Strategic Benefits of Adding Value to HR

Mike Cook is the Founding Partner of Vitalwork, Inc., a leadership development
firm that focuses on assisting business leaders attain their goals by “radically
increasing employee engagement,” and helps companies and employees compete
in today’s outsourced economy. Mike’s new book is Thrive: Standing on Your Own Two Feet in a Borderless World (St. Lynn’s Press).

There isn’t an HR director or manager practicing inside a company today who
isn’t aware of the growing corporate trend toward outsourcing HR functions to outside HR service providers. Rather than view this recent development as worrying, HR professionals should see it as a wake-up call. It’s time to add value to your function, and to remind yourself first - and then to inform your employer - that you are an indispensable strategic partner.

Most HR professionals aspire to provide more value to their employer. And they all know they could, if only (a) they could free themselves up from the administrative entanglements that normally consume their days, or (b) the employer would simply ask. So what is really holding them back?

Consider this: Most employers will not ask their HR manager for more value because they do not recognize HR professionals as strategic partners. Conversely, these same HR folks do not see themselves in a strategic light either.

If you can accept these statements as true, then freeing yourself up from purely administrative HR functions, and inviting your employer to demand more of you, become the pathways to a new future. And, doing so is also your responsibility. Value in the outsourced economy is the new currency. The traditional “HR administrator” role is now synonymous with quicksand.

From cost center to value center
Historically, the human resources function grew out of the need to have someone in an organization handle the “nonproductive” aspects of the employment arrangement -the “care and feeding” of the employees, if you will. HR was seen as a cost center - the part of the organization that does not produce direct profit and adds to the cost of running the company. Talent was viewed as a resource, not an asset.

In the past, there was nary a flash of strategic insight that revealed the true essence of organizations: that production quality and quantity are directly related to carefully designed relationships with employees. By this way of thinking, talent becomes the true measure of the value of a company - an asset rather than merely a physical resource.

Today’s competition makes it imperative that HR professionals take immediate steps to have their function viewed as strategic by the leaders of the business. They must concentrate on making the HR function a “value center” - the part of the company that produces value by boosting profits, and one that measures the return on investment of human assets. Thus, the limited “cost center” image that has been HR’s inheritance must be discarded.

What if you have not started the journey toward a “value center” future for your HR function? What if you are an HR professional who sees what is going on and is waiting for the courage to create a new value-based relationship function for the entire company? Waiting for either courage or an invitation by your leadership is exactly the wrong thing to do. The path of waiting, while seeming safe, actually makes you ripe for examination when questions of value get raised inside the business. Instead, now is the time to make the contribution your company needs from you - or seriously consider a new career path.

The new value proposition
Our economy has entered the era of the functional enterprise. Every aspect of business evaluation, including Human Resource Management, is being reconsidered based on contribution to the value chain. Management teams are currently or will soon be examining each functional area of their business and asking, “Could we be doing this less expensively?” “Should we being doing this function ourselves?” “Should we be doing this at all, regardless of past practices?” The traditional “make or buy” inquiry now applies to HR.

Anyone involved in the HR profession can no longer afford to operate from a passive or reactive administrator-only posture. Even getting better at what you have always done is no real help. The current economic climate is one that offers every business leader choices not previously enjoyed. “Hey Mr. or Ms. Employer, why do X function when we can do it for you better, less expensively, and give you the time to focus on what you do best? Let us remove your X function headaches and unnecessary costs. We can be your new X function partner.”

If you are aware of the changes unfolding right now in the HR industry, then you know that the future of many HR directors and managers is up for grabs. How do you carve out a new strategic role for yourself and the HR function while leaving the administrative limitations behind you?

How to consider HR going forward
There has been a literal explosion in business-to-business service offerings in the past thirty years, and Human Resource Management is now on the menu. A 2002 issue of HR Magazine entitled “Facing the Future-Human Resource Management is Changing,” predicted that HR outsourcing would exceed $100 billion by this year. The human resources segment now has the second largest percentage of jobs being outsourced (15 percent), exceeded only by information technology (28 percent).

Thirty years ago we would have all laughed at the idea that you could have a business, much less an entire industry, founded on (a) an administrative necessity, and (b) a service that every company performed in-house without concern for its value-adding capacity.

David Ulrich, Professor of Business Administration at the University of Michigan, and several of his colleagues published a book in 2005 called, The Future of Human Resource Management: 64 Thought Leaders Explore Critical HR Issues. The book is a compendium of opinions and research on how HR professionals need to consider themselves and their function going forward. The contributors suggest a very different future than what has traditionally concerned most HR departments.

Some of their suggestions are not even recognizable as having anything to do with the familiar tasks you may consider the work of your department! These are the experts. They are being paid by employers like yours to tell them what they should be doing with your function.

In the past 10 years, every major HR association (ASTD, SHRM. etc.) and publication (HR Magazine, Human Resource Executive, etc.) has published articles on issues that will affect the future of the HR function. The thought leaders in your own profession are letting you know there is a train coming. You are standing on the tracks!

A case study - from insider to outsourcer
Many years back, this author arrived at a new employer’s doorstep as a freshly minted holder of a Master’s Degree in Human Resource Management. During my seven-year tenure, I was involved in salary administration, benefits administration, benefits analysis, policy development and revision, Affirmative Action reporting and compliance, Workers’ Compensation, and a myriad of other things. I did good work and received promotions.

At the same time, I never felt I was having the kind of impact I was looking to make when I chose HR Management as a career. I was working with paper, not people! We now know all too well how paper can be outsourced. We also know how it feels when the impact we want to make never materializes.

I left my employer and founded my own service company. Like other service firms, ours offers a full suite of solutions aimed at maximizing the performance and fulfillment of the most important asset: humans. For the past 27 years, I have been learning how your employer does business, what makes their business tick, and where they have needs for professional help from experts who understand how people work.

It’s no surprise employers are interested in this conversation. What is surprising is that most HR professionals are not. Rarely do I speak with the HR director or manager as my entry point into any firm. I am not alone in this. The thoughtful and forward-looking HR professional might want to learn why this is going on.

How to do what outsourcers do - better
In general, service providers have learned that HR practitioners tend to be focused on the administrative details of HR management and have no appreciation for, nor interest in, the strategic issues of the business. Service providers have found that HR practitioners really don’t understand the business as a business at all. They don’t connect their work to the value chain of their organization.

In contrast, outside HR service providers focus on the “for - profit” nature of the enterprise and intentionally frame their pitches to contribute to the bottom line of the business. They knock on the doors of the people most concerned with the bottom line in any company. Quite frankly, they have come to believe it is not the HR director or manager.

The future for outside HR service providers depends on being able to demonstrate clear business value to employers, with or without the partnership of internal HR practitioners. If the HR director or manager wants to partner with an outside HR service provider, they must develop a proactive approach to their role and function. They must become business literate in order to get the attention of their employer’s leadership and demonstrate that they are strategic business partners, too. They must learn to think differently. They must desire a new identity and make changes. The changes will get made anyway because they are necessary. When something becomes necessary, there is little concern for who does it - and plenty of concern that it gets done. Your choice: be a strategic partner or a victim of outsourcing.

HR’s new role
Every HR director or manager needs to know this for certain: Someone outside the company, if they haven’t already, will be contacting your CEO or ownership team to convince them that they can do the job of the internal HR staff as well or better for a fraction of the current costs. Is outsourcing what’s best for your company? That’s the question you need to contemplate and answer.

There are other questions HR leadership has to answer as well. They are complex, for sure. They involve consideration for the direction of their own career, the development of the HR function, the value that can be provided if and when the basics of administration do or should get outsourced, and so on.

The information you will need is available if you go looking. A new future for HR has already arrived. Consider this brief and probably incomplete list of possible roles in the new HR world:

• HR Value Analyst: Determine which categories of employees really make a significant and unique contribution to the company’s bottom line. Someone inside or outside will soon be performing this role for your business.
  
  
• HR Competency Developer: As talent pools tighten up, line managers will increasingly be held to account for recruitment, development, and retention of key talent. Develop this competency and keep it up to date with line managers who currently think like technicians but will need to be coaches and talent developers instead.
  
  
• Manager of the Talent Pipeline: Assess the talent needs of the business - short term and long term.
  
  
• Manager of Outside Service Providers: Once decisions are made to outsource, someone will need to monitor quality and costs, and develop partnerships with outsourcing firms and other vendors.

• HR IT Specialist: Locate opportunities for application of knowledge and information technologies that can save money, provide real - time service, and contribute to both performance and overall employee satisfaction.
  

Taking the first step
If administration rules your days, if you’re intrigued by new roles to play, if you want a seat not currently offered by your firm at the strategy table, then you’re not alone. But if you don’t take action now, you will be alone, and you’ll be left behind.

As a forward-thinking HR manager, you need to find a way to engage your colleagues and your employer in a conversation about change. Since there is safety in numbers, find others who can entertain your new vision for the HR function. Reference periodicals and articles, some mentioned here, that portray the changing landscape of human resources and the increased importance of new HR roles to adding value. Build a new job description for yourself and your team and pitch it like mad. Get certified in a program that fills a strategic niche. Partner with forward-thinking HR professionals who are already making these changes in their own organizations. Grab what is yours.

(Editor’s Note: For information about the author’s company, go to www.vitalwork.com, and for information about his book, check out www.thrivebook.com. Or, for more information, contact EG’s Editor, Wendy Taylor, at wtaylor@employersgroup.com.)

Susan Rodriguez represents employers in the Cerritos office of Atkinson,
Andelson, Loya, Ruud & Romo in all aspects of labor relations and employment law. Admitted to the California Bar in 1990, Ms. Rodriguez received her BA from Yale and her law degree from the University of Michigan.

Several times each week, Employers Group’s Helpline consultants field
questions from members about implementing English-only policies. Many of
these employers genuinely feel that implementing an English-only policy will promote harmony in the workplace.

State law has not been amended since Governor Davis signed AB 800, codified as Government Code § 12951, into law in 2001. This statute, which adopts the EEOC Guidelines interpreting English-only policies to presumptively violate federal law, is fairly clear, if not draconian: an employer who imposes an English-only policy in the workplace presumptively violates the law, unless it can show that such a policy serves a business necessity. The California Courts have published no significant case law on the interpretation or application of this statute, either.

Why so many questions? Businesses need to operate safely and profitably in an ever-changing society where people - employees, vendors, customers and clients - speak a multitude of languages within a spectrum of proficiency in the English language.

Employers seek to enact English-only rules to promote workplace safety, harmony, or to service customers’ needs more effectively. The answer thus often flows more from societal and business contexts than a legal one, but an English-only policy nonetheless must comply with state and federal laws.

Title VII
Title VII of the Civil Rights Act of 1964 prohibits discrimination on the basis of national origin. Nothing in the language of Title VII prohibits English-only policies in the workplace. However, the EEOC Guidelines, set forth in the Code of Federal Regulations (“CFR”), interpret Title VII to bar employers from implementing English-only policies except under specific circumstances.

The EEOC deems one’s primary language as “an essential national origin characteristic.” A rule requiring only English to be spoken by employees at all times at work, therefore, would be a “burdensome term and condition of employment” that “may also create an atmosphere of inferiority, isolation and intimidation based on national origin which could result in a discriminatory working environment.” Thus, such a rule presumptively violates Title VII and would be subject to close scrutiny by the EEOC. 29 C.F.R. § 1606.7 (a).

An employer may implement an English-only rule if narrowly applied; if “justified by business necessity;” if proper notice is provided to employees of when only English may be spoken; and if proper notice is provided to employees of the consequences of violating this rule. 29 C.F.R. § 1606.7(b), (c).

Garcia v. Spun Steak Company
In 1993, the 9th Circuit upheld an English-only rule imposed by a California company that required some employees, nearly all of whom were bilingual and fluent in English, to speak only in English except during rest and meal periods and other specified occasions. Garcia v. Spun Steak Company (9th Cir. 1993) 998 F.2d 1480.

The 9th Circuit refused to adopt a per se rule that English-only policies created a hostile work environment, and it refused to be bound by the EEOC Guidelines - whereby an employee establishes a prima facie case of disparate impact “merely by proving the existence of the English-only policy.” Id. at, 1489.

So why focus on the EEOC Guidelines when the 9th Circuit does not? First, other jurisdictions, such as Texas and its 5th Circuit, still operate under the EEOC Guidelines. California companies that operate outside of California need to be aware of this. Second, California essentially adopted the EEOC Guidelines in 2001.

California Government Code § 12951
In 2001, Government Code § 12951 was enacted, in part, to reconcile Section 8 of Article I of the California Constitution - which prohibits the disqualification of an individual “from entering or pursuing a business, profession, vocation, or employment because of sex, race, creed, color, or national or ethnic origin” - with Section 6 of Article III of the California Constitution that sets forth the policy that English is the official language of the State. Section 12951 provides that

Guidelines for the California employer
Given the historical framework of these laws and regulations, the employer is left to figure it out on its own - with the understanding that English-only policies presumptively violate the law.

First, identify the business necessity for implementing an English-only policy and consider whether any less burdensome means can be implemented to meet this objective. Requiring a medical team to speak only English while in the operating room, requiring saw operators to converse in English while operating lathes, or requiring engineers in a nuclear reactor facility to communicate in English when performing job duties, where mistakes could be catastrophic, would conceivably pass muster for the obvious safety reasons.

Also, a New York court recently upheld the termination of a bilingual administrative assistant who refused to comply with a taxi cab company’s policy that only English could be spoken in the main office of the dispatch center. The company established the business necessity to prevent miscommunications, especially between dispatchers and drivers. Gonzalo v. All Island Transportation et al. (E.D.N.Y. 2007) 100 FEP Cases 591.

Next, consider the existing work force and how it will be affected by the policy. The employer should determine the percentage of impacted employees, and how many of them are bilingual, are marginally proficient in English, and/or are unable to speak or understand any English. In Garcia v. Spun Steak Co., for instance, the company employed 33 individuals, of whom all but two Spanish-speaking-only employees had varying degrees of English language proficiency. Id. at 1483.

Next, understand that there cannot be too many ways of communicating the policy and consequences of violating it, be it through a memorandum accompanying paychecks, an amendment to the employee handbook and verbal announcements - all translated into languages spoken by the work force.

Finally, is workplace harmony a business necessity to justify such a policy? No, it is not. No matter how many complaints a supervisor receives from monolingual English-speaking employees who feel slighted by co-workers who speak in front of them in a language other than English, the law is not designed to teach basic manners. Implementing an English-only policy, in this framework of tension, could actually further divide employees. Under these circumstances, the solution may actually lie with an organizational consultant rather than with a lawyer.

The Turnover Rate

By Dagmar Muthamia,
SPHR, Helpline Consultant

Recruitment and retention are in the HR headlines as demographic changes
shrink the available pool of candidates for many positions. Retention is the ability
to keep employees after they are hired. The measure of how well this is done is called a turnover rate

How is turnover calculated?
The Bureau of Labor Statistics (BLS) computes a monthly turnover rate using data from approximately 16,000 U.S. business establishments. The survey is called the Job Openings and Labor Turnover Survey or JOLTS. The JOLTS survey covers all nonagricultural industries in the public and private sectors for the 50 States and the District of Columbia. Total employment is reported for the pay period that includes the 12th of the month, job openings on the last business day of the month and hires and separations for the entire calendar month. BLS data is available at http://www.bls.gov/jlt/.

The formula used by the BLS is: T = (S ÷ M) x 100. T is the turnover per 100 employees; S is the total number of voluntary and involuntary separations occurring during the month, and M is the average number of employees on the payroll during the month.

For example, in April 2007 ABC Company had an average of 89 employees and 4 separations. The turnover rate for April is:

The other major survey is conducted and published quarterly by the Bureau of National Affairs, Inc. or BNA. BNA’s Job Absence and Turnover Survey is sent to HR and employee relations executives throughout the United States. The data is organized in three major industry categories: manufacturing, non-manufacturing and non-business. Separate data are provided for finance and health care establishments.

BNA uses the same formula except job eliminations, reductions-in-force, layoffs and departures of temporary staff are excluded separations. In the above example, if three of the terminations were lay offs then only one termination would be used in the formula and the turnover rate would be as follows:

This rate is a better measure of terminations that might have been prevented by the company. Layoffs due to lack of work are not a reflection of the HR management of the company. It is more effective to analyze avoidable turnover; for instance, employees who leave voluntarily due to dissatisfaction with pay, advancement opportunities, working conditions, or some other aspect of their jobs.

Sometimes HR is asked to produce an annual turnover rate. The annual turnover rate is the total number of separations for the year divided by the average number of employees per month times 100. Thus an organization with an average employment of 100 that has a total of 36 separations in one year has an annual turnover rate of 36%.

Is turnover good or bad?
Too much or too little turnover is almost always a problem. If the turnover rate is too high the organization will suffer from lower productivity, service and quality. Very little turnover is also usually a negative factor. Companies with very little turnover risk becoming stagnant. They are not easily able to respond to changing conditions and marginal performers become entrenched in their jobs.

Evaluating turnover may also require that you compare your company to others in the industry. For instance, the BLS turnover rate for February 2007 is 2.7% in Manufacturing, 4.9% in Leisure and Hospitality and 0.9% in Government. Comparing your own rates from year-to-year or month-to-month is another way to evaluate your turnover.

HR can help to lower the turnover rate
Analyze the reasons for turnover in your organization. Tools you can use to do this are employee surveys, exit interviews with departing employees, interviews with existing employees and your own interactions with employees, including observing them in their work environments.

If you make an effort to learn as much as you can about how a department works and what role each employee plays in the department you may be able to make suggestions for organizational changes that will help reduce turnover. For example, a low level job that puts an employee at the beck and call of many other employees is almost always a job with high turnover. Changing the reporting relationship may significantly lower the turnover.

At the same time you are learning about the structure and working of one part of the company you may also be learning about employee morale. Low morale is major factor in turnover. Are employees upset about inconsistencies in the application of rules? Do they perceive that supervision is unfair? Do they have complaints about the schedules, pay or facilities? Many problems that you may be able to identify are easy to deal with and will impact the turnover rate.

Unsuccessful selection and inadequate orientation is another source of high turnover. New hires that are not provided with realistic information about the job duties, reporting relationships and opportunities for advancement and increased earning are likely to be unhappy, short term employees. HR can improve this by being an active partner in hiring and designing and implementing new employee orientation.

Improve Communications
Open-Door policies, employee suggestion programs, companywide meetings, and regular employee surveys build employee morale and make your organization a better place to work. Employees want to be involved and have a voice.

Address work/life concerns. For some employees, time is more valuable than money. They value flextime, job sharing, telecommuting, and part-time work benefits to help them balance career demands and family responsibilities.

Promote the best pay and benefits programs that your company can afford. Make it possible for individual employees to do better for themselves through promotional opportunities and bonus programs. Wages alone are usually not the primary reasons for employees to leave, but the entire package and the potential to grow and earn more is an incentive to stay.

Layoff Guidelines (Part 2)
-The Aftermath

By Kimberly Nwamanna,
Helpline Consultant

Part 1 of this article appeared in last month’s newsletter, “Planning a Layoff? These Guidelines will Help.” Part 2 covers the effects on the workplace once a layoff has taken place.

So you have executed your layoff and now you ask what’s next? The aftermath of a layoff will leave many survivors filled with guilt and questions about their future and the future of the company. The key to a successful transition is to stay focused on the people in your organization.

Many compare the aftermath of a layoff with that of a death. Survivors need time to mourn their losses and to say good-bye. Most survivors identify with the victims of the layoff, especially if they feel that the victims where not compensated enough.

Communication
The first step is to get everyone to move beyond the immediate event of the layoff. The organization must communicate to survivors that…

• the company is empathetic with both the victims and survivors of the layoff,
  
  
• the criteria used to select the victims was a decision based on the current needs of the business,
  
  
• ask for understanding and acceptance that the changes are real and irreversible, and
  
  
• it is necessary to move on.

Set new or expand existing goals
The second step is to set or re-emphasize the goals of the organization. The survivors will need to understand where the organization is going. Most survivors ask themselves “will I survive the next round of layoffs?” So be prepared to answer this question with the utmost transparency and by having clearly stated and focused goals. The survivors will need to see consistency in the company’s priorities. The more consistent you are about how everyone will reach their goals, the more likely you will keep your best people.

Engage your employees in the process
Next, get your employees going. Quickly engage your people in the transition process. The best way to move beyond the event is to get everyone involved in the transition. Speak in terms of current agendas, programs and tasks. Make sure your leaders do not look back and speak on how things were done in the past, rather project how objectives are to be achieved today. As people come to accept their new roles, structure and goals, the organization will begin to have a sense of “normalcy.” Steadily, employees will focus on their jobs rather than dwelling on the past.

Make sure leaders are visible
Lastly, this is a time for leaders to be visible. It is a knee jerk reaction for leaders to retreat into their dens. Now, more than ever, employees need to see strong leadership. They should see their leaders involved, as well as contributing towards successfully achieving goals and providing reassurance.

• Get your top executives visible to the rank and file.
  
  
• Promote transparency, optimism and a “can do” attitude regarding changes that need to be made.

The leadership should build teamwork and a sense that “we are all in this together,” including the top echelon. Leaders ought to not forget to acknowledge and celebrate contributions and every success.

The natural tendency to be depressed, angry and guilty eventually settles for survivors after a layoff where organizations are consistent and transparent regarding the goals. The survivors will quickly lose this label and once again become regarded as your employees.

Communicate, communicate, communicate! From the first decision to layoff your employees to rehabilitating your organization towards prosperity, remember that there is nothing more valuable than communicating often and well with your employees.

Overview of Benefits in Mergers and Acquisitions (Part 2)

By Tanya Butler, M.S.,
Helpline Consultant

This concludes the article on this subject in last month’s EG newsletter. Part 1 covered the fact that regardless of the types of plans being merged, participants are entitled to have the valuable benefits, rights and features of their plan maintained after a merger. Part 1 focused on the rules and risks of 401(k) plans, and this part covers rollovers, participant loans, and executive nonqualified supplementary retirement plans.

Rollovers
If the 401(k) plan is properly terminated before the transition and distributions are made, the next issue is whether the distributions from the terminated plan should be accepted as rollovers into the existing plan of the acquiring company.

One concern is that the terminated plan might have suffered a disqualifying defect, and any plan that accepts rollovers from a plan that is not qualified runs the risk of being disqualified as well. However, so long as the plan sponsor secures appropriate assurances from the sponsor of the distributing plan as to its qualified status, it has protected the qualified status of the receiving plan. In any event, it would be prudent to seek an IRS determination with respect to the qualified status of the terminated plan up to the date of termination to avoid any concerns.

If rollovers are permitted, substantial increase of assets in the recipient plan can affect the plan positively or negatively with respect to top-heavy rules (rules that protect non-highly compensated individuals when a plan unduly favors key employees) and other matters, depending on the particular makeup of the plan.

One benefit that can result from an increase in plan assets is a smaller percentage of trust assets being charged by providers as fees for services rendered, and the availability of additional investment options.

Participant loans
Many participants may have outstanding loans at the time of a 401(k) plan termination. Outstanding loans may be accepted as part of the rollover if the distribution otherwise meets the requirements for an eligible rollover, and if the plan provisions and loan terms allow for the rollover.

Each participant with a loan being rolled over should execute an acknowledgment that the acquiring firm will be substituted as the obligee on the loan. A transfer of a note, which is part of an eligible rollover distribution, will not be considered a loan renegotiation or revision since the substantive terms do not change. While the loan must be repaid within its original term, the repayment schedule can be revised to accommodate the acquiring firm's payroll process without causing any tax consequences. [See Private Letter Ruling 9729042 and IRC Secs. 72(p) and 402(a).]

Rollovers of participant loans may not always be possible. Many times a loan agreement will provide that upon termination of employment, a participant's outstanding loan balance becomes immediately due and payable and, if not paid off, the participant's account balance is offset to satisfy the outstanding amount. If such a provision exists, or if the recipient plan does not allow for rollover of outstanding loans, the acquiring firm can provide a “bridge” loan. The employee uses the bridge loan to pay back the outstanding balance to the terminating plan and, upon entry into the new employer's plan, the employee takes a loan from the plan to pay back the bridge loan.

Nonqualified plans
Finally, executive nonqualified supplemental retirement plans deserve attention. Since these plans are not qualified, they must remain “unfunded” to retain favorable tax treatment. Pared down to basics, an unfunded plan is simply an unsecured promise by the employer to pay future benefits out of its general assets.

In many law company mergers, unfunded retirement obligations have become a key factor in the success or demise of the transaction, especially where one law company maintains one or more such plans, and the other law company has none. As popular and beneficial as these types of plans may be, they are often viewed as an impediment to a merger.

A related problem lurking in the wings is the not-so-uncommon practice of employers making informal, inadequately documented promises of deferred compensation to its key employees. Once an employee performs in reliance on such a promise, a unilateral contract, on which the employee has a right to collect, is created. Again, a thorough and creative due diligence effort can uncover even those types of arrangements so that all parties concerned are on the same page with respect to potential liabilities.

Since the passage of ERISA, liabilities with respect to employee benefit plans, may no longer be erased by a plan termination, the treatment of employee benefit plans in corporate acquisitions and mergers has taken on a greater significance. Both buyers and sellers should be aware of the problem areas and potential pitfalls and through the entire negotiation process arrive at a method of dividing these responsibilities and liabilities before any transaction occurs.

Closing notes
Defined contribution plans include the following types of plans: 401(k) plans, profit-sharing plans, money purchase pension plans, Employee Stock Options Plan (ESOPs) and stock bonus plans. In some cases a plan will include a combination of these types of plans. Defined contribution plans are characterized by the fact that each employee/participant has an individual account.

Defined benefit plans provide benefits in accordance with a formula contained in the plan. The formula is usually based on the employee’s service, compensation and age. These benefits are generally payable in annuity form, but some plans allow lump sum payments. These plans are funded on a group basis, not through individual accounts.

Welfare plans may include group health insurance, disability, flexible accounts, life insurance, dental, severance pay plans, employer-provided post-retirement medical benefits and life insurance, and executive compensation plans..

By Wendy Taylor,
Communications Manager and
Legislative Coordinator

Health care and Workers’ Comp are probably the two issues employers are most concerned about in this year’s California Legislature. For information about all of the employer-related bills being considered in the 2007 session, go to the Employers Group Website’s home page to link to the 2007 Employer-Related Bills, which is updated weekly.

Health care
The Governor’s proposed health care plan requires all Californians to have health insurance. It requires employers to either provide health insurance for their employees or pay the state 4% of payroll to be used to help provide health insurance for those that need help purchasing an insurance plan. It also requires doctors and hospitals to pay a fee that would also be used to help the poor obtain health insurance.

The proposal has not been introduced as a legislative bill yet, and most likely won’t be put into a bill until the end of the legislative session in late August or early September. The Governor is currently in negotiations with the Senate and Assembly leadership on his proposal. In the meantime, the legislature has its own proposals.

Below are three major bills in the legislature dealing with health care.

• SB 48 is authored by the President Pro Tem of the Senate, Don Perata.
  
  
• AB 8 is authored by Assembly Speaker Fabian Nunez.
  
  
• And, the Chair of the Senate Health Committee, Sheila Kuehl, has reintroduced her single payer bill from last year (SB840).
  

SB 48 by Senator Perata requires all taxpayers with a specified income to have a minimum health coverage policy, and requires employers to spend a certain percentage of payroll on employee health care or pay an equivalent amount into a newly created Health Insurance Trust Fund (Fund). The bill would create the Connector, a state purchasing pool. Employees whose employers opt to pay into the trust fund could receive health coverage through the Connector. The bill would also expand eligibility for Medi-Cal and Healthy Families coverage for low-income children and parents. The bill would also establish various insurance market reforms.

AB 8 is Speaker Nunez’s bill to expand health care coverage by making it easier for children to qualify for Medi-Cal or Healthy Families coverage and offering coverage under Medi-Cal and Healthy Families to parents of children who qualify. The bill also establishes another health insurance program for low-income families.

It requires employers to pay a fee to the state if they do not offer health coverage to their employees. The bill requires health insurance carriers to offer coverage to all mid-size employers. Health insurance carriers would be required to limit their administrative expenses so that 85% of premium dollars are used on providing health care services.

SB 840 (Kuehl) establishes the California Universal Healthcare System (CUHS), under which all California residents would be eligible for specified health care benefits. The CUHS would, on a single payer basis, negotiate for, or set fees for, health care services provided through the system, and pay claims for those services.

Similar legislation was passed last year and vetoed by the Governor. SB 840 will probably be passed by the Legislature this year and will likely be vetoed by the Governor again.

The Governor continues to negotiate with legislative leadership to see if an agreement can be made on health care. The Governor wants a mandate on individuals to have health coverage; the Democrats oppose this. The Governor wants the “pay or play” contribution level for employers to be 4% of payroll; the Democrats want it at least double that.

The Governor believes his 2% tax on doctors and 4% tax on hospitals is a “fee” and not a tax. His own party is arguing whether or not it’s a fee or a tax. If it’s a fee, the bill could pass the Legislature by a majority vote, and the Democrats have enough votes to pass it. If it’s a tax, it takes a 2/3’s vote and Republicans would then be needed to pass it.

No one really knows whether a health care deal will come together in August. There is a general feeling that they’ll try to pass something, and the Governor and the Legislature may do what they did on the Greenhouse gas bill last year – pass a broad concept at the last minute in session, and leave the details up to a commission to decide through regulations.

Workers’ Compensation
There are two bills in this year’s session to keep an eye on.

AB 812 (Hernandez) - This bill provides that if an employer fails to allow access by the insurance carrier or its authorized representative to its records, to enable the carrier to perform a payroll audit for the policy period, the employer shall be liable to pay to the carrier a premium up to three times the carrier's then-current estimate of the annual premium on the policy.

The bill also specifies that the employer shall be liable, in addition to the premium, for the costs incurred by the carrier in its attempts to perform the audit, if the employer has failed by the carrier's third request to provide access during a 45-day period.

The bill requires an employer to make an employee’s personnel records available at the place where a current employee works within 21 days of a request for the records. For former employees, the records must be available at the location where the employer stores the records or a copy must be made available to the former employee within 21 days.

The bill provides for the recovery of a $750 penalty if the employer fails to comply with these requirements and provides that a current or former employee may also bring an action for injunctive relief and recover costs and reasonable attorney's fees in such an action. This bill is moving and we can’t predict the outcome.

SB 942 (Migden) - This bill creates a rebuttable presumption that an employer who refuses to reinstate an employee after the employee has recovered from an occupational illness has discriminated against the employee. The bill also creates a rebuttable presumption that an employer is discriminating against an employee, if when the employee returns to work, the employee is required to perform additional physical duties.

The bill allows the employer to object to the opinion of the treating physician and to have the employee undergo an evaluation by an agreed medical evaluator, if the employer pays the employee his or her full wages and benefits due for that period. The evaluation must be based on an in-person physical examination.

The bill also creates a presumption that an employer has discriminated against an employee if the employer denies a qualified employee the right to predesignate a treating physician prior to an injury or illness or if the employer denies an employee the right to see that predesignated physician or a medical provider to whom the predesignated physician has referred the employee after occupational injury or illness.

With respect to supplemental job displacement benefits (SJDB), for injuries occurring on or after January 1, 2008, the bill changes the trigger date for eligibility from 60 days from the termination of temporary disability payments to 60 days after the disability becomes permanent and stationary, thereby allowing SJDB in cases where temporary disability benefits ended some significant time before an injured worker reached maximum medical improvement (i.e., permanent and stationary condition).

The bill specifies that the employer shall not be liable for SJDB if the employer offers the employee regular work, modified work, or alternative. The bill is strongly opposed by business.

The Supreme Court says Missed Meal and Rest Periods are Wages

Joseph C. Liburt is a partner in the Silicon Valley office of Orrick, Herrington & Sutcliffe LLP, and a member of the firm’s Employment Law Group. He has defended numerous wage and hour class actions, collective act-ions, representative actions and multi-plaintiff actions under state and federal laws. The Orrick firm is a member of EG’s Legal Committee.

On April 16, 2007, the California Supreme Court issued its decision in Murphy v. Kenneth Cole Productions, Inc., 40 Cal. 4th 1094, 56 Cal. Rptr. 3d 880 (2007), a case of significant interest to California employers. A unanimous Supreme Court decided that the payment for missed meal and rest breaks (provided by Labor Code Section 226.7) is a premium wage, not a penalty. The decision is important because the statute of limitations for a penalty is one year, but the statute of limitations for a premium wage is three years (and plaintiffs’ lawyers will argue that the statute of limitations can be expanded to four years under Business & Professions Code Section 17200).

Thus, the Supreme Court’s decision that the payment for missed meal and rest breaks is a premium wage means that employers are now subject to potential liability going back three or possibly four years. This is particularly troubling because some employers may not have complete records of employee meal breaks going back that far, and most employers are unlikely to have any records at all for rest breaks since California law does not require employers to keep records of rest breaks.

The decision was surprising to employment defense counsel because almost every court of appeal that had ruled on the issue had held that the meal and rest period payment was a penalty, not a wage. It was also surprising that the Supreme Court’s decision was unanimous. Based on the questions that the various Justices asked during the oral argument, it appeared that the vote might be split.

More consequences of the decision
The Murphy decision has several other consequences that are unfortunate for employers. Not only may employers now be on the hook for extra years of potential liability for meal and rest periods, but there are several penalty statutes that may now be used to seek additional penalties on top of the meal and rest payments. Most of the penalty statutes in the Labor Code are based on an employer’s failure to provide wages. If the payment for missed meal and rest periods had been ruled a penalty, then these penalty statutes would not apply. But because the Supreme Court ruled that the payment for missed meal and rest periods is a wage, these penalty statutes come into play. Thus, plaintiff’s lawyers will argue that the following penalty statutes may now be based upon missed meal or rest periods:

• Waiting time penalty for failing to pay all wages due upon termination of employment (Labor Code Section 203)
  
  
• Penalty for failing to provide accurate itemized pay stubs (Labor Code Section 226)
  
  
• Penalty for failing to pay all wages biweekly (Labor Code Sections 204, 210, and 2699)

Moreover, plaintiffs may seek attorney’s fees (Labor Code Section 218.5) based on missed meal and rest periods.

The Supreme Court’s ruling that the meal and rest period payments are wages also has income tax and withholding consequences. Since the payments are wages, they are taxable as wages and subject to standard withholding in employee paychecks.

Important unresolved issues
One issue that is unclear after the Murphy decision is whether an employee can recover one, or more than one, Section 226.7 premium wage per day if an employee misses more than one break in a day.

The most important unresolved issue relating to meal periods is whether employers have an obligation to police their employees to make sure employees actually take all meal periods, or whether employers simply have an obligation to make meal periods reasonably available to employees - i.e., to provide an opportunity to take a meal period, and leave it to the employee’s choice whether to do so. (The California Labor Commissioner has always taken the position that with regard to rest breaks, employers must simply provide the opportunity to employees, rather than ensure that rest breaks are actually taken.)

Although this issue will almost certainly make its way to the Supreme Court eventually, the law is currently unsettled. Because of the vastly increased potential liability discussed above, until the issue is settled by the courts, employers may wish to take a conservative approach and assume they are obligated to ensure their employees actually take all meal periods.

Steps employers should consider
In light of the significant increase in potential liability, it is now more important than ever for employers to comply with all meal and rest period requirements, and demonstrate that they are attempting to comply. There are several concrete steps that employers should consider in response to the Murphy decision.

1. Training and Policies. Conduct training about the importance of non-exempt employees taking (and accurately recording) all meal periods. Make sure meal and rest break policies are up to date and accurately reflect California law. Obtain signed acknowledgments from non-exempt employees that they have received and understand the policies, and agree to comply with them.
   
   
2. Records, Monitoring and Discipline. Preserve all meal period time records going back at least four years. Ensure that your timekeeping system accurately captures meal periods taken by employees. Carefully monitor employee time records for missed meal periods (ideally by having software automatically flag any missing or short meal periods). Promptly address with employees their failure to comply with company policy. Discipline supervisors who fail in their responsibility to ensure employees comply with company policy. Require employees to report missed breaks and provide an easy means for employees to do so (making sure that such reporting is in writing or electronic so a record is created, and the absence of such a record can work to the employer’s advantage).
   
   Consider having every timecard completed by employees (whether paper or electronic) contain an acknowledgment that during that pay period, (a) the timecard accurately reflects all time worked, (b) the employee took all meal periods or promptly reported any missed meal breaks in writing (or electronically), and (c) the employee had the opportunity to take all rest breaks provided by company policy, or promptly reported any rest breaks that the employee did not reasonably have an opportunity to take.
   
   
3. Payment. If the employer decides to take the cautious route of assuming that it has an obligation to force employees to take meal periods (rather than simply providing the opportunity), promptly pay the Section 226.7 premium wage for the missed meal period during the pay period in which it was missed. Since it’s a wage, it is subject to standard withholdings. Pay stubs should clearly reflect that the employee was paid the premium wage for missed meal period(s).

Given the extensive risks that employers face in relation to meal and rest breaks, employers should consult counsel with questions or concerns.

Wisely Spending your Background Budget

Michael Byrd is the Executive Vice President for ScreeningOne, and is a nationally recognized expert on fraud and background investigations. His experience in both background investigations and physical surveillance provides a unique perspective into the investigative resources available to employers and the myriad of laws governing the employment screening industry. Employers Group has partnered with ScreeningOne to provide its services to members.

With increasing risk of claims and liability for employers, more and more businesses are finding the need to implement applicant background screening programs. Given this trend, employers need to identify the key areas to consider in building a successful program.

Developing an effective program
Since each organization is different, it is encouraged that designing a background screening program be a collaborative process. Take the time to meet with all key individuals, including general counsel, to determine what type of inquires into an applicant’s past are suitable for your organization.

The first crucial step in this process is to review your hiring policy. An effective policy will provide a baseline upon which all employees will be evaluated for hire. One successful approach is to establish background screening packages that match specific job types. This way, each candidate is treated fairly and your background check uncovers pertinent information to the position in which they are applying. When evaluating inquiries for various job categories, ensure you have positive response to the following “litmus test” questions:

• Does the information I am obtaining coincide with our hiring policy?
  
  
• Does this information represent how the applicant has acted in his/her public life?
  
  
• Is the information I am obtaining “Job Related?”

Choosing appropriate products
In the background screening industry there are a variety of products available and a multitude of variations on these products (ScreeningOne offers over 25 background screening services to date). While specific products or variations may work in different industries, there are a few key products that should be a part of any successful applicant screening program.

The Social Security trace
The first product that any company should start with is a Social Security Trace. This report is a great source of information and is considered an “Investigative Starting Point” for any background check. A social security trace will provide three (3) key types of information:

• Current and past addresses for an applicant that establishes where to search for criminal records,
  
  
• Alias names associated with an applicant that assists in isolating all possible records associated with the applicant,
  
  
• Potentially fraudulent information or data entry mistakes provided in the employment application - this search can verify that the social security number and date of birth match the applicant, as well as obtain the correct spelling of the applicant’s name.

Beyond a social security trace, the second key area of focus should be criminal records. It is estimated that one in every 37 adults in the United States has been incarcerated at one time or another. In addition, criminal records are a great indicator of future behavior because of the high occurrence of repeat offenders. It is estimated that 67% of released convicts were re-arrested within three (3) years of their release date.

County criminal searches
By taking into account the quality of the data, turnaround time, accessibility of records, and reasonable costs, we recommend a County Criminal Search as the frontline for criminal investigations. Almost any time that an arrest and conviction is made it will be reported at the county level. Therefore, a county criminal search is the most reliable and up-to-date criminal investigation. As an industry best practice, we recommend doing a county search in each county the individual has lived in over the previous seven (7) years. If your business operates in an area where several counties merge, you may consider conducting searches in those counties for individuals who frequent those neighboring areas

Statewide federal criminal search
A final key area of investigation is a Statewide Federal Criminal Search. Federal criminal records are maintained in federal courts and are not covered under a county criminal search. Federal criminal searches usually include federal offenses such as drug trafficking, postal offenses and fraud.

By incorporating a social security trace in your background screening program and making sure you are utilizing a county criminal search and statewide federal criminal search for your criminal records you are well on your way to designing a comprehensive and successful background screening program

Partner with a background screening provider
In evaluating products to complete your program, it is important to look at each service and the potential information it provides. During your evaluation process, your background screening partner should set the expectations for each product you consider. Once you have established expectations and the limitations of each product available, you are ready to complete your screening program.

(Editor’s note: For information about ScreeningOne’s services, please contact kscott@employersgroup.com.)

AB1825 Regulations are Finally Adopted

By Jeff Hull,
Director of Learning Services

Two years following the adoption of AB1825, more than a year after public
debate began and after countless versions, the final regulations for mandatory harassment prevention training for California employers has been adopted by the Fair Employment and Housing Commission.

By all appearances, the adopted rules are expected to soon be codified by the Office of Administrative Law (OAL). The final regulations are more streamlined and employer friendly than previous versions. Below is a breakdown of the final regulations and what they mean for you.

What organizations are subject to AB1825?
Any company engaging 50 or more employees everyday for the past 20 weeks, organization-wide regardless of location (i.e., both inside and outside the state), is subject to AB1825. Companies on the cusp of 50 employees, must provide training within six months after they reach the threshold.

Who must be trained?
Training needs to be provided to any employee subject to the definition of supervisor, which means any individual having the authority, in the interest of the employer, to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or the responsibility to direct them, or to adjust their grievances, or effectively to recommend that action, if, in connection with the foregoing, the exercise of that authority is not of a merely routine or clerical nature, but requires the use of independent judgment. (CA Government Code section 12926(r).

How much training is needed and what types qualify?
Instructor-led, e-learning, online training and webinar-oriented training qualifies if it lasts at least two hours. Training content needs to be created by a trainer or instructional designer. Instructor-led must be delivered in a setting removed from trainee’s daily duties. Webinar training has the biggest burden since the requirement is quite subjective (the need to document how a trainee actively participated in the interactive contents). Employers Group does not advocate using webinar training to meet the AB1825 requirement.

What must the training include?
Regardless of type of training, the program must include questions that will assess learning, activities to illustrate application of content, and hypothetical scenarios each with discussion questions to engage trainees. The training must be geared to prevent harassment from occurring in the first place. To that means, the training should include but not be limited to: case law, statutory provisions and state and federal definitions of harassment; conduct, remedies and strategies to prevent harassment; practical examples; limited confidentiality; victim resources; investigative obligations; supervisory accusations; and essential elements of an effective policy.

Who can deliver training?
Three types of qualified instructors are identified in the new regulations:

• Consultants or HR Professionals who have a minimum of two years practical experience dealing with harassment, delivering harassment training, responding to complaints, conducting investigations or advising employers regarding harassment.
  
  
• Attorneys admitted to any state bar in the U.S. for at least two years and whose practices involve employment law under FEHA and/or Title VII.
  
  
• Law School Professors or Instructors who are credentialed and have 20 or more instruction hours dealing with FEHA and/or Title VII.
  
  
• Others are able to provide instruction; however, they must either “team teach” with a qualified instructor or a qualified instructor must be available throughout the training to answer questions.

Employers Group recommends contracting with a third-party provider to deliver harassment training. Conflicts of interest may arise if employment counsel or if an internal HR professional provides training and a complaint or lawsuit arises.

How often should you train?
Training must be provided at least every two years through an individual tracking or training year approach. Individual tracking means that the individual employee must complete their subsequent training by two years from the day they last received training. Training Year means that training must be anytime in the year that training is due (2005, 2007, 2009, etc.)

What documentation should be kept?
HR departments should keep track of who was trained, who provided the training, what trainer delivered the program and what date the training was delivered. All records should be maintained at least two years. Employers Group also recommends that actual course materials be kept along with the administrative documentation required by law.

When should you train new supervisors?
Within six months of either assuming supervisory duties or being hired. Employees claiming to have received training at a former employer should still be trained as the burden of proofs rests with the current employer whether the prior training qualified. If prior training was deemed effective (certificate of achievement from a trusted party), then the employee simply needs to read and acknowledge receipt of the current employer’s anti-harassment policy.

What happens if you do not comply?
If the Commission has determined that a company failed to provide the training as outlined (content or timeframe), they will issue an order mandating that compliant training be completed within 60 days; however, the real liability is created with plaintiff’s attorneys who will immediately try to identify whether the training was provided in the required timeframe and whether or not it was fully compliant.

Time will tell whether this law will have an effect in the number of complaints or lawsuits filed against California employers. In the meantime, employers should be most concerned with not only meeting this requirement, but for creating a work environment based upon mutual trust and respect. For these reasons, Employers Group highly recommends training all employees.

As to Executive Pay, Companies Practice Caution

By Jennifer Shin,
Research Marketing & Communications Coordinator

Executive compensation in corporate America has become a touchy HR subject these last few years. More than 150 public companies alone are under investigation by the SEC or the Justice Department. Consequently, there’s little surprise that executive salary increases has taken a conservative dive for 2007.

Moderate salary increases for 2007
When it comes to executive compensation, who can blame all the attention? The median salary bonus for corporate commanders in large U.S. companies this year is $2.598.284. Not to mention the elaborate perks, for example: i2 Technologies CEO Michael McGrath had one of the most regal corporate-jet perks last year. The software company paid $942,000 to shuttle him back and forth from his home in Maine and his office in Dallas during the year.

According to the 190 firms surveyed in Employers Group’s 2007 Executive Compensation Survey, however, most companies are remaining more moderate with executive pay. Although, many would argue the chasm between executives’ salaries and the pay of rank-and-file employees continues to widen, salary increases for 2007 have remained somewhat moderate.

Public sector and financial services firms saw a dip in increases this year, 5.2 percent and 7.4 percent from 6.1 percent and 7.7 percent in 2006, while Non-profit and manufacturing firms slightly rose from 4.5 percent and 5.0 percent in 2006 to 5.8 percent and 5.7 percent this year. Despite the slight increases, this year’s salary increases pale in comparison with the 12.8% increases many firms saw in 2000-2002.

Healthcare benefits on the rise
While salary increases for executives have remained temperate, benefits for many California executives have been made over. No longer is a reserved parking space listed as the top frequently granted benefit to executives. Instead, companies are granting better health care and accident coverage. While expense accounts remain the number one granted benefit, company payment or reimbursement of accident and health insurance, and reduced cost-healthcare coverage, as well as no cost-psychological counseling jumped up as this year as well.

Companies are hiring executives from within to save costs
According to CareerJournal.com, directors are increasingly looking within their company's ranks for CEOs. In 2005, 40 percent of the CEOs hired by companies were considered outsiders, according to executive-recruiting firm Spencer Stuart. Companies sought out outsiders to often come in and “save” firms that were in financial trouble. In 2006, perhaps due to the country’s growing economy, this figure fell to 15 percent. In the first quarter of this year, there were eight CEO transitions among the Standard & Poor's 500; only one went to an outsider.

Companies may be actively seeking to hire up executives within their own company, because data has shown that outsiders often get paid more than insiders. According to Careerjounal.com, CEOs hired from the outside in the 1990s on average made 22 percent more than internally promoted chiefs, even after excluding hiring bonuses and the like.

According to Careerjournal.com, this may be because outsiders take more of a risk by leaving the familiar for the unknown, and they frequently leave millions of dollars in accumulated equity behind, for which they want to be compensated.

Although the economy has been improving, according to Employers Group survey data, organizations remain somewhat cautious about increasing spending, especially on executive pay. Although, some would definitely argue that despite these moderate increases for 2007, executive pay has simply gotten too large, there is no doubt that companies are taking more care in making sure that executives only reap big rewards when the company is succeeding.

The 2007 Executive Compensation Survey is here!
This Employers Group California survey tracks the compensation levels of 40 top-level executive jobs, and sorts data by industry, revenue, and type. This year’s report includes over 40 top-level executive classifications in General Management, Finance, Administration, Engineering, Manufacturing and Sales & Marketing. Survey questions for each position include current base salary, bonus, other cash compensation, total compensation, established salary ranges, and bonuses, as well as executive perks and general employee benefits. A U.S. edition is also available with data from over 1,500 companies making this report a perfect match for those firms with California as well as national operations or those who benchmark their compensation package with U.S. norms.

As an employer, we know determining competitive and attractive compensation packages can be a daunting task. For more information on our compensation or benefits survey, please call us at 213.765.3935 or email: surveys@employersgroup.com.