unemployment rate over nine percent, Americans are most worried about jobs.
Almost 14 million are looking for work and those who are employed are fearful
their jobs will disappear.
widespread concern over unemployment, no one seems to be talking about the
$2,000 per worker penalty on employers enacted as part of the 2010 Patient
Protection and Affordable Care Act. Scheduled to take effect in 2014, this
penalty for employers may already be costing our economy jobs, especially among
To understand why
this penalty is a job killer, it’s critical to first understand how it works. Beginning
in 2014, those businesses not offering health insurance will be subject to a
penalty if they employ more than 49 workers in all their establishments.
For up to 49
workers, the penalty is zero. For 50 workers, the penalty is $40,000 because
the business does not pay the penalty on the first 30 workers. For 75 workers,
it is $90,000 and, for 150 workers, the penalty is $240,000. Each time a
business adds another employee, the penalty rises.
to exempt businesses with few workers from the new penalty, but the law made no
provision for franchise businesses—small enterprises that form part of a group and
whose combined employment can be over 50.
Dairy Queen, and franchisees - the local business people who operate individual
Dairy Queen stands and restaurants - own groups of small businesses. Many
retail stores, restaurants, motels, and hotels are franchises. These businesses
often employ 50 or more people at several locations that are commonly owned. Think
of a group of Dunkin Donuts, Jiffy Lubes, or McDonald’s. Each one may have
fewer than 50 workers, but the group of restaurants together employs 50 or
these have real incentives to try to avoid or reduce their exposure to the
penalty. To either get below the 50 worker threshold or to minimize the
penalty, franchises may consider one of the following responses.
may employ fewer people. In a study
I led earlier this year on the impacts of the Affordable Care Act on the
franchise industry, we issued a survey to franchises that found employers were
already concerned about increased operating costs, and were already expecting
major financial uncertainty around growth and hiring. We estimate at
least 3.2 million total jobs are at risk.
franchises could reduce the number of locations. Suppose a single multi-unit
franchisee owns four establishments with 15 full-time employees each. Under the
new healthcare law, this multi-unit franchisee will be treated as a single firm
with 60 full-time employees, and the employer will be required by law to
provide healthcare benefits for all employees or pay the penalty of $2,000 per
full-time employee per year.
If these four
establishments were owned and operated separately, they would be exempt from
the requirement of providing healthcare benefits. Further, if these four
separately-owned businesses chose to offer health insurance, they would in some
cases be entitled to a small-employer penalty credit—a financial incentive for
small employers to provide health insurance for their employees.
This problem isn’t
limited to franchise businesses, either. It would also affect entrepreneurs who
open additional branches of their businesses, and could be a real obstacle to
could move employees from full- to part-time positions because the penalty is
not paid on part-time workers.
A firm with 55
full-time workers and seven part-time workers that does not offer health
insurance would pay a penalty of $50,000. By keeping the number of hours worked
the same, and reducing full-time workers while increasing part-time workers
until the firm reaches 49 full-time workers and 19 part-time workers, the penalty
would be completely eliminated.
In order to avoid
the penalty, franchises could also pay firms to share employees so they worked
fewer than 30 hours at each place of employment. That means more part-time
employment, and fewer full-time jobs.
changes could be especially harmful for low-income and low-skill workers, many
of whom are employed by franchises. Restaurants, for example, are an important
source of employment for teenagers and low-skill adults, two groups that are
already suffering high jobless rates.
Not only would
these workers take a hit if franchises cut back or close down, but one rational
approach to the penalty would be for employers to try to squeeze more
productivity out of individual workers. This would lead them to hire a few high-skill
workers in place of a greater number of low-skill workers.
may begin to see these negative labor market effects well before the law comes
into force in 2014. That’s because many businesses may well be adjusting to the
anticipated law now. Businesses are not stupid—they plan ahead.
remaining stubbornly high, and employers already showing little willingness to
hire, it’s time for Congress to review the new healthcare law to determine
whether it is more of a problem than a solution to securing America’s future.
To print a PDF version of this document, click here.
Diana Furchtgott-Roth is a senior fellow at the
Manhattan Institute and a contributing editor of RealClearMarkets.com.