Unintended consequences – reducing employee hours to avoid cost of health insurance coverage

Ignored in policy setting discussions is the likelihood that people will change their behavior in unexpected ways to go around a costly or burdensome or intrusive new policy. The latest of many examples is from yesterday’s Wall Street Journal – Health-Care Law Spurs a Shift to Part-Time Workers. 

I will work up an example to show why companies would consider this.

It seems that in order to avoid a major increase in costs, many employers are thinking about reducing their staff’s hours to less than the number of hours where health insurance coverage is required.

The article mentions several companies moving in this direction:

• Pillar Hotels & Resorts, with 5,500 employes in 210 hotels
• CKE Restaurants is currently replacing departing full-time staff with part-time staff
• Anna’s Linens is considering a shift
• Darden Restaurants, owner of Red Lobster and Olive Garden, is making the shift, starting with a test in some stores
• An owner of 10 Subway stores is already cutting hours for about 60 staff who work more than 30 hours

Multiple bloggers I follow have discussed this since the article came out. I’ll work through some numbers.

Here is the short summary from the article:

Several restaurants, hotels and retailers have started or are preparing to limit schedules of hourly workers to below 30 hours a week. That is the threshold at which large employers in 2014 would have to offer workers a minimum level of insurance or pay a penalty starting at $2,000 for each worker.

What do the numbers look like?

Let me work up an example:

• 30 – number of staff working 40 hours a week – this is the assumed staffing for a modest size restaurant or retailer
• $0 – cost of health care if staff work below the 30 hour threshold
• $2,000 – fine per employee if staff are eligible but don’t receive health care
• $500 per month or $6,000 per year – health care costs

That monthly cost is less than what I typically see at organizations in Southern California, and I’m guessing the health care costs under ACA will be higher than today, so the $500 amount is actually a low assumption. But I’ll go with it anyway. You can adjust my analysis as you wish.

Shift in employees –

• If 30 staff are working 40 hours a week, then 50 staff could cover the 1,200 hours of work if they are working 24 hours a week.

Health care costs –

• $0 per year – No insurance when staff work under 30 hours a week
• $60,000 per year – fines if staff work over 30 hours a week but health care is not provided
• $180,000 per year – health insurance provided at $500 per month for the 30 staff

Costs per hour.  If there are 1,200 work-hours per week, the cost per hour works out to:

• $0.00 – operate with all part-time staff
• $0.96 – effective cost per hour of paying fines
• $2.88 – effective costs per hour of providing full health insurance

Percent increase in compensation.

Here’s where you can see the problem. Look at that hourly amount as a percent of compensation.

If your staff are earning an average of $10 per hour, that is an increase of 9.6% with the fine approach and 28.8% if full coverage is provided.

If your staff are paid $6 because they get a large portion of their income from tips, then the increase in labor costs are about 16% with the fines approach and a 48% increase with full insurance.

Take any one of those numbers – 10% or 16% if no insurance is offered or 29% or 48% with full coverage.

It would be an extremely rare business that could absorb a 10% to 50% increase in labor costs.

Unless all businesses in an industry decide to offer full health insurance and all of them can increase their prices drastically, it is perfectly logical and rational that we can expect to see a large number of employers in many industries reducing their staff’s hours to part-time.

Unintended consequences can be severe.

As an aside, this is an economic commentary, not a political one.  That is why I’m posting it during election day 2012, not before the election, and not after the ballots are counted.