Key Takeaways

• Laws and regulations that mandate paid leave for employees in certain circumstances can vary widely from state to state, from circumstance to circumstance, and even within a given state

• Employers with operations in different locations or those seeking to expand beyond their city/county/state borders will likely have to take an assortment of paid leave rules into account in crafting and executing their own internal paid leave policies

• While applicable laws certainly shape paid leave policy and expectation from one place to another, employers that operate in areas with relatively unobtrusive paid leave rules often adopt policies that go well beyond the minimum required of them by the government in order to comply with industry/geographic norms and/or gain a competitive advantage with regard to talent attraction and retention

‍

ARTICLE | Top 25 States With Most Employer-Friendly Paid Leave Laws

Last month, we covered the rising popularity and prevalence of consolidated and unlimited leave policies relative to non-consolidated leave policies, which have now nearly become a minority policy among US employers.

These policy choices and changes do not occur in a vacuum, however, and can be significantly impacted by both industry and geographic norms as well as governmental rules and regulations, which can sometimes vary widely from one state, county, and municipality to another.

While data on the geographic distribution of leave policy structure can be found in our benchmarking reports, available on mployeradvisor.com, this piece will be the first in a pair of articles that will highlight major differences in the rules governing paid leave from state to state in the US, compiled from information primarily from Vacation Tracker and Paycom.

This piece will cover the 25 states that provide the most leeway for employers to determine their own policies with regard to providing employees with paid leave.

‍

Alabama

Alabama state paid leave law requires only that employers provide their employees with paid leave for jury duty if the employee provides notice of jury duty summons within one business day of receiving the summons. Further, that PTO for jury duty service must not reduce the amount of PTO an employee may have otherwise accrued, although employers are permitted to deduct the amount paid to the employee by the court from any amount the employer owes the employee.

‍

Alaska

Alaska state paid leave law requires employers to provide employees with paid voting leave in order to cast ballots in municipal, county, state, and federal primary and general elections if that employee’s shift starts earlier than 2 hours after the polls open or ends later than 1 hour before the polls close. While the employee is to be given sufficient time to enable them to vote, the employer gets to determine the hour(s) when the employee leaves work to cast their vote.

‍

Arkansas

While Arkansas provides no mandatory paid leave for private employees in the state beyond what the policies and contract requirements set by the employers themselves, state law does allow public employees paid sick leave for illness, injury, and the death or illness of a close family member. Those public employees can accrue up to 30 days (depending on employee tenure) of paid sick leave every year.

‍

Arkansas state law also requires state employers to provide paid leave for jury duty, but no similar requirement exists for private employers, although private employers are prohibited from requiring an employee to use vacation or other leave in order to fulfill their jury duty requirements.

‍

Florida

Florida state law imposes no obligations on employers with regard to paid leave for employees.

‍

Idaho

Idaho state law entitles state employees to up to 8 weeks of paid leave following the birth or adoption of a child, but no similar requirement for private employers exists unless the private employer has adopted or contracted to provide such a policy.

‍

Indiana

Indiana state law makes no requirements for employers to provide employees with paid leave.

‍

Iowa

Iowa provides for some paid vacation leave for state employees, but there is no similar requirement for the employees of private employers.

‍

Further, employees who do not have 3 consecutive hours off work during which time polls are open are entitled to up to 3 hours of paid leave in order to cast their votes, though employers have the right to determine which 3 hours are made available to their employees.

‍

Kansas

Kansas has no formal state laws requiring paid leave, although internal leave policies adopted by companies may be legally enforceable against employers if they rise to the level of a “promise.”

‍

Kansas employers must, however, provide employees with up to 2 consecutive hours to vote (including employee non-working hours when the polls are open) and the timing of which the employer has the right to determine.

‍

Kentucky

In Kentucky, employers are not required to offer paid leave for vacation, but if they do offer such paid leave, it is considered essentially equivalent to wages and must be dealt with accordingly - in this case meaning any unused leave of this sort must be paid out when an employee leaves the company.

‍

Further, while Kentucky doesn’t require paid family leave to employees upon the birth of a child, if an employer does provide paid maternity/paternity leave, they must also make those provisions available to newly adoptive parents.

‍

Mississippi

Mississippi state law imposes no obligations on employers with regard to paid leave for employees.

‍

Missouri

Missouri employers are required to provide 3 hours of paid voting leave if employees schedules do not already allow for 3 consecutive non-working hours when the polls are open.

‍

Montana

Montana state law imposes no obligations on employers with regard to paid leave for employees.

‍

New Hampshire

New Hampshire state law imposes no obligations on employers with regard to paid leave for employees, although there is an optional paid family and medical leave insurance program that employers can opt into.

‍

North Carolina

Although North Carolina state law doesn’t require employers to provide paid vacation time, if employers choose to do so and don’t specifically state as a matter of policy or contract that unused PTO will not be paid out when the employee leaves the company, then NC employers are required to make those payouts at the conclusion of employment.

‍

North Dakota

While North Dakota state law doesn’t mandate PTO, employers who choose to offer it are required to pay out unused PTO upon the conclusion of employment, although there are a few exceptions. Employers are not required to pay out unused PTO if the employee does not provide at least 5 days notice prior to their departure or if an employee has been on the job for less than 1 year. Also, employers can provide written notice at the start of their employment that any unused PTO will not be paid out, in which case the employer is not required to pay out unused time.

‍

Ohio

Although Ohio employers are not required to provide paid vacation time, if they do offer paid vacation and employment policy and contracts don’t specifically make it clear that unused PTO will not be paid out when an employee leaves the company, then employers are required to pay out for unused PTO when the employ departs the organization for whatever reason.

‍

Oklahoma

Oklahoma employees are entitled to 2 hours of paid voting leave (and more than 2 hours if their commute to polling place and work would reasonably require it), but employees are required to provide at least 1 day notice to their employer regarding their absence.

‍

Pennsylvania

Pennsylvania employers are not required to provide paid sick leave in general, but employers in Philadelphia, Pittsburgh, and Allegheny County are required to provide employees with paid sick leave.

‍

In Philadelphia, employers with 10 or more employees must provide paid sick leave to employees, which accrues at a rate of 1 hour earned for every 40 hours worked up to 40 hours, which aren’t usable until the employee has been on the job for 90 days.

‍

In Pittsburgh, employees earn 1 hour of paid sick leave for every 35 hours worked, capped at 24 hours per year for employers with fewer than 10 employees and capped at 40 hours total for employers with 10 or more employees.

‍

Allegheny County employers with 26 or more employees must provide them with 1 hour of paid sick leave for every 35 hours worked, capped at 40 hours.

‍

South Carolina

South Carolina state law places no paid leave requirements on employers.

‍

South Dakota

South Dakota employers are required to provide any employee that doesn’t already have 2 consecutive hours off duty when the polls are open with 2 hours of paid vote leave, although the employer can set the time during which the leave is exercised.

‍

Texas

Texas employees who notify their employer in advance and who don’t already have 2 consecutive hours off work during polling hours are entitled to a reasonable amount of paid voting leave.

‍

Virginia

Virginia state law limits paid sick leave requirements to home health care workers who work an average of 20 hours per week or 90 hours per month. Qualifying employees accrue paid sick leave at a rate of 1 hour earned for every 30 hours worked, capped at 40 hours per year and capable of being rolled over from year to year unless the sick leave was frontloaded.

‍

West Virginia

West Virginia employees who don’t already have 3 consecutive hours available when they’re off duty and polls are open are entitled to 3 hours of paid voting leave so long as they provide at least 3 days notice prior to the day of the election.

‍

Wisconsin

Wisconsin state law imposes no obligations on employers with regard to paid leave for employees.

‍

Wyoming

Wyoming employers are required to provide employees (who don’t already have 3 consecutive hours when they are not scheduled at work and polls are open) with 1 hour of paid voting leave, though the employer is allowed to pick when the employee exercises the leave and only has to pay out on the hour of wages owed if the employee actually votes.

‍

Mployer Advisor’s Take

Stay tuned for Part 2 where we'll take a look at the 25 states with more employee-friendly paid leave laws and what they are requiring from employers.

‍

‍

Editor's Note: This report is based on survey data from June 2024 that was published in July 2024. This is the most recent data available. (Source: Bureau of Labor Statistics)

‍

The unemployment rate hit 4.1% as of the latest report from the Bureau of Labor Statistics, which is the highest the unemployment rate has been since November 2021, albeit still well within the range of a healthy job market.

‍

US employers added 206 thousand jobs, which slightly exceeded the 200 thousand that were expected. That said, the latest report also included downward revisions of the job additions reported in April and May amounting to 111 thousand jobs, which is a reduction of almost 25% of new jobs from what was initially reported.

‍

The number of unemployed people climbed a bit to about 6.8 million after hovering around 6.5 million for several months, and the number of long-term unemployed made a significant jump up by about 166 thousand up to 1.5 million last month, as well. 

‍

Of the approximate 200 thousand new jobs added, the largest portion were government jobs, which grew by 70 thousand payroll entries -  a significant improvement over the approximate 50 thousand government jobs added on average over the last year.

‍

The healthcare industry was also responsible for a significant chunk of the new jobs, netting almost 50 thousand new jobs, which is strong albeit down from the 64 thousand monthly average, followed by the social assistance and construction industries, which each grew by about 25 thousand jobs last month.

Industries that recorded a net reduction in jobs last month include the retail and professional services industries, which dropped about 9 thousand and 17 thousand jobs respectively, while there was no meaningful change in the employment numbers in the energy, manufacturing, warehousing, transportation, information, financial activities, and leisure and hospitality industries. 

‍

The average workweek didn’t budge from 34.3 hours per week for the third month in a row, while average hourly pay rose by 10 cents to $35.00 per hour, which is a 0.3% jump over the month and represents a slight slowing in rate increase from the month before. Hourly wages are up 3.9% total over the last year.

‍

Mployer Advisor’s Take

‍

On one hand, there are economic professionals who describe the latest jobs report as the ideal balance, with a job market that’s neither too hot nor too cold, but instead is right in the sweet spot in the middle that the Fed is targeting.

‍

On the other hand, however, there are plenty of experts of equal stature who are starting to call more attention to the potential problems on the horizon.

‍

Beyond the dramatic downsizing of the last couple of months of job gains, another potentially troubling sign is the sharp reduction in temporary worker employment recorded last month, which can often foretell employer expectations that their growth will slow, stop, and or reverse. 

‍

Another problematic indicator worth keeping an eye on is the noteworthy increase in the percentage of unemployed people who are now long-term unemployed, which has grown nearly 3 and a half percent in the last year and now accounts for 22% of the total unemployed population in the US.

‍

The Fed will meet again at the end of this month and determine whether or not to keep interest rates where they are or whether to start bringing them down, and this report (including recent revisions) certainly makes a rate cut or two this year more likely and markets seem to believe we remain on track for  a quarter point decrease in September. 

‍

As previously noted, however, any rates that may come to be are far from guaranteed at this point, even if markets are largely pricing in a pair of quarter point drops before 2025. 

‍

From this onlookers perspective at least, the latest report makes an interest rate reduction sometime this fall now more likely than not, but another report like this one and a rate reduction this year will graduate to plain old ‘likely.’ 

‍

Check out the Mployer Advisor blog here.

ARTICLE | The Employers’ Guide To Consolidated, Non-Consolidated & Unlimited Leave Policies

Leave practices and policies can be wildly inconsistent between states, industries, and organizations - even internally - and yet they are regularly one of the top factors employees consider when evaluating and taking stock of their prospective and/or current compensation packages and job situations, generally.

‍

Further, according to Forbes’ best employee benefits of 2024 reporting, leave is one of the most notably undervalued benefit package components in terms of the gap between the importance ascribed to favorable leave policies by employees vs. the importance ascribed to favorable leave policies by employers.

‍

The combination of the wide-ranging leave policies employees may have encountered over the course of their careers and the large number of employers that are overlooking the significance of leave from the employee perspective provides an opportunity for employers to better align leave policy with larger organizational goals while gaining a competitive edge over other players in their respective industries at the same time.

‍

‍Paid Leave In the USA

Despite that the idea for paid leave first started gaining steam globally around 1910 after President Taft proposed a law (that never came to pass) requiring 2 to 3 months of mandatory paid vacation for every American worker, the US has lagged behind its international, industrialized peers ever since in terms of ensuring its domestic workforce has access to paid time off from their labor.

‍

In the years since, many state governments have stepped in to require private employers to provide some forms of paid leave in some situations, and many private employers have of course gone above and beyond state minimums as part of a compensation package designed to attract, retain, and optimize the output of talent, but the end result is a mess of policies and expectations that can vary considerably depending on a number of different variables.

‍

The net effect of those varying policies is that a little less than 8 out of 10 workers on average in the US have access to some form of paid leave, with about 79% of US workers having access to paid sick leave, 77% of US workers having access to paid holidays, and 75% of US workers getting some form of paid vacation.

‍

Non-Consolidated Leave vs. Consolidated Leave vs. Unlimited Leave

Even among similarly situated employers, there remains at least 3 distinct approaches for how best to navigate this shifting leave policy landscape - the standard non-consolidated leave approach, the growing consolidated leave approach, and the emerging unlimited leave approach.

‍

There are, however, disadvantages and advantages to each of the potential leave approaches that comparably positioned organizations may weigh very differently and are best addressed on a case-by-case basis in light of the circumstances specific to a given employer.

‍

Non-Consolidated Leave

Non-consolidated leave policies separate different potential types of leave into categories with a separate amount/tranche of leave time offered for each category. For example, in non-consolidated leave plans an employee is offered a set amount of paid sick days during a given term/year, as well as a set amount of paid vacation days, and a set amount of paid/personal time off (PTO) to be used for personal business, etc.

‍

According to the most recent available data from the Bureau of Labor Statistics, about 56% of US employees are subject to non-consolidated leave policies, which, while still a majority, is down considerably in just the last few years and is hanging onto that majority status by a thread.

‍

This kind of leave segmentation is in many ways more the natural evolutionary byproduct of paid leave plan administrators adding new types of leave piecemeal over time than it is a cohesive policy conceived in pursuit of some specific aims, but there are nonetheless advantages that non-consolidated leave policies can potentially wield over the newer, less-structured alternatives.

‍

The main advantages that non-consolidated leave policies provide employers is a greater degree of hands-on control that may enable them to better tailor leave policies in line with the needs of both the organization and the employees.

‍

For example, sick days can be deemed to rollover from one term to another in order to encourage employees to come to work when capable while knowing that those days aren’t lost if they find themselves experiencing a more significant, contagious, and/or long-term illness or injury down the road.On the other hand, vacation days may be deemed not to rollover, thereby encouraging employees to take the breaks that have been afforded them in order to relax, recharge, and return to work ready to produce at a high level, which is in all parties’ mutual interest.

‍

Further, sick days, personal days, and vacation days can potentially be set to accrue at different rates based on different inputs in line with business needs, as well.The disadvantages to non-consolidated leave policies, however, are largely centered around enforcement difficulties and the additional administrative expenses incurred to manage them. While employers may have an interest in having their employees use sick days only when they are sick, the process for confirming and documenting proper leave utilization can be cumbersome, invasive, and/or lead to ill will between workers and management that is outsized relative to the perceived advantages that are attained.

‍

Consolidated Leave

In consolidated leave policies, time made available for employee leave - whether for vacation, illness, personal business, or otherwise - all comes out of the same collective pool (sometimes referred to as a PTO bank) with no need for segmentation into leave categories.

‍

As of the most recent data available, about 44% of US workers who have some kind of PTO work under consolidated leave plans, although that number climbs to over 50% when measuring only workers who receive paid vacation days (as of 2023), in contrast to the fewer than 25% of workers with paid vacation who had consolidated leave plans back in 2010.

‍

Clearly, consolidated leave plan adoption has been on the rise, and while they do not share some of the employer-tailoring potential that non-consolidated plans can offer, consolidated plans do have the benefit of allowing employees to tailor their leave utilization in line with their own motivations and interests, which is a selling point in its own right and a meaningful one from the vantage point of many employees.

‍

Consolidated plans also immediately remove the sick-day skepticism that can poison working relationships between workers, managers, and coworkers alike, in addition to cutting down on costs associated with collecting, tracking, and storing certain leave utilization documentation.

‍

Unlimited Leave

The latest trend in leave policy takes consolidated leave flexibility one step further by not only consolidating the different types of leave into one PTO bank, but also removing the cap on the number of days in that bank so that the number of PTO days available to a given employee is technically unlimited.

‍

According to a recent report from the International Foundation for Employee Benefit Plans, about 9% of private employers surveyed had adopted an unlimited PTO policy, which comports with the 8% of companies offering and 10% of employees being offered unlimited PTO as reported by Zippia.

‍

Further, 87% of those employers offering unlimited-PTO have begun doing so within the last 4 years, and Indeed reports that the number of job listings referencing unlimited PTO grew by 40% between 2019 and 2023, so the growth trajectory for unlimited leave is even steeper than that of consolidated leave has been.

‍

While an unlimited PTO model may sound like a dream to many workers and a nightmare to some employers, the reality so far has in many ways been the opposite.Workers who may envision themselves going on regular extended sabbaticals more often than not actually find themselves taking fewer days off work under the unlimited PTO model than they did with a set number of PTO days. Such employees often cite a heavy workload, social stigma, coworker/manager coordination, and not wanting to offload responsibilities to others as some of the main reasons for underutilizing the opportunity to take leave. In fact, workers with unlimited PTO take only an average of about 13 PTO days per year.

‍

Employers, on the other hand, who may be reluctant to adopt the unlimited leave model for fear of mass employee absenteeism not only end up with employees working more than before, they also can eliminate carrying the liabilities associated with accrued vacation days on their accounting books and can avoid paying out on unused PTO to terminated employees (as is required in 19 states: CA, CO, IL, IN, LA, ME, MD, MA, MT, NE, NH, NM, NY, NC, ND, OH, RI, WV, WI) simply because there are no longer any PTO days that have accrued.

‍

Those kinds of advantages may become increasingly hard for employers to ignore, even as employees adjust to the new system and begin to utilize it more to their own advantage, as well.

‍

PTO Laws By State

While a majority of states (27) have some form of PTO law on the books, the scope ranges from relatively small (as in Louisiana's requirement that each employee be given one day of PTO for jury duty or Virginia’s requirement that home health workers who work at least 20 hours per week receive one hour of paid sick leave for every 30 hours they spend on the job) to much more broad in application (like Nevada’s law requiring employers with more than 50 employees to provide 0.01923 hours of PTO (capped at 40 hours per year) for every hour worked, which employees can use for any purpose.

‍

The following states have enacted at least one law with regard to PTO for private employers/employees, the vast majority of which focus on sick and family leave:

• Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, Oregon, Rhode Island, Tennessee, Vermont, Virginia, and Washington

‍

The following states have no current laws mandating any form of PTO:

• Alaska, Florida, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Washington D.C. West Virginia, Wisconsin, Wyoming

‍

Mployer Advisor’s Take

While there are a few potential advantages to non-consolidated PTO, many of those advantages in terms of shaping employee PTO usage are often more theoretical than practical, whereas the additional burdens of verifying and administering non-consolidated PTO are very concrete.

‍

Though non-consolidated PTO remains the majority position for the time being at least, all the momentum seems to be behind consolidation.

‍

Whether that momentum will ultimately carry the unlimited leave model and its even greater levels of flexibility to become standard business practice and the majority approach among employers remains to be seen, but unlimited PTO certainly seems to have the necessary tailwinds behind it to make that outcome a real possibility.

‍

Despite the practical downsides for employees with unlimited PTO - which employees will adapt to over time and which employers can mitigate through proactive efforts to help encourage culture shift and encourage optimized leave utilization - the idealized promise of unlimited PTO remains a strong draw for talent from a recruitment and retention perspective.

‍

Further, employers would be ill advised not to consider the potential benefits that can be immediately realized from a liability perspective when the policy is implemented, especially if they operate in a state that considers accrued PTO to be equivalent to wages and/or mandates the payout of accrued PTO to employees that have been fired.

‍

The right PTO arrangement may very well be a little different for any given employer based on what they do, where they are, and what they hope to accomplish via the policy, but consolidation and unlimited PTO offerings are clearly not only attracting the interest of a growing number of employers, but many of those employers who take a closer look are liking what they see and making a change.

Key Takeaways

• Juneteenth occurs every year on June 19th and commemorates the end of slavery in the US

• Though Juneteenth has been celebrated for nearly 160 years, it has only been a federal holiday since 2021

• Juneteenth is the fastest growing holiday in terms of the percentage of employers adopting Juneteenth as a companywide holiday and offering employees PTO (39% as of 2023)

• Although banks, post offices, financial markets, and most government buildings will be closed on Juneteenth, as with any other federal holiday there are no federal requirements imposed on private employers with regard to Juneteenth observance, though state and local rules may vary

‍

ARTICLE | The Employers’ Guide To Juneteenth

Juneteenth is coming up on June 19th, 2024 - Here’s what you need to know.

‍

Juneteenth - a celebration and commemoration of the end of slavery in the US - is the latest holiday to join the esteemed ranks of the 10 other federal holidays that can be found on the US calendar.

‍

As with all other federal holidays, private employers are not federally mandated to provide paid time off or any other accommodations for employees with regard to Juneteenth under the Fair Labor Standards Act or otherwise, but the scope of the holiday’s impact will extend well beyond government employees getting the day off work.

‍

Juneteenth - Practical Considerations

In terms of practical impacts, most government buildings will of course be closed including, post offices, public schools, and courts. Banks and financial markets will be closed, as well.

‍

Further, 38 states so far have declared Juneteenth as a state holiday, so many state workers will be off-duty too, and more than a few cities and local governments have also passed Juneteenth-related ordinances to varying effect that may be worth looking into in your geographic area.

‍

This year, June 19th will be a Wednesday - but for those who do/will offer PTO for Juneteenth and want to stay in line with the federal holiday schedule protocol in the event that June 19th falls on a weekend - if it’s a Saturday the holiday should be observed on the preceding Friday and if it’s a Sunday the holiday should be observed on the following Monday.

‍

Juneteenth - Private Employer PTO Adoption

Perhaps most impactful will be the growing number of private businesses that are choosing to make Juneteenth a companywide holiday.

‍

According to a study from Mercer, about 39% of private employers in the US had adopted Juneteenth as a paid holiday as of last year (2023 - the most recent data available), which is up by 6% over the 33% adoption rate reported in 2022.

‍

In 2021 - the year that Juneteenth was declared a federal holiday - only 9% of private employers had adopted Juneteenth as a paid holiday, so while the rate of adoption has slowed over time, the upward trajectory almost certainly continues as more organizations get on board and time off for the Juneteenth holiday approaches the tipping point from normalized to expected.

‍

In some industries, to be clear, that threshold from Juneteenth PTO normalization to expectation has already been crossed, such as in the financial services industry for example. In 2023, nearly 2 out of 3 employers in the financial services industry (63%) were already offering employees paid time off for the Juneteenth holiday.

‍

Juneteenth PTO Adoption Vs. Other Holiday PTO Adoption

How does Juneteenth PTO adoption among private employers stack up compared with PTO adoption for the other holidays, federal and otherwise? It is about middle of the pack, which is especially impressive given how recently it attained federal holiday status.

‍

Prior to gaining federal holiday status in 2021, the PTO adoption rate for Juneteenth was less than half of the PTO adoption rate for President’s Day and Good Friday, both of which have been adopted as company holidays by about 19% of private employers. Juneteenth was even below Veteran’s Day and New Year’s day at 11% and 14%, respectively, according to Indeed.

‍

After becoming an official federal holiday, however, and being adopted by an additional 30% of private employers in the 3 years following that status declaration, the number of private employers offering Juneteenth as a company holiday now likely exceeds the number of private employers who do so for the Day After Thanksgiving (~39% PTO adoption), Christmas Eve (26% PTO adoption), or Martin Luther King, Jr. Day (24% PTO adoption).

‍

While Juneteenth still has a long way to go to reach private employer PTO adoption rates comparable to the heavy hitter holidays like Christmas Day, Thanksgiving Day, Independence Day, Labor Day, New Year’s Day, and Memorial Day - all of which have approximately 90% or more adoption across private employers - those kinds of adoption figures are not outside the realm of possibility if the labor market remains tight and leave/benefits become an increasingly competitive battlefield in the fight for top talent.

‍

Juneteenth History

Despite being a recent addition to the federal holiday list, there is a long history and tradition surrounding the Juneteenth celebration stretching back nearly 160 years, and a closer look at that history will serve to encourage further the adoption of the holiday for reasons beyond talent attraction and retention.

‍

While slaves in secessionist states were technically freed upon Lincoln’s issuance of the Emancipation Proclamation on January 1, 1863, it wasn’t until 2 and a half years later - and more than 2 months after the war had technically concluded - that the Union army finally secured the physical release of the last remaining slaves from a Confederate stronghold in Galveston Texas (on June 19, 1865) that the promise of the Emancipation Proclamation was finally fulfilled.

‍

It is also worth noting that the last remaining slaves in the US were not actually freed until the 13th Amendment was ratified on December 6, 1865 since the Emancipation Proclamation only addressed the slaves in secessionist states and had not covered slaves in Kentucky and Delaware, neither of which had joined the Confederacy despite allowing legalized slavery within their borders.

‍

By the end of 1865, all slaves had been freed in the US, and the following year on June 19th, 1866, the first ever Juneteenth holiday was celebrated to mark the significance of the occasion and memorialize the gravity of what had taken place the year (and the years) before.

‍

Mployer Advisor’s Take

With the growth we’ve seen over the last few years in the number of employers recognizing Juneteenth and offering employees paid time off, it is probable that the holiday has already reached critical mass at which point observation of the holiday and company-wide holiday status for Juneteenth is more likely to continue growing than to recede.

‍

We are, however, still in the sweet spot when Juneteenth PTO is becoming commonplace but has not yet become a majority position among private employers (in most industries), so the window of opportunity to gain a competitive advantage as an early adopter is still open for most organizations and enterprises.

‍

Whether or not commemorating an important date in American history coupled with forward-thinking talent attraction and retention tactics is enough motivation to consider expanding PTO-covered holidays to include Juneteenth, it would be wise to recognize these dynamics at play in terms of how they are likely to induce additional adoption in the years ahead.

‍

The downside for late adopters, of course, is that instead of getting ahead of the competition while signifying the importance of the occasion and making a positive connection, they end up coming around anyway just to keep up with the competition even as the benefits for doing so yield increasingly diminished returns.

‍

Don’t miss out on the opportunity to call attention to the occasion and celebrate Juneteenth this year!

‍

Key Takeaways

• New rule from the Federal Trade Commission (FTC) banning non-compete contracts for most workers (excluding senior executives that meet certain criteria) is set to take effect in September 2024 - although lawsuits are likely to delay implementation of the rule temporarily if not indefinitely

• For HR Professionals, some of goals sought by non-discrimination agreements can be achieved via other means, like non-solicit agreements to limit client-poaching, more specific non-disclosure agreements to protect intellectual property, and longer vesting periods for stock options to promote talent retention

• The healthcare industry will be critically impacted by the new rule as a result of both the high stakes associated with healthcare outcomes and the large number of physicians currently subject to non-compete agreements

• The FTC claims that banning non-competes will reduce healthcare expenses by 200 billion over the next decade, but many industry insiders believe it will cause health care expenditures to increase, in part due to wage inflation for healthcare workers

• The new rule, if implemented, is estimated to produce 8,500 new businesses each year, tens of thousands of new patents, and will result in the average US worker earning $524 dollars more each year

‍

ARTICLE | The HR Professional’s Guide To The End of The Non-Compete Era

Last month, the Federal Trade Commission issued a new rule that invalidates non-compete agreements for the vast majority of employment contracts, reducing the percentage of the employees subject to non-compete agreements from almost 20% of the workforce to less than 1%.

‍

For human resource professionals, executives, and organizational leadership, the impacts of these changes will be considerable - from talent acquisition and retention to employee health outcomes - and may be worth considering in advance of when the new rule takes effect this coming fall.

‍

To be clear, it’s very possible if not more likely than not that at least one of the pending/forthcoming lawsuits challenging the new rule will succeed on some level, but the FTC makes a fairly compelling case - both against non-compete agreements and for the agency’s ability to regulate them - that is unlikely to go away even if the new rule in its current form doesn’t survive judicial review unscathed.

‍

In the event that the current era of non-competes truly does come to an end, whether sooner or later, more than a few aspects surrounding common business practices for managing talent retention, intellectual property protection, and limiting competition will have to be rethought and reconfigured from the ground up, which will provide both significant challenges and meaningful opportunities.

‍

How HR professionals and organizations in general respond to those challenges and adapt their way of doing business to adjust to the new non-compete normal, and more importantly how effective those adjustments prove to be, will likely reshape human resources management practices and business organizational structuring for decades to come.

‍

• What: The new rule prohibits the establishment of almost all new non-compete agreements going forward beginning on the effective date for all employees, including senior executives but excluding business sales. The new rule also invalidates current existing non-compete agreements for most employees, but makes an exception that allows existing non-compete agreements to stay in place for senior executives - defined as earning more than $151,164 in the last year and having final authority to make policy-setting decisions that affect significant aspects of the business.

• When: The new rule is set to take effect on September 4, 2024, at which point non-excepted existing non-compete agreements will be invalidated and all future non-compete agreements will be banned. Any existing non-compete agreement that does not meet exception criteria will no longer be operable from that date forward, assuming that judicial intervention doesn’t delay the start date.

• Why: The FTC determined that non-compete agreements lead to inefficiencies in the labor market that can increase cost and lower the quality of output in addition to being coercive, exploitative, and suppressing the wages of workers, even including workers not directly subject to non-compete agreements.

‍

Non-Competes In US Before New Rule

Non-Competes In US After New Rule

‍

What Happens Next?

The first thing that employers must do is notify all employees who will be affected by the new rule and inform them that their non-compete agreement will no longer be in effect as of September 4th (or whatever date in advance of September 4, 2024 that the company may choose). The FTC has provided model language to assist in the process that can be found on the agency website.

‍

The next step must be quickly adjusting course in line with the new reality that non-compete agreements may soon be a relic of the past.To understand how the absence of non-compete agreements will affect business operations, it’s important to start with the main goals that non-compete clauses are typically utilized to meet - retaining talent, protecting IP/ trade secrets, and limiting competition.

‍

These goals can all be pursued via a combination of other efforts, of course, but those efforts will not necessarily all be as effective as non-competes had been, nor will they all be equally effective for every employer that puts them to use.

‍

While it remains to be seen what methods will and won’t be effective for a given employer/industry/goal, that process of trial and error in discovering what works and what doesn’t will likely have major consequences that will be felt across the labor market and economy as a whole in terms of how business is conducted going forward relative to the status quo.

‍

IP Protection:

Non-compete agreements have often been employed in order to ensure that in-house know-how and trade secrets stayed in-house.

‍

Perhaps the most relatable of the justifications for restricting the free movement of employees within a market is the understandable desire for organizations to keep some information out of the hands of competitors, would-be market entrants, and others who may inhibit the ability of the business to grow and succeed.

‍

To those ends, non-compete agreements were fairly effective, which is partly responsible for the widespread practice of routinely including non-compete agreements in employment contracts.In a post-non-compete world, one concrete measure organizations can undertake to better protect intellectual property and trade secrets is putting in place more clear and restrictive policies and procedures for using company equipment and for accessing, downloading, storing, and utilizing company data and work product.

‍

These efforts can decrease the likelihood that confidential information gets outside of the building in the first place, in addition to potentially helping to determine if, when, how, and by whom that information was improperly accessed or disclosed in the event of a breach.

‍

While laws that allow for the protection of trade secrets and IP remain in place even absent non-compete agreements, however, in practice it can be much more difficult to prove infractions than to prevent them.

‍

As a result, to better reduce the leaking of valuable information without non-compete agreements to limit in-house knowledge from benefiting competitors, employers are likely to redouble their talent retention-efforts, especially for specialized roles with specific insight into the organization’s competitive advantages.

‍

Regardless of the efforts taken to retain talent, however, some employees with access to trade secrets and valuable organizational knowledge will inevitably move on to work for another employer, in which case tighter, and more specific non-disclosure agreements with heightened penalties for term violations may be the best tools available for ensuring departing employees know both what information should not be revealed and the legal repercussions they may face if they do so.

‍

Talent Retention:

Once non-compete restrictions are lifted, employees will be able to more directly test the market value of their labor by offering it to competitors.

‍

At first, this newfound employee freedom of movement may lead to both increased turnover and increased wages/labor expenses. While some employees will take the opportunity to open their own business, the majority of the influx of talent on the market will likely look to move on and/or move up resulting in an industry-wide game of musical chairs.

‍

As a growing number of companies begin adopting alternative means for achieving the goals they had previously pursued via non-compete agreements, however, that churn is likely to settle and may ultimately lead to a lower turnover rate overall.

‍

For example, while non-competes provided a serviceable ‘stick’ to limit employees’ ability to leave their jobs, the absence of non-compete agreements suddenly makes the various ‘carrots’ that serve a complementary purpose all the more crucial.

‍

While some other retention-aiding ‘sticks’ can still be put to use toward improved retention, including Training Repayment Assistance Programs (TRAPS) so long as those programs are not so severe as to constitute de facto non-compete agreements, ‘carrots’ like escalating bonus schedules, accumulating benefits, and longer vesting periods for stock options will have an increasingly important function in keeping top talent on board.

‍

Inhibiting Competition:

The threat of increased competition is two-fold when employees are suddenly more capable of either putting their skills to use for a rival organization or starting their own operation in the space.

‍

In either case, non-solicit agreements can be effective in limiting that exposure by limiting the ability of employees to poach clients on their way out the door and for a period of time following their employment. Non-solicit agreements should also be put in place to restrict former employees from hiring your organization’s current staff, agents, and sales people for a set period of time following the former employee’s term of employment.

‍

Non-disparagement and non-interference agreements may also be useful in similar situations with similar goals by preventing former employees from disparaging, disrupting, damaging, or otherwise interfering with their former employer’s business.

‍

As for inhibiting competition from existing industry counterparts who benefit from talent your organization developed in-house, the best defense is to shore up your IP protection alongside reinforced talent longevity and retention efforts.

‍

The best offense, on the other hand, may be to bolster your own organization’s ranks with some of the new talent who will be making their services available on the market in the near future.

‍

Exceptions To The Rule:

Beginning September 4th, 2024 most non-compete clauses will be banned going forward, but not all.

‍

Non-compete agreements involving the sale of a business will remain valid for both past and future business sales so that buyers can remain protected from competition from the seller.

‍

Importantly, this exception applies to any bona fide good faith sale in which the seller has an ownership stake regardless of the size of that stake - which is a departure from the proposed rule which required a minimum 25% ownership stake for non-compete clauses to be valid. Though the final rule is an expansion of the exception form the proposed rule, the FTC is clearly aware of the potential abuse of this exception.

‍

Further, the FTC notes that the invalidation of existing non-compete agreements isn’t retroactive, so violations of existing non-competes can still result in viable legal action if the violations or conditions enabling the violations occurred prior to the new rule taking effect.

‍

Most existing non-compete agreements that don’t meet the business sale exception will also be invalidated as of September 4th, 2024, but there is an exception for existing non-compete agreements involving ‘senior executives’ - defined in the rule as employees who earned at least $151,164 in the last year and who have final authority to make policy-setting decisions that affect significant aspects of the business.

‍

Non-profit organizations are also outside the scope of the new rule as beyond the purview of the FTC, but regulators note that they do retain jurisdiction over organizations who may be non-profit in name, designation, and/or tax status, but nonetheless operate as for-profit entities and/or primarily for the benefit of their operators, in which case the new rule will be applicable.

‍

Healthcare-Specific Impacts of Banning Non-Compete Agreements

Given the prominent role that healthcare plays in workforce management, benefits administration, and worker productivity, human resources professionals should also be mindful of some of the healthcare-related changes that may result from banning non-compete agreements.

‍

The two primary negative impacts that non-compete restrictions can have on the healthcare industry according to public commentary highlighted by regulators can be boiled down to reduced access to care and reduced quality of care.

‍

While reduced quality or access to a product or service is generally considered a problem across most industries, the stakes are often significantly higher when health is involved, which is one reason that the FTC paid special attention to address some healthcare related issues and objections related to banning non-competes.

‍

Further, the healthcare industry will be critically impacted by the new rule as a result of the large number of physicians currently subject to non-compete agreements, with as much as 45% of physicians at for-profit hospitals are currently constrained by non-compete agreements.

‍

While the new rule has the support of the American Medical Association, there are still plenty of agents and organizations within the healthcare industry who are of the opinion that the rule will ultimately have a net negative impact.

‍

In responding to those who oppose the new rule, regulators make it clear that they are very much aware of the relevant concerns held by some within the healthcare industry about how the new rule will affect their operations - including that the rule would worsen the existing healthcare worker shortage problem and would drive up healthcare worker wages and health care costs in general as a result - but the FTC largely dismisses those concerns as unsupported by the data.

‍

It is not entirely clear whether or not regulators found those concerns to be without merit, however, or if the evidence in support of those propositions was simply insufficient while they found the data and commentary in opposition to non-compete clauses more compelling.

‍

For example, a significant number of physicians commented that non-competes negatively impact the quality of care they can provide by forcing them to accept care-impacting decisions made by administrators at the institution with which they are contracted while depriving them of the opportunity to offer their skills and experience to a competing institution instead, which can ultimately lower the overall quality of care for both healthcare institutions in the example.

‍

Further, while regulators conceded that tax-exempt organizations in general operate outside the realm of the FTC, they do notably claim jurisdiction over (and fired a shot across the bow of) the many nominally non-profit hospitals and healthcare organizations that nonetheless pay executives exorbitant salaries and contribute less to their communities than the value of the tax breaks they get as a result of their non-profit structure.

‍

What will be the overall impact on healthcare? The FTC claims the new rule will lower healthcare expenses by an average of $20 billion per year over the next decade in addition to creating more competition and offerings to better meet patient needs/demand, while opponents believe freedom of movement for healthcare workers will result in higher wages that drive the cost of healthcare up.

‍

Whatever the end result, there will almost certainly be healthcare-related confusions and complications that arise as the industry adapts to the changing environment, which will likely cause employees to lean on their employers further for guidance and help navigating the evolving healthcare landscape.

‍

Economic Impacts of Banning Non-Compete Agreements

‍

The Case Against Non-Compete Agreements

According to the Federal Trade Commission (FTC), about 30 million workers are currently subject to non-compete agreements, which means any problems that non-compete agreements may be causing or exacerbating are going to be felt economy wide.

‍

Despite the widespread adoption and long history of non-compete clauses in employment contracts, the practice has long been the subject of controversy, with data analysis increasingly seeming to confirm some of the most common critiques of non-compete agreements, including that they are economically inefficient, lead to higher costs, result in worse quality product/service offerings, and stifle innovation.

‍

One of the biggest arguments against non-competes embraced by the FTC is that they unnaturally inhibit free market forces that could potentially distribute labor more efficiently if non-competes weren’t restricting the free movement of talent within a market/geographic region.

‍

Those restrictions affect not only the movement of labor and ideas among existing competitors within a given market, which affects the value of that labor in turn (i.e. wage suppression), but non-compete agreements also inhibit new entrants from accessing the market, which has a chilling effect on innovation by limiting the availability of expertise and experience to would-be innovators and their organizations, whether preexisting or brand new.

‍

Interestingly, data indicates that non-competes not only depress wages and earnings for workers whose contracts contain non-compete clauses, but also for workers who aren’t directly subject to non-compete clauses, as well, by lowering wages across the entire category.

‍

Quality of product and service offerings is another victim of non-compete agreements highlighted by the FTC, noting that employees who are unable to take their services elsewhere are less capable of pushing back against excessive workload, job requirements, or cost-saving measures that are likely to result in a lower quality of work output.

‍

Given these findings, it is no surprise why the FTC decided that the use of these kinds of restrictions should be banned.

‍

Not everyone agrees, however, with opponents challenging both the wisdom of the new rule and the FTC’s authority to issue it, which is a position supported by many stakeholders across a range of industries who believe that regulators at the FTC have overstepped their regulatory bounds with the new rule and grossly misunderstood and/or mischaracterized the potential effects that banning non-compete agreements may have.

‍

Legal Challenges To The New Rule

As of this writing, there are at least 2 separate lawsuits that have been filed against the FTC with regard to this rule.

‍

The most prominent plaintiff thus far is the US Chamber of Commerce, which claims that the FTC lacked the authority to issue such a broadly-sweeping rule, amongst other claims. The suit was filed in the US District Court for the Eastern District of Texas, which the Chamber presumably believes to be a district friendly to the cause and somewhat increases the chances that the challenge will be heard favorably, at least in the short-term.

‍

In making its case, the Chamber specifically pointed to the substantial costs that companies would have to undertake to protect their investments in terms of both developing talent and safeguarding intellectual property if non-competes are no longer permissible.

‍

The FTC counters those complaints by claiming that the agency is specifically mandated to regulate unfair methods of competition, which they have concluded includes non-compete agreements.

‍

The Chamber has not yet said whether it will move for a temporary injunction blocking the enforcement of the rule pending their legal challenge, but as September approaches, that motion for injunction becomes increasingly likely unless another legal challenger to the new rule (of which many more are anticipated) takes that action first.

‍

Mployer Advisor’s Take

Despite having the final rule in hand and just a few months before it is scheduled to take effect, the general consensus is that legal challenges to both the rule banning non-competes and the FTCs right to enact the rule will succeed in delaying implementation at the very least.

‍

How those cases play out remains to be seen for the time being, but given the current makeup of the federal judiciary, substantial changes to the rule if not a de facto gutting of it seem more likely than not prior to the rule taking effect.

‍

Even if the non-compete ban is severely diminished if not invalidated by the time it has been terminally adjudicated, given the clarity of the case they present and the resolution in their actions, regulators at the FTC may very well attempt to achieve the same ends via different, more judicially palatable means should they still be in position to do so next year following the elections this fall.

‍

One way or another, the spotlight has been shone on non-compete clauses, and a return to the era of widespread, default non-compete agreement use is unlikely to happen regardless of the fate of the current legal challenges to the new rule.In justifying the ban, the FTC noted that there were a number of less-intrusive ways for employers to achieve the benefits they’ve come to expect from non-compete agreements including talent retention and IP protection, including some of those discussed above.

‍

Further, the FTC pointed to the experience of several early adopter states like California and Oklahoma that paved the way for the new rule via heightened non-compete regulation above and beyond the national standards at the time. Those early adopter states not only provide evidence that banning non-competes won’t result in the worst outcomes predicted by those opposed to the new rule, but they are also home to thousands of companies that can serve as case studies that can benefit out-of-state companies addressing these issues for the first time with how best to adapt to the new, more competitive environment.

‍

Forward-thinking organizations might be wise to begin looking toward those models, exploring their options, and making the transition away from relying on non-compete agreements before being directly faced with a swiftly approaching the legal deadline for doing so, whether that deadline ends up being this coming September or a little farther down the road.

Key Takeaways:

• ICHRA adoption is growing rapidly but still accounts for only a tiny fraction of market share, and year-over-year growth is already slowing.
• ICHRA efficiency gains and cost savings are only likely to materialize for very small organizations and/or those that provide benefits significantly below market average.
• Structural disadvantages - like not aligning well with the existing brokerage-based systems - will likely significantly curb future ICHRA adoption growth potential.

‍

ARTICLE | To ICHRA or Not To ICHRA?

Individual Coverage Health Reimbursement Arrangements (ICHRAs) have been getting an increasing amount of attention in recent years and are being touted as a potential next evolution in how employers support employee healthcare.

‍

While the rate of adoption has been quite impressive in the little more than 4 short years since ICHRAs were first legislated into existence, however, the question remains as to whether the reality of what ICHRAs can deliver lives up to the hype they have been generating.

‍

Thus far at least, the heightened attention surrounding ICHRAs and the resulting meteoric rise has only translated into a tiny sliver of market share, and although that market share has been obtained over a relatively short amount of time, the types of companies that are best suited to capitalize on the advantages that accompany ICHRA adoption are too few in number to make widespread adoption seem likely.

‍

What Are ICHRAs and How Do They Work?

Essentially, ICHRAs provide employers of any size the opportunity to set aside a fixed amount of money each month/year that employees can use to cover healthcare expenditures like premiums, deductibles, copays, and other qualified medical expenses.

‍

There are several aspects of ICHRAs that are very appealing to employers for obvious reasons, including that they enable employers to satisfy Affordable Care Act requirements via tax-deductible contributions as long as cash available for reimbursement meets or exceeds the minimum affordability standards.

‍

Also, these accounts can be offered as standalone health benefits, or they can be offered in tandem with traditional employer-sponsored insurance, and there is no upper limit on reimbursement levels, which allows for significant flexibility in tailoring these arrangements to the needs of the talent pools that your organization hopes to attract and retain.

‍

Further, compliance and administration for ICHRAs are theoretically simplified relative to traditional group-plan coverage, and risk/cost is limited due to the predetermined amount of reimbursement available each term.

‍

At face value, the potential ICHRA appeal is immediately clear - risk limitation for employers and freedom of choice for employees - but a deeper analysis reveals a considerably more complex dilemma than may be apparent on the surface.

‍

ICHRAs Then and Now

The story of the ICHRA can not be told without acknowledging the Health Reimbursement Arrangement (HRA) from which it evolved.

‍

The IRS first recognized HRAs in 2002, and though the popularity of HRAs swelled throughout the early part of the century, in 2013 an interpretation of the Affordable Care Act effectively outlawed them for failure to comply with the new credible coverage rules.

‍

Because many companies (especially those on the smaller side) were unable to provide any employee healthcare spending support at all in the wake of the HRA ban, however, Congress created the QSEHRA in 2016 to allow small employers to offer HRAs if they met certain conditions that made providing traditional health insurance coverage less feasible.

‍

In 2019, the Department of Labor took the additional step of enacting rules to expand the access to HRAs to companies of all sizes, enabling the first ICHRAs to come online in 2020 and bringing the HRA adoption trend line full circle.

‍

And while HRAs continue to be a major factor in employer-sponsored health coverage today, and make up a core component of most high-deductible health plans, which in turn make up about 45% of all employer-sponsored health plans, it is ICHRAs that are currently dominating the spotlight, with the number of companies offering ICHRAs last year increasing by more than 60% over the year before.

‍

ICHRA and QSEHRA Adoption Rates

Supporters like to compare the current shift toward ICHRA adoption and away from traditional health insurance coverage offerings as analogous to the shift away from defined benefit retirement savings offerings toward defined contribution retirement savings plans.

‍

In short, plenty of ICHRA proponents think that ICHRAs will eventually replace traditional healthcare benefits similar to how pensions have been largely replaced by 401ks and other investment vehicles over the last 40 years, and based on the year-over-year changes between 2022 and 2023, that possibility seems quite plausible.

‍

As the chart below shows, there were about 2,500 employers offering ICHRAs in 2022, but that number jumped up by about 64% to an approximated 4,100 employers in 2023.

‍

The QSEHRA adoption tells a somewhat different story, however, with only about an 8% increase between 2022 and 2023 in the number of small employers offering QSEHRAS bringing that figure from 6,000 up to an approximated 6,500.

‍

Of course, QSEHRA adoption had a few years-long head start on ICHRA under the latest regulatory rules, which can partially explain the slower adoption rate for QSEHRAs relative to ICHRAs.

‍

More importantly, however, the additional flexibilities built into ICHRAs have made QSEHRAs relatively obsolete for all but a small slice of qualifying small businesses, so the disparity in pace of growth between ICHRA and QSEHRA adoption is more likely to grow than shrink at this point.

‍

For context however, even with this kind of significant levels of year-over-year adoption, ICHRAs went from accounting for 0.08% of employer-sponsored healthcare expenditures in 2022 to 0.1% of employer-sponsored healthcare expenditures in 2023, so the impact on the overall market still remains incredibly small for the time being at least, and that may not be a bad thing.

‍

HRA Availability Growth From 2022 - 2023

ICHRAs and QSEHRAs By The Numbers

- Nearly two-thirds of employers (64%) that offer ICHRAs or QESHRAs have 5 or fewer employees;

- Only 6% of employers that offer ICHRAs or QESHRAs have 50 or more employees;

- The fastest growing segment of ICHRA adoption is by employers with 50 or more employees, which grew by more than 140% between 2022 and 2023; and

- The number of employers offering ICHRAs grew by 170% between 2022 and 2023 while the number of employers offering QSEHRAs grew by about 100% over the same period.

- 55% of employees insured via ICHRAs or QSEHRAs in 2023 were age 44 or younger.

‍

Percentage of Employers Offering ICHRAs and QSEHRAs (By Number of Employees)

Age of Workers Insured Via ICHRA/QSEHRA in 2023

Advantages of ICHRAs

It’s important to note that there are some understandable reasons driving interest in and adoption of ICHRAs. In fact, there are a number of situations in which ICHRAs or QSEHRAs may be the best available option for employers to support employee health care coverage.

‍

First and foremost, employers that don’t intend to contribute at least 50% contribution toward total employee healthcare spending may be well-served by offering ICHRAs, which allow employers to specify and cap in advance the maximum amount of reimbursement available to each employee each one-year term.

‍

This type of risk-limiting arrangement can be appealing to employers, especially those on the smaller side who may not have sufficient resources to fund traditional employer-based health insurance coverage.

‍

Further, despite requiring employees to submit monthly any healthcare bills for which they are seeking reimbursement, ICHRAs are also considerably less complex and labor-intensive to administer than traditional employer-sponsored health plan management, which appeals to employers that may lack the necessary human resources or finance department/professional(s) capable of handling the workload.

‍

ICHRAs also can be a good idea for employers with high turnover and/or whose employees primarily qualify as low-income and therefore can still obtain substantial discounts on health insurance through the public marketplace as a result, even after accounting for the ICHRA reimbursement funds available to them.

‍

Disadvantages of ICHRAs

As the above example under the Advantages of ICHRA header makes clear, having a relatively small business and a small number of employees is the primary common factor linking the situations in which ICHRA adoption is most optimal, which seems to remain the case for both ICHRAs and the QSEHRAs that were designed specifically to accommodate the needs of small employers.

‍

Interestingly, however, employers with 50 or more employees were the fastest growing segment in terms of ICHRA adoption between 2022 and 2023 nonetheless, even though employers with more employees and greater resources are often going to find that the disadvantages associated with ICHRAs outweigh any advantages they may have hoped to gain via implementing an ICHRA program.

‍

For example, while it is true that ICHRAs set a hard limit on employer healthcare costs, that limit is only meaningful for employers that intend to provide less than market-competitive employee health benefit spending.

‍

In reality, almost all employers covering 80% of an employee’s healthcare costs (which is the market average) are going to get a much better group rate for their employee pool than what individual employees would be able to obtain on their own through the ACA exchange, with the only exceptions being employers that have a very small number of low-income employees, as noted above.

‍

The alternative, of course, is offering healthcare benefits that are below market rate, which is a strategy that comes with tangential disadvantages of its own, including productivity loss, higher turnover rates, and other talent acquisition and retention issues.

‍

There are also some other potential - though relatively minor - issues with ICHRA administration that aren’t necessarily baked into the system but can be problematic nonetheless. ICHRAs rely on employees to submit their medical expense bills in a timely and consistent manner, for example, which doesn’t always result in lightening the administrative workload as much as expected.

‍

Perhaps the main problem with ICHRAs, however, is that they are simply not currently designed to work in a complementary fashion with the current insurance broker model that undergirds the weight of the US healthcare system.

‍

Similar to Medicare Advantage enrollment, initiating an ICHRA or QSEHRA program requires each employee to be enrolled individually. Currently, however, most brokers don’t really have an ICHRA enrollment vehicle to efficiently facilitate that process, so many traditional brokers who currently own employer accounts will no longer be able to collect the health commission and fees associated with those accounts, which would instead go to the Medicare-Advantage-type of enrollment broker.

‍

Those Medicare-Advantage-type brokers, on the other hand, are unable to facilitate enrollment in dental and vision plans as well as other employee benefits that traditionally sit in the traditional insurance broker wheelhouse, further scrambling the division of responsibilities and the incentive structure as they currently exist in the insurance and employee benefits markets.

‍

Percentage Growth of US Employees Offered ICHRAs 2022 - 2023

Percentage Growth of US Employees Offered QSEHRAs 2022 - 2023

Mployer Advisor’s Take

While there are clearly advantages that can be gained by implementing an ICHRA program, those advantages appear to be primarily applicable to a much smaller subset of employers than the current interest in ICHRAs and the accompanying expectation for their impact on employer healthcare provision norms in the future seem to indicate.

‍

At the end of the day, however, for most employers other than those with only a small number of low-income employees, the disadvantages that come with ICHRAs will amount to more on balance than the advantages.

‍

Although the ICHRA adoption growth rate still looks impressive, those rates are already slowing year-over-year just a handful of years after their introduction on the market.

‍

Further, employers utilizing ICHRAs still make up an infinitesimal portion of overall market share at one-tenth of one percent, and with brokers and carriers both disincentivized to help expand the size of that market, adoption rates seem likely to continue slowing in the next few years.

‍

Despite any clamor about a potential future in which ICHRAs play a much more prominent role in supporting employee health coverage, the numbers as they currently exist and the forces likely to shape those numbers going forward largely don’t support those conclusions.

‍

‍