From a legal perspective, there’s a lot to consider.
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In an ideal world and economy, every employer would be able to provide benefits such as health insurance, retirement plan matching, and travel reimbursements to all employees. However, it’s often not financially feasible for many small businesses.
According to the Bureau of Labor Statistics, benefits made up about a third of the cost of an employee. Meaning, an employee salaried at $50,000 would actually cost the employer another 30 percent more, for a total of $65,000. For small businesses with thin margins, like local grocery stores, this sort of expenditure per hourly employee can be next to impossible.
The ethics of not providing benefits is a topic that has been debated at length elsewhere (although it’s clear that benefits can help lower turnover, which could offset the additional costs), but the legalities of not providing benefits are plain and simple: Your business could be heavily fined and even shut down for not providing federally mandated benefits.
Best to avoid this scenario! Let’s examine which benefits you must provide to your hourly employees.
Related: The 7-Step Health Care Plan for Small-Business Owners
According to the Affordable Care Act (ACA), employers with 50 or more full-time employees must be offered health insurance that is affordable and provides “minimum value,” meaning it pays at least 60 percent of the cost of covered services.
Something to watch for: While most employers might see “full-time” and think their hourly workers who only work 30 hours a week are considered part-time, that’s not the case here. The ACA guidelines state that employees who work at least 30 hours a week or 130 hours a month (on average) are considered full-time employees.
So, if you employ at least 50 people working 30-plus hours a week, your business will have to provide health benefits.
Social Security and Medicare
If you pay hourly employees as regular payroll, social security and medicare taxes will be withheld from your employees, and they will eventually get that money back in their retirement years. It’s a benefit we take for granted, even though employers pay into these at the same rate as the employees. So for Social Security taxes, the employer pays 6.2 percent and the employee pays 6.2 percent (as of 2020).
However, hourly employees that are considered contractors are on the hook to pay the full 12.4 percent with the employer having to pay nothing. Same goes for the Medicare tax.
So how do you classify an hourly employee from a contractor? Unfortunately there’s no one-size-fits-all definition, but federal guidelines are available to help you tell the difference. Let’s just say you’ll most likely be caught and fined if you try to pass off all your hourly employees as contractors just to save on paying out benefits.
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Family and Medical Leave
The Family and Medical Leave Act (FMLA) is a federal act that gives certain employees the right to take unpaid leave for specific reasons. For private sector employers who have 50+ employees, you must offer leave under the FMLA for those who have worked 1250 hours during the 12 months prior to the leave.
While this benefit is unpaid leave, it does protect even hourly employees from being fired from their long-term job due to medical or familial issues, such as pregnancy.
Other state-specific benefits
While the above covers the basic federally mandated benefits for hourly employees, there are state specific considerations that employers must make themselves aware of. For example, California law includes a paid sick leave program for all employees, including part-time hourly workers, granting 1 hour of paid leave for every 30 hours worked.
Check with your state’s employer guidelines for other specific benefits you must provide.
Of course, while these are the minimum benefits employers must provide to hourly employees, the best employers who want the lowest turnover and the highest rate of engagement from their employees will go above and beyond the federal minimum. It’s just good business.
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