Job Killer? The Effects of the Healthcare Law on Low-Skill Employment

Posted December 8, 2011

With the 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.


Despite such 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 low-income workers.


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.


Congress intended 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.


Franchisors, like 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 more. 


Businesses like 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.


First, franchises 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.


Second, 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 expansion.


Third, franchises 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.


These three 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.


Unfortunately, we 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.


With unemployment 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.

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Diana Furchtgott-Roth is a senior fellow at the Manhattan Institute and a contributing editor of