique passwords for each website…and then go back and change them periodically. The last thing that you want is for a hacker to get your Amazon password and then be able to login to twenty different websites as you utilizing that same password! Online accounts for credit cards, banks, mortgage companies, utilities, and even email are common hacking targets, so take special care to diversify those passwords and change them frequently.

Software and Antivirus Updates – Operating system updates and antivirus definitions should be installed as soon as you receive them. Your operating system and anti-virus software routinely update protections to combat new and emerging cyber threats. If you shop online using your phone, make sure you also download antivirus software for your phone. In some ways, your phone is even more vulnerable to hacking than your desktop or laptop.

Beware of Phishing Scams – This time of year, e-mail inboxes get flooded with holiday offers for goods and services. Many of those offers are legitimate; some however, are not. Avoid opening e-mail attachments and clicking on links imbedded in the email from senders that you do not recognize. Often the fraudulent attachment or links contain malicious content that can infect your computer or cell phone and steal information you have stored on the device (e.g., passwords, contacts, apps, photos, etc.) Also, be suspicious of e-mails or phone calls requesting that you verify account information, such as login ID’s, passwords, account numbers, etc. Legitimate businesses almost never call or e-mail you directly for this information. When in doubt, delete the e-mail or call the company yourself to find out if the inquiry is legitimate.

B. Tips for Merchants and Businesses

Businesses that process credit card payments online (e.g., Amazon, Netflix) are always targets for hackers. But any business that utilizes e-mail and the internet to conduct business (even if they don’t process credit card purchases) is at risk of having the company’s or its clients’ information stolen and should take some common sense precautions, especially around the holidays when hackers are the most active.

Firewalls and Intrusion Prevention – Any business that utilizes websites or portals where clients or the public can access information about the company should use a firewall and a properly configured and monitored intrusion prevention and/or detection system. These make a hacker’s job far more difficult when trying to gain unauthorized access to your website, software, or web portals.

Remote Access – Allowing remote access into your company’s network should be limited, secured, and monitored for unusual activity. Make sure employees who have remote access are logging in through a secure VPN and from devices (laptop, phone, tablet, etc.) that meet the company’s security protocols.

Network Segmentation – Segregate any credit card payment processing from other network applications, such as e-mail, forms databases, or other company or client-related information. Proper network segmentation and segregation can help lessen the loss of information should a hacker gain access to part of your network.

Beware of E-Skimming – E-skimming is a fraud technique where hackers introduce malicious code on e-commerce credit card processing web pages to capture card and personally identifiable information and send the data to another domain that the hackers control. Some precautionary measures that companies can take include:

  • Regularly update all system and payment software
  • Implement software code integrity checks
  • Monitor and analyze web logs for irregularities
  • Install all recommended patches from your payment vendors

C. Conclusion

In today’s technology driven world, making purchases online for goods and services has become the “norm” for individuals and businesses alike. The convenience factor is impossible to beat, but there are individuals with malicious intent ready to take advantage – particularly around the holidays. While there is no full-proof way to avoid an unscrupulous hacker, make it difficult for them. Be vigilant with your personal and credit card information, and take common sense precautions when making online purchases or when providing web-based services to the public or your company’s clients.

 

C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.

Promoting Growth Mindset

As a company grows and evolves, it becomes necessary to create new positions. One dilemma many business owners face is whether to promote someone from within the company or hire an external applicant. Ultimately, the biggest factor in making that choice depends on the needs of your company; but promoting from within can provide several unique advantages, including the following:

1.  Don’t underestimate the talents of your current staff

Be willing to challenge the outside world with the people you have within. You can show commitment to your employees by encouraging them to expand their natural skills and abilities through training and educational programs designed to help them assume more responsibility within the company.

2.  Leveraging company growth into opportunity

Your employees are your greatest assets.  Valuing and utilizing those assets to the fullest extent encourages increased responsibility and accountability.

3.  Motivated employees work harder

Promoting based on merit keeps employees motivated and provides a real incentive for them to do their best.

 4.  More opportunity means happy employees

Promoting from within can often be more cost-effective than hiring externally and boosts the morale of your employees. It also aids both the financial and cultural health of your company.

5.  Maintaining Operational Continuity

Current employees already understand the company, its culture, and processes.  Familiarity with those can help them hit the ground running in their new role, as opposed to external hires who often arrive unfamiliar with their new employer’s systems and procedures.

Adjusting to Bans on Salary History Inquiries

One of C2’s government contracting clients recently asked us to review their employment application and offer suggestions on whether it needed updating.  One of the application questions requested that the applicant list his or her compensation at their three most recent positions.  When we suggested to the client that this question be removed or, at least, revised, the client was confused as to why.  After all, isn’t what someone has made before an important factor in considering what you should pay them now?  And salary history has been a common question posed to job applicants for decades – why the need to change now?  As we explained to our client, many states are enacting laws to prohibit salary history questions on employment applications.  The rationale behind these new laws requires some further explanation.

A. Background

In recent years, state legislatures have taken it upon themselves to craft a variety of employee protections that are just not present in our federal HR laws. Protections such as meal/rest periods, paid family/sick leave, “ban the box” laws, and extending employment protections to LGBTQ individuals are all examples of states’ efforts to enhance employment protections for its citizens.  There is, however, a new type of law “making the rounds” through state legislatures – salary history bans.  These laws, in essence, ban employers from asking candidates about their salary history as part of the job application and/or interview process.

Historically, using applicants’ salary history has been a standard tool for many employers to eliminate applicants from the hiring pool: “This person is too expensive.” “At that low rate of pay, this person must be unqualified.” Another common reason employers offer for asking about salary history is to ensure they’re not putting candidates through the interview process who are already earning more than the budget available for the position.

However, there can also be some misguided motives at play as well. Employers often try to determine what to pay for a position by asking the candidates about their salary history. Other employers may hope to save on budget by lowering an expected offer based on a candidate’s pay history, which is lower than market if.  However, basing an applicant’s in-coming compensation on their salary history can also perpetuate the salary disparity that exists for minorities and women.  For example, if Sally historically has earned 10% less than her male counterparts of similar education and experience, then her pay at a new job is likely to reflect (and perpetuate) that 10% historical pay disparity, if her prior compensation is used as a guide.  By eliminating employers’ ability to inquire about salary history, many state legislatures are hoping that the pay disparity gap will continue to shrink.

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 B. Jurisdictions with Pay Disparity Laws

States that have enacted some form of salary history ban for private employers include California, Connecticut, Delaware, Hawaii, Massachusetts, Oregon and Vermont. Localities with similar salary history bans include Cincinnati (starting in 2020), New York City, Philadelphia (pending a legal challenge), Puerto Rico and San Francisco, as well as several counties in New York. Additionally, some states and localities ban salary-history inquiries by public employers only (i.e., government agencies).

The number of jurisdictions that are enacting some form of salary history ban continues to grow.  For HR professionals and hiring managers, this growing patchwork of laws requires vigilance and training so that everyone involved knows what information they can and cannot request from a job candidate, depending on the laws of the jurisdiction where the applicant will be working.

C. Is There a Federal Law Banning Salary History?

The short answer, is “no.”  However, white it’s unlikely to pass given the Republican-controlled Senate, legislators in the House of Representatives have repeatedly introduced a Bill throughout the last decade to eliminate salary history inquiries by prospective employers.  The proposed legislation, entitled the Paycheck Fairness Act, would prohibit employers nationwide from asking job applicants about their salary history and require employers to prove that pay disparities between men and women are job-related.   Rep. Rosa DeLauro (D-Conn.), re-introduced the bill in January 2019. Since its initial introduction in 1997, the law has been re-introduced several times, but has failed to pass both chambers of Congress. Equal pay for equal work, regardless of sex, is a fundamental concept that has been a part of our laws for more than half a century (e.g. The Equal Pay Act), “but women still face barriers to equal pay,” said Rep. Suzanne Bonamici (D-Ore.), during a joint hearing of two U.S. House of Representatives Education and Labor subcommittees on Feb. 13, 2019.   However, many employers today still rely on information about job applicants’ current pay because it provides valuable information about applicants’ experience and performance.

The intent of the Paycheck Fairness Act is to address the gender pay gap by ensuring that low pay doesn’t follow women from job to job and compound over time.   For the immediate future, however, the Bill is unlikely to become law, which means employers will have to continue to navigate the growing patchwork of state, city, and county laws surrounding the issue.

D. Best Practices for Employers

With the rapid growth in technology, employers (even small ones) are increasingly doing business in multiple jurisdictions.  Couple that with the fact that it’s now  increasingly common for employees to work in multiple jurisdictions or even remotely, and you have a recipe for compliance disaster, with employers left to track salary history ban laws that frequently vary from state to state or even city to city.  So what options can employers utilize instead?

  • Stop asking the question. The relationship with a potential new employee should get off to a good start, so don’t put them in the awkward position of having to decide what to reveal about their previous pay. Eliminating salary history questions gives a better impression about the way pay is set at the organization, and it eliminates the need for employers to check each jurisdiction about whether salary history questions are permitted.
  • Price the job, not the person. A candidate’s current salary should have no bearing on what an employer is willing to pay for a particular position. Compensation should be a data-driven decision based on the current value of a given position in the talent market. Certainly, a candidate’s unique skills may place them lower or higher in the pre-determined salary range, but their current salary shouldn’t be the basis for determining their pay.
  • Tweak the process for setting pay expectations. If the reason for asking about salary history is to establish whether a candidate is above the available budget for a position, there are other ways to get to that same answer. Employers could ask about a candidate’s salary expectations for the role. Or they could consider a bold step and simply share the salary range for a position to find out if meets with the candidate’s expectations. They can make clear that the candidate will be placed in the range based on their specific skill set or experience level.

In short, employers have other options and are well advised to begin moving away from using salary history as a metric in their hiring process.  Some jurisdictions already prohibit it, and more are sure to follow.  Eliminating salary history questions not only helps remedy historical pay disparities, it also eliminates the risk that an employer will unknowingly run afoul of a state or city law prohibiting such inquiries and find itself embroiled in litigation rather than spending its valuable time onboarding new talent and growing the business.

 C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.