In order to attract and retain the best employees, a total compensation scenario for companies should:

• Strive to pay at the 50^th% percentile
• Provide comprehensive PPO medical/Rx, dental, vision, life, and disability coverage with required employee premium contributions, co-payments and co-insurance; and
• A 50% 401(k) match on the first six percent of pay contributed
• Offer competitive PTO

Despite these offerings, more companies are experiencing high turnover, displeased employees and an increase in costs.

Why is this happening? Simple answer: One size does not fit all.

Combined with other cultural factors and opportunities, this inflexible approach simply does not work anymore and has greatly increased the popularity of the gig economy.

If companies want to keep up with the changing workforce landscape and retain the best employees, they must consider alternate benefits approaches. A Total Compensation program that allows employees to choose a package that best suits their needs—while still maintaining cost efficiency for employers—is a potential solution.

But…how did we get to this point?

A tight labor market, real wage increases, recent changes to healthcare options and new employee classification rules have accelerated this line of thinking. Here are a few reasons why these trends will continue to grow:

Health Reimbursement Accounts will be even more attractive.

Beginning in January 2020, any employer can give employees pretax compensation to buy individual market health insurance instead of providing a traditional employer-sponsored group health plan. Health benefits have historically been associated with employment status. Two issues have generally preserved the status quo of this model, with about half of Americans in employer-based coverage:

1. Until the Affordable Care Act (ACA) was introduced, the individual health insurance market was not functional in many places, leaving employers few options if they wanted to cut back their health benefits.
2. Employers have a significant incentive to provide generous health benefits because employer spending on a health plan is not treated as taxable income for employees, effectively increasing the value of this form of compensation. This incentive was strengthened by the ACA’s requirement that large employers share in the responsibility for providing health coverage to employees.

The ACA solved the first issue but only inflated the second. However, the new federal rule fixes the second issue by permitting employers to fund health reimbursement arrangements (HRAs) for employees to buy individual market health insurance. Employees do not have to pay tax on amounts employers contribute to the HRA.

The defined contribution 401(k) approach to health care will only be successful if two things occur:

1. Employees are willing to accept jobs that do not guarantee them particular health benefits
2. Employers are willing to test the labor market and face making the entire total compensation offering a viable total employment package.

A significant roadblock exists for this structure; reimbursement by employment-based health plans drives many sectors of the health economy. This change could be significant as providers and others will receive lower reimbursement in a similar vein as the level for Medicaid and Medicare patients. The individual market coverage that the HRA offers is quite different from employment-based coverage--it will have fewer providers, lower reimbursement rates, no out-of-network benefits except for emergencies, higher deductibles and other enrollee cost sharing.

Sound familiar? Employers today are actually pushing for this option as a potential solution for high costs.

Changes in employment status: independent contractor vs. part-time vs. full-time.

California recently passed legislation regarding independent contractors that may make it much more difficult for employers to legally classify workers as independent contractors. Assembly Bill 5 (AB 5), which will take effect in January 2020, codifies the ABC test and extends its application to numerous additional California employment laws.

Under the ABC test, a worker is deemed an employee unless the hiring entity establishes each of the following:

A — The worker is free from the direction and control of the company; and

B — The worker performs work that is outside the company’s main business; and

C — The worker normally performs work in an independent business or trade that is in the same vein as the work he or she is performing for the company.

The reach of the decision will extend beyond California’s wage laws, including workers’ compensation, paid sick leave, unemployment and other protections under the California Labor Code.

The ABC test on the gig economy (e.g. UBER and Lyft drivers) has been causing waves in the media. However, AB5 will affect almost all companies who rely on independent contractors in California. What’s more--other states such as Oregon, Washington and New York are expected to soon follow California’s lead and adopt similar ABC tests.

For many businesses, the total cost of reclassifying a worker from contractor to employee – taking into account additional taxes, healthcare coverage, retirement contributions, workers’ compensation insurance and unemployment insurance contributions – will increase the cost of doing business substantially. In some instances, the cost of complying with AB5 may threaten the viability of current business model. On the other hand, potential liability for failing to comply with AB5 is significant.

Armed with this information and struggling to become an employer of choice, companies may choose to embrace the status of certain classifications for their workers. Various packages of pay and benefits can be created for each different classification regardless, dependent on their status.

Suppose a person who is currently considered an independent contractor is dubbed a part-time employee. The ABC test might cause altering business models slightly while still being able to keep costs in line with current levels. Typically, part-time employees do not receive the same level of benefits as full-time employees. Why not provide some form of benefits for the potential class of those who may now be deemed as part-time or remain non-part-time?

Why not make the business a more attractive option for those who can legally remain as freelancers and who prefer this status and/or are classified as part-time regardless of their preference? The HRA benefit described above may be an ideal tool for this purpose and can be offered to a class of employees, without it being deemed discriminatory. Other low-cost items can be offered combined with a voluntary benefit package with affordable group rates.

With competition for talent at an all-time high, a very different labor market where some evaluate their positions with an extremely limited shelf life, increasing costs of health care, other benefits and compliance, creating total compensation offerings for all classes of workers may be the path to actually becoming an employer of choice. New legislation may actually facilitate this process.

Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, health-care benefits, retirement and pension issues, and Taft-Hartley fund consulting.