How to Recession-Proof Your Employee Benefits Plan

With inflation taking hold, the Russia-Ukraine conflict continuing to push oil prices higher and fears of a looming recession looking closer and closer to being realized, businesses are being heavily impacted by the macroeconomic environment. Dampened consumer moods and soaring wage inflation leave many companies facing significant challenges ahead.

how to recession proof employee benefits plan

Now, more than ever, there is a real urgency to implement new HR resolutions and strategies that are recession-resistant for both employer and employee. CFOs and finance departments play a major role in ensuring businesses both survive and, where possible, thrive in an economic downturn by saving their companies time, money and energy on things that aren’t mission critical.

Labor Shortages, Wage Inflation and a Looming Recession

Although Covid-19 turned the labor market on its head, its recovery is totally different from previous recessions. Unemployment remained stuck at 9% for 3 years following the Great Recession of 2008, however today's unemployment is at its lowest level since 1969 at 3.6%.

Monthly unemployment rate in the United States from May 2021 to May 2022 (Statista 2022)

With only 6 million unemployed workers in the US and 11 million job openings, the US labor market is extremely tight. The US Bureau of Labor Statistics (BLS) reported a shortage of workers across industries, markets and companies which rose to a historic high of 3% in September to November of 2021.

"It is widespread across industries and markets and companies," said Rajiv Chinniah, ACMA, CGMA, CA (ANZ), CPA (Australia), the CFO of Coty ANZ.

Existing job openings tend to be for higher-skilled positions, and with many workers lacking the necessary credentials, the skills mismatch within the labor market continues to grow.

It is surprising therefore that despite the impact of the Great Resignation and severe talent shortages, wage inflation trails general inflation in 2022. While the BLS reported a 7.9% increase in the Consumer Price Index (CPI), a recent survey of US companies measured wage increases at 3.4% in 2022. Although this is substantially more than annual salary increases in 2021 of 2,8%, current wage inflation rates remain less than half the current rate of inflation.

That being said, more than a third of businesses plan to increase pay to keep up with rising inflation.

According to BLS data, wages & benefits costs are at their highest rate in over 20 years with many employers opting to increase salaries for the highest demand jobs and individuals who have been promoted or have changed jobs/employers during the Great Resignation. While the “War for Talent” has prompted increases in employee benefit costs, in industries such as healthcare, distribution and technology, starting salaries have also increased to attract new entry level employees, who consider financial wellness for work life balance of great importance.

This trend of increased starting salaries and benefits for nurses is particularly beneficial for healthcare professionals, as it helps attract and retain talented nurses in a competitive job market, ultimately enhancing patient care and healthcare services. Similarly, bolstering starting salaries and benefits for teachers is crucial for educators, as it fosters the recruitment and retention of dedicated teachers, ultimately elevating the quality of education and educational services for students.

Additionally, economists are forecasting stormy times ahead with increasing fears that a recession could be nearing. Stephen Miran, a former senior adviser at the U.S. Treasury Department argues that it’s likely the U.S. economy will fall into what he calls a “garden variety recession.” This is where the economy “overheats,” causing inflation to rise. This leads the Federal Reserve to increase interest rates and “crush demand to try to crush inflation,” and a recession ensues.

This cocktail of changes is having a real effect on employer spending and budget forecasting. However, the greatest recession-proofing strategy is within reach; changing the way that PTO is viewed by employers and employees.

Why Unused PTO Leaves Companies Vulnerable to Wage Inflation

When considering the impact of unlimited time off policy and unused PTO one should consider its accrued aspect which accumulates and balloons with increases in pay.

If the cash value of one accrued vacation day is an employee’s annual salary divided by 260 working days a year, then for an employee earning an average salary of $65,000, the value of one day is ($65,000/260) $250. As the employee’s wage increases, the value of their accrued vacation day increases in kind. With wage inflation averaging 6% in the US, the value of one day increases from $250 to ($250*1.06) $265. These increases are typically compounded annually, so the following year, the value of each day would increase to ($265*1.06) $281.

When it comes to employee retention, at some point, every employee will leave their job, whether by their own initiative or not. This is already happening in the United States. Large companies, such as Meta, have laid people off, frozen recruitment and retracted offers already made to employees. If those employees have accrued a significant amount of PTO, of which many are across all industries, employers will be stuck paying employees out at inflated rates.

Take Dave for example. He’s been working in his current role for 3 years and began earning $85,000 per year. On average, he accrues and rolls 6 days of unused PTO each year. Initially each day was valued at $327. Over time, he received an average annual pay increase of 6%. Now that Dave has handed in his notice, his company needs to payout his unused PTO according to the current wage rather than his original wage. So, while Dave was only earning $327 per day when he accrued some of his days, his employer now has to pay him out at $389, which amounts to a whopping $7,009 having been accrued over a 3 year period.

When companies have to either downsize or let go of people, such as frontline workers, to become more efficient, employers are often faced with expensive, cash-intensive employee payouts. Often-time, the compounding impact of wage inflation over time exacerbates the problem.

Given a trifecta of 1) wage inflation 2) large numbers of accrued PTO days during the COVID-19 pandemic and 3) the macro-environment forcing companies to prioritize cash preservation, it has never been more important for CFOs to actively look for ways to mitigate this unpredictable cash outlay in advance. For example, implementing strategies that prioritize financial wellness for frontline workers and address the financial strain associated with downsizing or layoffs.

How Sorbet Provides a Win-Win Wage Inflation Solution for Both Employer and Employee

For CFOs, the objective is to remove PTO liabilities from the balance sheet. This can be achieved if PTO can be turned from an unpredictable liability into a predictable payment. This ensures greater control and predictability of cash flow which allows CFOs to forecast finances more accurately. Reducing PTO liabilities can help to ease financial pressure and frees up money to be invested elsewhere in the company. It’s a smarter way of keeping an eye on costs and keeping the wheels turning.

Enter Sorbet!

Sorbet buys UNUSABLE PTO from employees and refinances liabilities for companies. Our unique solution gives employees the choice to cash advance the days they have not used, maximizing employee benefits, rather than letting the ‘loan’ accumulate, turning an unpredictable, ballooning liability into a controllable, cost saving expense. This approach is one of the best examples of employee benefits.

What does this mean for the employer?

Finance departments can improve their financial wellness, and control and predict their cash flows without too many surprises.

In the end, it is most important for employers to give value to employees.

During this period when interest rates, mortgages and cost of living are sky high, giving employees the choice and freedom to use their PTO in a way that works for them provides real added value, financially and emotionally.

Understanding how to encourage employees to take PTO can literally be one of the most important ways to recession-proof your business.

Learn more about Sorbet and how we can be your company's PTO solution.