By the end of 2013, The Codfather Seafood Restaurant’s workforce of over 400 full-time employees must be reduced to less than 50 full-time employees. Willy Fry, owner of the Codfather Seafood chain, is also requiring his managers to limit all part-time employees to less than 28 hours a week. Why?

Willy believes the Patient Protection and Affordable Care Act or Obamacare will cost him about $800,000 or more a year – several times more than his annual profit. His competitors are smaller restaurants that are exempt from Obamacare.  To compete, the Codfather managers must reduce their workforce and limit their employees to fewer hours. Is Willy’s problem really that bad? Is his plan a sound one?

Urban Legend or Legitimate Concern

Denny’s, Olive Garden, Red Lobster, Papa John’s, Applebee’s and other owners of restaurants and restaurant chains believe that Obamacare will change the service sector making the 40-hour work week a thing of the past.  Some are experimenting with multi-team systems where two teams of people working part-time replace the former group of full-time employees.  Many predict a reduction in hours and 25% pay cuts in 2013. Much like the Mon-Fri workweek emerged as a standard, restaurateurs believe there may be a complete shift in the US labor model as companies adopt standard ways of dividing up the work week for part-timers, making it easier for schedules to mesh. Expectations of changes in the 40-hour work week are also projected for higher education. The Community College of Allegheny County announced that 400 part-time employees will have their hours cut back by year’s end because the college cannot afford the $6 million projected cost for these employees’ health insurance. CCAC part-timers will see their hours slashed to 25, and adjunct faculty will teach only 10 credit hours, rather than 12.

Yet many believe that Obamacare will, over time, decrease health care costs, and lead to more satisfied workers, competitive hiring, and higher rate of employee retention. While restaurateurs claim Obamacare will further hamper the already sluggish economy by imposing new costs on employers who want to hire, others insist that the health care reform law will only impose a modest increase of 2.2 percent on total employer spending, and that, for small businesses of 100 employees or less, total spending could actually decrease by 1.4 percent. Either way, would the federal government encourage employers to cut full-time employees to part time as a solution to perceived costs related to the Obamacare insurance requirements (for full-time employees)? Surely Obamacare benefits, rather than burdens, millions of Americans without health care. Could legislators working on this law have allowed such a loophole?

Part-time Workers Are Not a Simple Solution

Part-time employees also count toward the 50 full-time employees limit. According to the Congressional Research Service: “The hours worked by part-time employees (i.e., those working less than 30 hours per week) are included in the calculation of a large employer, on a monthly basis, by taking their total number of monthly hours worked divided by 120.” For example, if The Codfather keeps 35 full-time employees (30+ hours) and 20 part-time employees who work 24 hours per week (96 hours per month). The part-time employees’ hours are treated as equivalent to 16 full-time employees (20 employees x 96 hours / 120 = 1920 / 120 = 16). Therefore, The Codfather would be considered to have more than 50 full-time employees. An example provided by the National Federation of Independent Businessman concluded that a small business with 51 employees that doesn’t provide health insurance would owe $42,000. If employees who receive government subsidies are considered in the equation, the calculation is more challenging and the potential tax penalty is even greater.

Tilting the Scales in Your Favor

First, know that the Obamacare insurance requirements do not become applicable until 2014. There is no urgent need to fire employees or to immediately turn your workforce into part-time employees. And, if you choose to re-tool for part-time employees, know that their treatment as full-time equivalent employees must be taken into consideration.

Second, the regulations implementing the Obamacare tax are still being written. Stay tuned for more updates. I, for one, will be relying upon the able assistance of Jason Luter, a recent lateral addition to our Looper Reed team, who is already an expert in employee benefit plans, ERISA and Obamacare- as much as anyone can be an expert on this developing area of the law!

But note, that if you employ 50 or more employees (or qualify under the part time employee formula), you will face a major choice at the beginning of 2014: you can sponsor a health plan for 100% of your workers (even those signed up for government-subsidized health insurance) or pay $750 per worker in penalties to the federal government.

  • I believe that all American are entitled to a minimal level of health care by virtue of being alive. That is not to say that very costly, end of life measures, should be supported by the taxpayers.
    But I like to believe that we are a civilized society. If this seafood operation cannot survive as a
    result of employer support of health care, perhaps it is time that it collapse. In my mind, businesses that require labor intensive staff, without a minimal extension of health care, do not deserve, in a capitalistic society, to survive.

  • In response to employers who eliminate employees because they will be required to underwrite health care insurance.