Employee Retention Credit - A Top Level Overview

Over the past year plus, the U.S. Government has rolled out a variety of programs to help businesses as we work through the pandemic.  The Employee Retention Credit (ERC) is available for businesses that sustained declines in their gross receipts as compared to 2019.  The credit is available both in 2020 and 2021 although the rules for eligibility differ between those two years.  The eligibility rules are easier to meet for 2021 as compared to 2020 (e.g. 500 employee cap vs. 100 in 2020, only a 20% decline in a quarter's gross receipts needed in 2021 as compared to that same quarter in 2019 vs. a 50% threshold in 2020 vs. 2019).  Further, the credit available for 2021 is up to $7,000 per employee, per quarter vs. $5,000 per employee for the full year in 2020.  The numbers add up and the credit generated is quite meaningful.

A business can go back and file amended payroll tax returns for previous quarters in which they qualify to claim the credit.  For payroll tax returns in future qualifying quarters (the program has been extended through the end of 2021) the credit can be claimed while preparing those returns.  For a business with 50 employees, in 2021 an eligible business clearing all the issues that need to be addressed (notably PPP covered period), up to $350,000 in credit can be generated.  This is for each qualifying quarter.  If a business qualifies for one quarter, the subsequent quarter will also qualify.

In addition to understanding the program, it's important to note that a business cannot "double dip" with other programs offered.  For example, wages paid claimed as part of the loan forgiveness for PPP are not eligible to be used as part of the ERC.  As a result, it is important that a borrower of PPP funds be careful about how they complete their PPP round 2 loan forgiveness applications.  Many borrowers have taken the easy path of claiming labor, and only labor, when completing these forgiveness applicatoins.  It's important to use the other factors available, such as rent, utilities, health/welfare/pension benefits for unions, etc. to achieve loan forgiveness.  This preserves wages that can be used for the ERC.

For further reading and a nice summarizing table, see this ERC Overview Article.   

SBA Paycheck Protection Program

Information and developments are flying fast these days. With the recent passing of the Coronavirus Aid, Relief, and Economic Security Act (CARES), another SBA program has been made available for businesses to gain much needed access to working capital.

The Paycheck Protection Program, part of the CARES Act, provides a path for businesses, through a participating SBA Lender/Bank, to be able to apply for funds as defined in the program.  The loan window will open up on Friday, April 3, 2020.  It is advised to wait until your bank sends the application as those applications may be adjusted right through the last minute.  The basic elements of the program are:

·        Must have 500 or fewer employees (beware of aggregation rules)

·        Maximum Loan will be $10 million

·        The loan can be forgiven if used for:

o   Payroll costs

o   Rent

o   Utilities

o   Mortgage/Existing Debt as defined

o   Other designated costs

o   Due to high subscription expectation, not more than 25% of loan forgiveness can be for non-payroll costs

·        Provisions for employee retention as defined.  Caps re: highly compensated employees

·        Debt forgiven will NOT be included as taxable income for federal tax purposes

The links below are official US Department of Treasury links (they are safe).

Department of the Treasury Press Release on the Paycheck Protection Program

Paycheck Protection Program - Borrowers Info Sheet

Paycheck Protection Program - Lenders Info Sheet

SBA Disaster Relief Loans

At the end of January, when I wrote about the possibility of a recession, I obviously had no idea anything like this would happen.  It turns out those graphs were solid evidence we weren’t far away from whatever factor may become the trigger for difficult times in the near future.

So here we are, dealing with a completely new set of circumstances.  The main objective for businesses right now is to make it to the other side of this.  It will hit different industries in different magnitudes and at different times, but all will be hit to some extent.

The government is rolling out new assistance programs as the days roll on, the one I wanted to get out to everyone now is the U.S. Small Business Administration (SBA) is offering low-interest disaster loans up to $2,000,000 for affected businesses.  The application process is online and can be found by clicking this hyperlink.

I strongly encourage business owners to immediately draw down on their lines of credit now to ensure liquidity for at least the next three months (maybe draw all available capacity).  I also suggest for those feeling they may need additional working capital sometime in the next three to six months or so, to apply for this SBA loan program and get in line.

The name of the game right now is to preserve capital and make it past this event.  Consider talking with your business partners, vendors, landlords, etc. as to how they can help your business if you feel your business will be significantly adversely affected.

This too shall pass.  It will pass better for those who execute well and make good decisions now to mitigate the impact.

Some more info...

SBA Disaster Loan Fact Sheet

SBA 3 Step Guide

Consumer Confidence, Unemployment Rate and Recessions

Last month I attended an economic forecast event and a few of the slides really caught my attention.  As business owners and advisors we are always looking forward, around corners, etc. in an attempt to see what lies ahead in order to make sound, prudent business decisions.  The following slides both contain shaded areas denoting periods of recession in the U.S. The first slide below is the Conference Board Consumer Confidence Index.  The index basically assesses consumers present feelings about the economy as well as their outlook for business and employment over the next 6 months; how they feel they will fare economically.

This next chart shows the actual unemployment rate against the natural rate of unemployment.  The natural rate of unemployment is the premise that even when the economy is at full employment, there is still a segment of the workforce who are unemployed.  What the chart indicates below is that the economy is so robust currently that organizations are really tapping deep into the available pool of workers, causing actual unemployment to dip below the natural rate.  You can see clearly in the chart that when this happens usually within a few years of going below the natural rate a recession typically begins (again, the shaded areas).  We've been below the natural rate for a few years now, and by many measures this economic expansion is long in the tooth.  We've also heard that expansions don't die of old age, it's generally some catalyst, often times monetary policy, that triggers a recession.

This time could be different/unique.  Perhaps it already is.  We have historically low interest rates that generally cause capital to move into risk assets and foster business investment.  We have technology advances that contribute to greater efficiency, productivity and profit margins.  Our clients 2019 calendar year results are rolling in with, in some cases, record level profits and in most cases healthy profits.  The business outlook for our clients is also strong, looking ahead to 2021 as well.  As always, remain vigilant, capitalize on opportunities and use this strength in the economy to shore up balance sheets.  This balance sheet strength is always a welcome position to be able to withstand the eventual slowdown that will come at some point.

2020 Construction Industry Outlook (So Cal Edition)

It’s been a good last few years in the construction industry, certainly here in southern California.  Most contractors have been reporting year over year revenue growth and strong profits.  Most contractors in the 10M to 25M revenue range have taken advantage of the recent law change allowing them to report taxable income on the cash basis method helping them boost cash reserves.  Larger contractors are generally ensuring their job budgets include contingencies resulting in conservative profit estimates.  Times are good.

Looking ahead, we see strong backlogs for most contractors.  We can already see a strong schedule through 2020, with many booking work in 2021 and some projects scheduled in 2022 as well.  Of course committed backlog isn’t a guarantee of precisely when that work will actually occur, however the backlogs we are seeing look good into the near future.  Many here in southern California point to some large scale events that will be visiting our region in the coming years as support for our market.  These include the following:

·         Super Bowl, being hosted in SoFi Stadium in Inglewood in 2022 (construction ongoing)

·         World Cup Soccer in 2026, Rose Bowl among the U.S. venues.  Canada and Mexico will each get 10 matches in this tournament as well.

·         2028 Summer Olympics, Los Angeles is the host city.  The events will use many venues already built or under construction, with a new arena in Inglewood proposed for construction for use by the LA Clippers.  There are many infrastructure projects on the boards for the LA area in anticipation of this event.

In addition to the work that will need to be done in anticipation of these events, there are many projects starting or proposed here in southern California.  Even if you aren’t associated with any of the big event projects cited above, construction resources will be utilized by those projects taking supply out of the market.  This should help with both opportunities to win new work as well as bolster pricing.

The rising tide doesn’t necessarily float all boats, although it does for most.  If a contractor isn’t making money in the last year or two, likely the issue is company specific.  Boats with holes don’t float in any tide.  We have seen a few cases where contractors in the market are having some challenges, however we can usually identify key areas they need to address.  Examples include not dealing directly with personnel issues (poor execution in their roles) including challenges with transitioning the business to new leaders.  If an owner is looking to pass the baton on to the next generation, s/he must make sure that the new leadership has a good grasp on that baton before letting go.  Labor is always the most difficult variable to manage, across all levels of the organization.  Be sure to address, in a direct and timely fashion, any issues your business may be encountering.  If one can’t make money in these times, it won’t be any easier when things slow down.

In summary, the outlook remains bright for at least the near term.  The hope is that the activity southern California will be enjoying over the next several years will continue to support the market.  As we know, it’s a cyclical industry and we are bound to see a slow-down at some point.  The last recession we saw 10 years ago was the “Great Recession” and was painful for many.  The next recession likely won’t be as deep or as long however it will still need to be managed.  For now, enjoy these good times and as always, have a plan ready for when things get slow.

Getting The Most Value When Selling Your Business

I was recently asked to speak about how business owners can maximize the value of their business as they prepare for an exit.  More and more business owners are starting to think about the next chapter in their lives and the demographics support this.  Note the following:

·         One quarter of business owners today are over age 60 (Source: Kiplinger Letter May '19)

·         Many of those intend to sell relatively soon, half of them within 5 years (Source: same)

·         Few of them have a solid exit strategy in place (Source: same)

Generally, it is best to have a 3 to 5 year runway of planning to execute a proper exit strategy.  The more time one gives to the process, the more options will be available.  The following are some bullet points I covered in my talk:

·         Valuation is key, depends on your sector, past performance, future outlook, composition/quality of customer base, management team, etc.

·         Re: management team, buyers just don’t buy businesses, of course they are also buying talent.  The more talent you have in management beyond the owner, the more valuable a business is.  If the business relies heavily on its owner, it’s more of an alter ego and lesser so a business.

·         During a potential sale, when going to market, stay focused.  Stay focused on business execution to maintain strong results (i.e. business value).  It’s easy to get distracted by the prospect of the exit, whether sale, ESOP, etc.  If business results start lagging, often so too will the value of the transaction.  Further, not all transactions are completed and if your business weakens as you lose focus, it's all your problem to solve when a deal falls through.

·         Have a strong accounting/reporting function.  The owner may know what is transpiring in the business, but outside parties such as prospective buyers and their due diligence teams, valuation firms (including for ESOP), etc. do not.  They rely on strong financial reporting to understand the intrinsic value of the business.  Incidentally, strong reporting is also useful in running the business regardless of potential exit.

·         Have a written strategic plan.  While the reporting function tends to tell the story of the past, a strategic plan provides insight into the future.  At the end of the day, valuation of a business is a discounting mechanism of the future cash flows of the business.  The strategic direction outlining opportunities/threats and how to address them is a useful document for prospective buyers as well as management.

·         Get year end CPA audited or reviewed financial statements.  Having this outside attestation regarding the quality of the financial statements is another useful resource for outside interested parties.  This will lend credibility to the financial data used by prospective buyers and valuation firms.

·         Curtail discretionary spending and ensure normalization of earnings during due diligence.  There are certain types of expenditures that a strategic buyer would not incur and those should be added back to earnings for a proper measure of enterprise value.

·         Run lean.  Ensure efficiency with your labor force.  This is one of the most difficult areas to manage in a business and not having unnecessary slack capacity is helpful to force efficiency into your business and improve earnings results, a key driver in valuation methodologies.

·         To the extent possible, avoid customer concentrations.  This is often times the norm, however mitigating these concentrations when all other things are equal is good to avoid questions with the associated risks and a potential downward adjustment to value or worse, a deal not happening because of them.

·         Build quality backlog (as you would ordinarily do).  Backlog is a clear indication of future earnings and will be built into the measure of enterprise value.

·         Sell at a good time in the cycle.  This seems obvious, but is sometimes hard for business owners to do.  Similar to walking away from the blackjack table when you are ahead, selling at a time of strong earnings and future prospects will lead to a higher valuation.  Waiting until the next downturn when things are not looking quite as good and when others are also looking to get out will have downward pressure on value.

·         Understand your enterprise value.  If you don’t, there is a risk you will not get a fair price for what you’ve built.  Be sure to have professionals on your team that can help in this regard.  You need to know the right price to make an educated decision regarding offers.

·         Understand the tax implications of the proposed transaction.  Entity structure, transaction type (e.g. stock vs. asset deal), and a myriad of other factors can significantly affect the net amount of the transaction.  It’s not what you sell for, it’s what you keep after taxes that counts.  Again, be sure to have professionals on your team that can help.  Work with these professionals on deal structure to maximize the benefit for all involved, both seller and buyer.  It’s generally best for all parties to “win” in any transaction.

·         Do not be distracted by purchase price.  There are other considerations such as non-compete, cash vs. credit (or some combination), the deal vs. the “after-deal” for you and your employees.  What will professional life look like for you and/or your team after the deal consummates?  Will your key people be happy in the new environment?  Will your customers be happy?  Is this the right fit?

As you can see, there are many considerations when thinking about your off ramp from business ownership.  The longer that off ramp is, the more likely it is to be smoother.

Transitioning your Family-Owned Business to the Millennial Generation

Family-owned businesses are a strong part of the fabric comprising the American business landscape.  They create an environment full of dynamics, both wonderful and challenging.  One area we are advising in more and more lately is business transition from one generation to the next.  We have a number of companies we work with where the business is being transferred to the Millennial generation.  For the last several years we have heard of Millennials and their place in the workforce.  Now, we are seeing examples of businesses, both large and small, where individuals in their mid- to late-30s have controlling stakes in their old line, successful family businesses.

These individuals are bright and eager, and now have the daunting task of leading their family business forward to the next chapter.  It is exciting for us to be an integral part of their team of trusted advisors.  These young owners lean on us to help solve problems in both financial as well as the operations side of the business.

In one case a father is selling majority ownership to his son.  The challenge is the method used to value the business was based primarily on the father’s monthly personal cash flow desires versus the true value of the business.  The valuation used was approximately double the true value.  That company is now in the process of bringing the valuation in line with reality and restructuring the debt.  In addition to constraining working capital for operations and growth, sufficient capital would not have been available to properly reward the efforts of the management group and employees.  Difficult conversations are being had; however, ultimately it is critical that fairness prevails - to all those who rely on the business. 

Other examples of Millennial owners being consultative include two late-30s owners taking over from one of their fathers.  Their management and financial reporting systems lack the quality needed to properly reflect the results of their operations and manage key performance metrics on a regular basis.  Our team is working with them to put the appropriate systems in place and train them on how to maintain and use the data.  In addition, we identified a number of areas in their tax returns that resulted in their business paying too much in taxes.  Lost tax deductions had cost them tens of thousands of dollars annually.  We were able to amend their prior tax returns within the statute and recapture those monies.  Another set of young owners who broke off from their former employer to start their own engineering firm is relying on us for similar consultative and tax services. 

We are working with young owners, helping them become high-level business operators by providing an education in business ownership and management.  It's great when we can help that next generation of young and eager new business owners looking to take their businesses to the next level!

4 Reasons Contractors Fail

As things continue to go well in our market for the building economy and contractors are generally doing well, it's always good to avoid complacency and stay true to sound business practices.  This month we'll take a look at four key areas of running the business of a construction company.  I say it this way because, regardless of sector, owners and CEOs need to manage the overall business of whatever it is their company actually does to generate revenue.

In times where revenues are strong and margins are decent, inefficiencies throughout one's business can be "covered up".  Strong revenue is, to some extent, a "cure" for less than optimal business practices.  Even though your business may not be feeling the effects of not performing well in these areas today, when the market gets tougher you certainly will.  Now is the time to ensure you have these areas covered before you get into crisis mode.  The piece below puts a focus on the following four key business areas:

1. Insufficient cash flow/working capital

2. Poor estimating/job costing

3. Expanding too quickly

4. Lack of Succession Planning

Construction Industry Financial Update and ABI Check

As we get to mid February many of our contractors 2018 numbers are rolling in, with results showing it was a good year for most.  Net profit margins are above average, with the majority reporting solid financial results for the year.  The challenge isn’t so much finding new work, it’s more finding qualified labor to execute on the abundance of work that is out there.

In construction, we get to see what is ahead in the short/intermediate term by virtue of the backlog as well as bid log, new contracts right around the corner.  Backlogs in our market today are strong, with work being scheduled filling out the balance of 2019 for many contractors with some work being slated for 2020 and even 2021 in some cases in our portfolio.  Prices used to bid new work today are generally designed to yield above average margins with the capacity being limited by already booked backlog.  Times are good for most right now and we should see positive results yet again for the whole of 2019.

The commercial construction market tends to lag the overall economy, which remains strong across the nation by most measures today.  A widely followed leading indicator for the industry is the Architecture Billing Index (ABI).  For more on that index click here… On a national level, the index for December 2018 was 50.4.  For the West region, the score was 49.2, trending up since October 2018.  In a nutshell, billings are reasonably steady, but not growing in the West in Q4 2018.  However activity, especially for those contractors with solid reputations and relationships, has been good in recent times so steady from that vantage point is not a bad thing.  It is interesting to note, however, that the trend line relating to architectural billings from the beginning of 2018 to the end in the West is down.

For 2019 it seems steady as we go with the relative strength we've been enjoying, with an always cautious eye for when the outlook doesn’t seem as rosy.  Always have that “what if the stuff hits the fan” budget ready for sharp revenue declines so you aren’t reactionary when things get tough.

Tax Depreciation Limits

I wanted to share this handy summary for any interested parties, I hope you find it useful…

Changes to Depreciation (2018 and Beyond)

Bonus Depreciation

Under new tax law, tangible personal property placed in service after 9/27/17 is eligible for 100% bonus depreciation.  Also, the property can be used.  Bonus depreciation drops to 50% in 2023.

Used property eligible for bonus does not include property received as a gift or inherited, or acquired from a related party or common control taxpayer.

Section 179 Depreciation

For tax years beginning after 12/31/17 maximum Section 179 depreciation increases from $500,000 to $1,000,000.  The maximum asset placed in service phase out increases from $2,000,000 to $2,500,000.  For assets placed in service after 12/31/17 Sec 179 is mostly redundant since Bonus Depreciation offers the same 100% depreciation without various limitations (exceptions for QIP and QRP).

Luxury Auto Limitations

These limits have been increased for passenger autos placed in service after 12/31/17 for tax years beginning after 12/31/17.  The depreciation has been increased from $3,160 to $10,000 in the 1^st year, $5,100 to $16,000 in the 2^nd year, $3,050 to $9,600 in the 3^rd year, and $1,875 to $5,760 in the 4^th and subsequent year.  For passenger autos eligible for bonus depreciation, the increase in 1^st year depreciation remains at $8,000.

Heavy SUVs (Gross Vehicle Weight over 6,000 pounds)

The $25,000 Section 179 limit remains but is inflation indexed.

However, bonus depreciation for these vehicles acquired and placed in service after 9/27/17, new or used is 100%.

Pick-Up Trucks qualify as a Heavy SUV if they weigh 6,100 to 7,050 pounds and the truck bed interior length is under six feet.

Qualified Real Property – 4 Categories

Due to the PATH Act of 2015, there are four categories of qualified real property, each with its own set of requirements and limitations, effective 1/1/16.  Note that none of these apply to residential real estate. The four categories are discontinued after 12/31/17.

Leasehold Improvements, retail improvement, and restaurant improvement property are 39 years for California (for all years).

  

Qualified Improvement Property – (After 12/31/17) This is a new category of property This property is not subject to the limitations in #1, 2, and 3 below.  Instead, the improvement must be placed in service after the date the building was first placed in service (even the very next day is fine).

Conference Report changed life to 15 year property and allowed bonus.  

However actual new law states 39 years and does not allow bonus (but does include Section 179.) Technical correction is required to allow Bonus and change to 15 year property. 

Not to be confused with 15 year land improvements in which Bonus depreciation is allowed.

Qualified Leasehold Improvement Property – (No longer exists for property placed in service after 12/31/17) This property is eligible for Sec 179 expensing, bonus depreciation, and 15-year depreciation.  This is an improvement to an interior portion of a building:

1.    Pursuant to a lease that is not between related parties, and used by either lessee or lessor.

2.    The improvement is placed in service more than three years after the building is first placed in service.

3.    Does not include common area of the building.

4.    Cannot include enlargement of the building, escalator or elevator, or internal structure of the building.

QRP (Qualified Real Property) also qualifies as QIP (after 12/31/17) and includes roofs, HVAC property, fire protection and alarm systems, and security systems.

After 1/1/18 a restaurant building does have a special 25 year life but is no longer eligible for Section 179.

Changes in Depreciation if electing out of Business Interest Deduction Limitations 163(j)

A real property trade or business electing out of the business interest limitation must depreciate

any nonresidential real property, residential real property and qualified improvement property in accordance with ADS (Alternative Depreciation System).

Nonresidential real property has an ADS class life of 40 years.  QIP property in this class is not eligible for bonus depreciation under ADS (this would be applicable if there is a technical correction in the law).  Residential real estate under ADS is 40 years if placed in service 2017 and earlier and 30 years if placed in service 2018 and later.

Existing residential real property that is required to be depreciated under ADS will have their depreciation lengthened from 27.5 to 30 years if originally placed in service 1/1/18 or later.  If originally placed in service 2017 or earlier the depreciation is lengthened from 27.5 to 40 years.  Nonresidential real property depreciation increases from 39 to 40 years.  This change to ADS depreciation will likely be the case for most of our real property trades or businesses that have interest expense.

An electing business must depreciate both existing property and new property under ADS in the election year and in subsequent years.  If this is properly done then a form 3115 for change in accounting method is not required because a change in computing depreciation for the election year for existing property is not a change in accounting method.

2019 Construction Industry Outlook

Last month I went to a construction industry trade conference and attended a session presented by ITR Economics.  I enjoy listening to economic forecasts and do so a few times a year.  ITR is one of my favorite firms in this space as they not only look at the near term, they review longer macro trends and forecast several years out.

I’ve included a copy of their full presentation at the end of this post, however I’ll put the summary below for those that don’t have time to review it in full. 

ITR Summary as of Fall 2018

•          Nonresidential construction lags; expect a strong year in 2019

•         Expect fewer projects up for bid late next year to fill 2020 pipeline

•          Multi-Family/Apartment market still throwing off warning signs, be cautious

•        Wage and input cost pressure will be intense near-term; prioritize profitable work in 2019, accept leaner             margins looking into 2020

•         Build cash reserves next year to ensure you can survive a later slowdown

•         Do anything to avoid layoffs, labor market will be tight through 2020

•         Follow the Leading Indicators

Although not as good as having an economist present the data to you, I will say clicking through the presentation embedded below is interesting nonetheless.  It provides data on the economy at the national level while also providing state by state economic/demographic data using easy to view maps.  The presentation also covered data on the various sectors of the construction industry including US office buildings, private commercial buildings, educational buildings, hospitals, etc.

One area highlighted was how government spending on healthcare, social security and interest continues to increase as a % of Gross Domestic Product.  In 2018 these areas accounted for just under 21% of total GDP.  That number is forecast to rise to 25% of GDP in the 2030s which will pose problems.  Right after this section there is a slide entitled “What to Tell the Kids” and it stated the following:

•         Live below their means

•         Learn a second language

•         Each household should have multiple or diverse income streams

•         Choose career(s) oriented toward the “opportunities”

•         Pay off as much debt as possible by 2030

•          Be ready to buy at the price cycle low in the depression 

•          Be self-reliant

Employment Practices Liability Insurance (EPLI) in the Era of the Me Too Movement (and a little HR function discussion)

EPLI is a type of insurance coverage addressing liabilities arising from wrongful acts involving employees.  These acts can range from sexual harassment to discrimination, wrongful termination, failure to promote, creating a hostile work environment, etc.  It has always been a good idea to at least seriously entertain this coverage, if not carry it. 

The main catalyst for me writing this post is that I’ve realized in recent months that many business owners not only don’t carry EPLI, they have never heard of it.  I have seen first-hand over the years where not having an EPLI policy in place has caused significant financial damage to businesses.  It’s a different time in our society where injustices are not tolerated as they may have been decades ago.  These changes have been occurring long before the “Me Too Movement”, however that movement has put a brighter spotlight particularly on sexual harassment in the American workplace (not just Hollywood and Harvey Weinstein) over the past year.  With these societal developments occurring, it has become increasingly important (it was always important) to train your workforce on a regular basis such that a person doesn’t have to be a victim to any of the circumstances which could give rise to a claim.  Secondarily, even if you have systems in place they could fail and that is when an EPLI policy could be effective in preventing significant financial harm to your business.

One area that has hurt many businesses are wage and hour claims.  The legal profession is aggressive in pursuing these claims and they can reach into the seven figures when they assemble a class of employees to join the lawsuit.  EPLI policies do not protect against wage and hour claims and you cannot bind coverage that would cover monetary judgments in this area.  You can, however, add coverage that will provide for the legal costs incurred against defending these claims.  Generally the amounts covered will be up to $100,000 and covers the defense costs only for wage and hour claims including meal, rest period and overtime.  As mentioned before, class action lawsuits are generally pursued and you must consult with your broker to determine whether there is a "multiple claim or class action exclusion" on the policy.  

Once you've made the decision to carry EPLI, making the best decisions surrounding deductible levels, amount of coverage, etc. are important as it is with any insurance policy.  One difference with EPLI coverage is that, with most standard policies, the amount of legal defense costs incurred goes against (i.e. reduces) the coverage amount.  With general liability policies this isn't the case, so that will be a factor and an important part of the discussion with your broker regarding coverage amounts.

In addition to reviewing EPLI options with your broker, I strongly recommend that if you don’t have a strong HR team in-house, you connect with an outsourced provider.  The maze of employment law rules and regulations is vast, and if you don’t pay attention to the details it could end up costing you and your business in a variety of ways.  Many small to medium sized businesses do not have in-house HR professionals but that doesn’t mean that function can be ignored.  There are providers out there who will take on all of your HR needs or if you have some functions covered internally, you can choose from a menu of services to complement what you already have in place.  Having the HR function properly covered by the right professional(s) can mitigate the risk of having an employment claim made.  As a backup, EPLI is a very good coverage to have in place.

An ounce of prevention is worth a pound of cure as the old saying goes.  Properly, and regularly, training your workforce with human resources professionals is vital in succeeding in today’s workplace environment.  With the right HR professionals on your team, you can not only potentially avoid having an employment claim made against your business, you can also learn how to get the most out of your workforce while your employees also get the most out of your organization in their journey to continuous professional growth and development.  It’s a win-win scenario when done correctly, and can also have many other positive effects on your business including cultivating built-in succession planning, for example, as employee retention (including key employee) increases within a good workplace.  Employees who are happy in their work environment will produce better quality results which should be evident in the bottom line.  At the end of the day we are all in the people business, be sure to treat your people well and have the right HR team in place to help with that initiative.

If you are interested in obtaining the right professional resources to help you with your business lines of insurance (including EPLI) or HR professionals, let me know.  

Technology and Your Business - Video Surveillance

Today we have an ever increasing number of technology tools to choose from to employ in our businesses.  The workforce has become more mobile with computing power held in our hands that was barely imaginable 30 years ago.  Productivity gains have been incredible and we can do more with less people.  That trend seems to be increasing as well with automation top of mind of many business leaders around the world.

There’s an old saying in business… “Employees don’t do what we expect, they do what we inspect.”  Well today we can inspect in better and different ways.  One such way is through video surveillance.  Security cameras can be utilized in many different aspects in business.  A business owner can place them on the manufacturing floor, in the warehouse and on the construction jobsite to name a few examples.  At our business we are considering placing cameras in the common areas of our building for added security for our professional staff and to better safeguard equipment.

You can see just in the examples above that cameras can be used for different purposes.  On the manufacturing floor, management can monitor equipment and people making sure processes are operating smoothly and all equipment is up and running effectively.  In a warehouse, cameras can be used to monitor inventory and serve as a deterrent to theft.  Additionally, any unsafe practices with forklifts, ladders or any other shortcut that an employee may take can be mitigated by the presence of surveillance cameras.  On a jobsite, you can again monitor the efficiency of processes as well as equipment usage practices, etc.  Safety can be increased as laborers will be less likely to take poor risks in the execution of the work.  What would it mean to your workers comp insurance premiums if your experience modification was improved in part due to this monitoring as well as keeping your employees safe and on the job?

In all of the above scenarios, having “eyes in the sky” can serve as essentially having another foreman on the site, in the warehouse or on the production floor.  Today’s cameras are high resolution and with certain makes/models, you can zoom in without losing any resolution providing clear pictures in the area of interest within the frame.  One can access these cameras anytime, day or night, from any device including your cellphone, tablet or desktop computer.  If you haven’t already added video capabilities to your business, now is the time to consider doing so.  If you are unsure where to find a technology provider, ask one of your business partners (banker, attorney, CPA, insurance/surety provider, friend in your industry).  This is an investment that should pay for itself in short order.

Prevailing Wage, Benefits and Compliance Overview

by Mike Bottinelli, Fringe Insurance Services

Prevailing Wage Overview

The wage determination belongs to the contractor (not the employee) with the mandate that it be spent for the employee's benefit in some combination of wages and bonafide third party administered benefits (ie health insurance, qualified retirement plans, flexible spending accounts, vacation plans and severance pay plans).

In California, the base wage must be paid out as cash compensation. Contractors not governed by a collective bargaining agreement may re direct some or all of the fringe portion into the aforementioned plans at their discretion. The employee has no say in how the fringes are allocated. These monies are viewed by DOL and the IRS as employer contributions - not employee elective contributions.

A Merit Shop contractor has enormous flexibility in allocating fringe dollars (absent a Project Labor Agreement (PLA)) to include allocating some or all of the fringes as an add on to wages. In addition, these allocation choices can be made on a job by job and labor classification basis. As a result, if it is advantageous to pay additional cash wages to compete for labor or attract certain trades on a particular job, there is latitude to do that.

Because of the discretionary nature of fringe allocations, benefit plan designs can be
customized to meet a contractor's individual needs. This flexibility often allows benefit plans to operate off the same platform for work performed in both the private and public sector. Conversely, prevailing wage drive benefit plans can be established to operate concurrently with existing core benefit plans.

The ability to redirect fringe dollars into benefit plans affords a significant tax and cost savings to both the employer and employee. Since these dollars don't flow through payroll they are not subject to payroll taxes (FICA, Workers Compensation, FUTA, SUTA or General Liability Insurance (based on payroll) nor are they subject to income tax at any level. Additionally, they can be used to directly offset medical insurance costs. These advantages level the playing field when bidding jobs.

How these savings are applied is at the total discretion of the contractor. They can be used to lower bids and/or increase profits and that decision can be made on a job by job basis.

Benefit Plans

Qualifed Retirement Plans:

Retirement plans in a wide range of platforms capable of addressing virtually any design requirements and/or demographics can be offered.

Plans are available on a bundled (administration and investment provider the same entity) or unbundled (administration firm independent from investment provider) with a wide range of investment and third party administration options.

Health and Welfare Plans:

Available programs include fully insured plans (HMO, PPO, HSA) from all major carriers, partially self insured plans, level funding plans and actuarially designed stop loss self insured plans and can be designed to desired specifications.

If necessary, prevailing wage employee groups may be isolated and offered dedicated plan designs without impacting other employee classifications currently covered by existing core benefits,

Vacation Plans:

Merit Shop contractors are not required to provide vacation pay. If they choose to offer this benefit they can put additional monies on the check for that purpose or accrue it in a third party trust. If they accrue it, they can only offset their cost with fringes dollars based on the ratio of public to private work. An in-house sponsored accrual plan is not allowed in California, while it is allowed in a Federal Davis Bacon or Service Contract Act.  In either case there is no tax savings - if it goes on the check it's subject to tax, if it goes into an accrual plan it merely defers the tax until the employee is issued a vacation check.

Hour Bank Plans

Participants become eligible for coverage by accumulating a minimum required hours of work credit. For example, if eligibility for benefits is based on working 130 hours per month, each 130 hour increment of work credit provides a subsequent calendar month of benefit for the participant (and dependents if family coverage is elected).

The hourly equivalent for monthly premiums is determined by dividing the participant's
monthly premium by the hour bank level (ie. $390 monthly premium divided by 130 hour bank level equals a $3.00/hr equivalent).

Once the participant has completed the necessary 130 hours of work credit, they will be
covered effective the 1^st day of the following month (ie. if contributions started September 1^st coverage would begin October 1^st). Participants accumulate hours of work credit for excess hours worked (ie. participant worked 160 hours in a month, the participant will accumulate an excess of 30 hours of work credit for the month (160 hours worked minus 130 hours required equals 30 hours excess credit toward future coverage).

If a participant falls below the required amount of hours of work credit, they or their employer can make up the difference. If not, then a COBRA notification will be issued. Once the minimum required hours have been reached again, benefits will resume the 1^st of the following month.

Upon termination of employment the cash equivalent of any remaining hours may be used to offset COBRA premiums or refunded to the participant. Refunds are subject to income tax and a 1099 will be issued to them at the end of the calendar year.

Hour Bank Plan Advantages

Hour Bank Plans solve the problem of contractors paying medical insurance premiums for employees as though they were working full time when they are often working less than full time.

Using this methodology, premiums are paid on a retrospective basis. The traditional method pays premiums at the beginning of each month with no way of knowing how many hours an employee will actually work that month. As a result, a contractor is either overpaying or underpaying. Hour Bank Plans remedy this situation with the added benefit of providing a method for reconciling monthly premiums to an hourly rate equivalent for compliance purposes.

Advantages from Employer's Perspective:

Employees learn coverage has to be earned

Addresses "lack of value" perception of benefits by employees
Aligns cost of benefits with bidding/job costing

Affords flexibility in amount of cost employee pays on private work

Advantages from Employee Perspective:

Helps cash flow issues when not working
Dollars vest immediately

Simple to understand - work an hour get paid a benefit for one hour
Earn extra benefits by working extra hours

Compliance

Wage Determinations:

On Federal jobs, the fringe is expressed as a lump sum. On State and Municipal jobs the fringe is designated in a "line by line" format ( ie. pension, health & welfare etc).

The Unions' various collective bargaining agreements determine the hourly rates by labor classification and the fringes are allocated in their trusts based on the various job classifications and area jurisdictions.

Merit Shop contractors are not bound by collective bargaining agreements and can allocate fringe dollars at their discretion (with the exception of training or when performing work governed by a Project Labor Agreement) in any combination of cash or bonafide third party administered benefit programs (ie. retirement plans, group medical insurance, vacation plans, flexible spending accounts and severance pay plans).

Employer Obligation:

Wage determination dollars belong to the contractor, not the employee. This is the basis for them not being subject to payroll taxes.

The contractor's obligation is to spend the money for the benefit of the employee on a per hour/per employee basis in some combination of cash and/or bonafide benefit plans with the base rate required to be paid in cash.

In an audit, the contractor does not have to prove the employee received a benefit from fringe dollars allocated to bonafide third party administered benefit plans. It is assumed the employee received the benefit of dollars allocated to these plans.

Annualization

Principle:

In order to take full credit with the fringe to offset medical insurance plans, the contractor must pay on every hour an employee works in a pay period (both public and private). The rationale for this rule being since Union contractors must pay into their trusts on every hour worked, not requiring it of Merit Shop contractors would give the an unfair advantage by giving them the potential to subsidize benefits provided on private work with dollars accumulated from fringes on public works.

The only exception to this rule is contributions to a qualified retirement plan because they are 100 vested immediately and, as such, are viewed as a "cash in kind" benefit.

Credit Calculation:

Determining Hourly Rate:

Monthly premium divided by hours worked in previous month on per employee basis, or
Annualized premium divided by 2080 hours on a per employee basis

Mechanics:

Ratio of public to private work:

Monthly premium = $260/130 hours worked = $2.00/hour 

80 hours worked on PV job - 80 hours worked on private job

80 hours x $2.00/hour = $130 credit

OUTSTANDING ADVANTAGES TO THE EMPLOYER

LOOK WHAT IT CAN MEAN FOR YOU

25                Number of Employees

$20 per hour     Fringe Rate

160 per month   Hours Worked

$80,000         Contribution per Month

20               Payroll Burden (FICA, FUTA, SS, Comp)

$16,000         Savings per Month

INCREASED PROFITS OR BID REDUCTION!

You Save:

FICA contributions

Workers Compensation premiums

General Liability premiums(if based on payroll)

FUTA

SUTA
 

Results:

                         - You become more competitive
You increase your contract volume
You generate higher profits