Why the employer mandate delay is good news for Illinois and the U.S.

February 13, 2014
By Naomi Lopez Bauman

The Obama administration recently announced an additional one-year delay of the Affordable Care Act’s employer mandate for some firms. This delay is welcome news for Illinois.

Illinois is in the midst of a decades-long struggle to overcome numerous challenges ranging from corruption, high unemployment, underfunded pensions and high taxes. At a time when the state can ill-afford any additional obstacles, recent data provide support to the claims that, since 2011, employers have been cutting employee hours in the lowest-wage sectors to avoid the costliest aspects of the health care law.

Employer mandate

Under ObamaCare’s employer mandate, employers with 50 or more full-time employees or full-time equivalents are required to offer “qualified and affordable” health insurance coverage to their employees. This provision of the law was supposed to go into effect Jan. 1, 2014, but was delayed this past summer for one year to Jan. 1, 2015, by the Obama administration.

The administration announced an additional one-year delay to Jan. 1, 2016, for firms with 50-99 full-time or full-time equivalent employees. Firms with 100 or more employees will be required to provide qualified and affordable coverage to at least 70 percent of their employees beginning on Jan. 1, 2015.

There is growing evidence that employers may have already been taking steps to avoid the costliest provisions of the law. There are no such penalties for employers with 49 or fewer employees. Firms that replace their full-time workers with part-time workers, regardless of whether or not they offer health insurance coverage, can avoid many of the fines altogether. That is because the formula for determining the penalty is based on full-time workers, not full-time equivalent workers. In fact, firms with 50 or more employees can significantly reduce their penalty by replacing their full-time workers with part-time employees, even if they remain above the 50 full-time equivalent threshold.

Under the law, a full-time employee is defined as someone who works 30 hours per week. Full-time equivalents, or FTEs, will also count toward a business’ full-time employee total. For example, a business that employs 20 full-time employees (30 hours or more per week) and 60 part-time employees (15 hours or more per week) will be considered to have 50 full-time employees. The sum of 20 full-time workers plus 30 FTEs is sufficient to reach the 50 full-time equivalent threshold. There is no penalty for not providing coverage to part-time employees working fewer than 30 hours per week.

And there is no doubt that smaller employers, especially those that are on the cusp of qualifying as a large employer, will look to cut workers and/or hours. Similarly, both small and large companies will have less incentive to expand their full-time workforces. Though the employer mandate has now been delayed until 2016 for some businesses, many Illinois employers may have already been responding.

ObamaCare in Illinois

To examine how the Affordable Care Act, commonly referred to as ObamaCare, is affecting employment in the state, this report examines average hours of labor in three sectors where average hours are the closest to 30 hours per week – the threshold under the law for determining full-time employment status.
For employers, the distinction between full- and part-time status under the ObamaCare law is significant. In many cases, employers can avoid hefty penalties by replacing full-time workers with part-time employees, and/or expanding their workforce with part-time workers instead of full-time workers. This means workers are seeing reduced hours and lost pay.

The three sectors that fall into both the lowest-paid and lowest work hours categories are: retail trade, food and beverage, and general merchandise. They comprise about one-fifth of the state’s total employment. Of these three sectors, all three now have average work hours of less than 30 hours per week.

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The findings are compelling.

Based on data from the Illinois Department of Employment Security:

• Retail: Lost hours in the retail sector is the labor equivalent of about 28,000 Illinois jobs lost in that sector since 2011.
• Food service: The lost hours in the food and beverage sector is equivalent to an additional 28,000 jobs lost.
• General merchandise: Lost hours in the general merchandise sector is equivalent to 7,000 jobs lost.
• Since 2011, Illinois has lost the equivalent of about 63,000 jobs through reduced work hours – roughly the number of nonfarm payroll jobs that the state added over the course of the past year to its fragile economy.

It is important to note that, before ObamaCare was passed, the average work hours remained steady for these sectors in Illinois, even in the aftermath of the financial crisis. In fact, average work hours increased slightly in two of these sectors between 2008 and 2010. But all three sectors saw dramatic reductions in average work hours after ObamaCare was enacted.

ObamaCare across the U.S.

Illinois is far from a unique example. This disturbing trend is becoming more apparent nationally, as well.

Retail employment, which makes up almost one-tenth of the nation’s total nonfarm employment, has seen similar reductions. In 12 of the 14 states including Illinois where average weekly hours worked are available, nonsupervisor workers in the retail trade showed average annual declines in hours worked between 2011 and 2013. In fact, six states saw average hours worked fall to 30 hours or less for that sector. One state had no change in hours and one saw an increase (See Table 1).

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Taken together, these states represent one-quarter of the nation’s retail sector. While some of these states did see employment gains, the net loss of equivalent jobs was about 1 percent of the sector’s total employment.

While it is difficult to determine the many factors that might be affecting the almost across-the-board cuts in work hours, it is unusual to observe employment growth with a simultaneous reduction in hours, especially because that trend was not as prominent between 2008 and 2010 when employment was shrinking (See Table 2).

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Another reason to repeal

The growing evidence from Illinois and across the country shows that employers, particularly those with the lowest-wage and lowest average hours, may have already dramatically cut labor hours and, likely, jobs since 2011. This trend is highly suggestive and points to employers cutting employees’ hours to avoid ObamaCare’s harshest penalties. That is why an additional delay in implementing the employer mandate is welcome news to the nation’s small employers and low-wage workers.

If one believes that this delay reflects a sincere desire to provide flexibility to the nation’s employers, one has to wonder why the individual mandate, which required individuals to purchase health insurance by the end of March or pay a fine, remains unaffected. The latest implementation delay of the employer mandate marks the 13th delay this year alone.

The president is seeking to unilaterally delay this damaging provision until after the midterm elections. That is why lawmakers should take a swift vote on ending both the employer and individual mandates.