A while back, I wrote about how accounting firms can offer HR advisory services and build trust with their clients. For those of you thinking, “Enough with the pointy-headed theoretical mumbo jumbo! Just give me the details!” then this post is for you.
Introduce your clients to payroll they’ll actually love.
As I said then, I’ll say again, for ages now, you’ve probably heard experts saying that accountants need to “become advisors.” It’s an empty phrase that is rarely spelled out in detail. Very few examples are offered, or even vague notions of what advisory is supposed to mean to you or your firm.
You can’t say that about this post. It will explain why you should consider advising on human resources matters, it’ll give you a handful of ideas to consider for getting started with HR advisory services, and we’ll even have some examples to illustrate how they could work. Shall we continue? We shall.
Wait a minute, why should I advise on HR?
If you read my prior post, then this will sound repetitive, so skip to the next section.
Accountants are nicely positioned to advise their clients on human resources. Why? For starters, there’s a need. HR isn’t just a big business function. Smaller businesses need it too, and chances are, they’re busy with other things and don’t dedicate 100% of their time to HR.
An accounting firm can step in to support these efforts and provide immense value in the process.
But from a more practical standpoint, accountants should advise on HR because there’s an opportunity. Look no further than this chart from Xero’s 2018 Accounting and Bookkeeping Industry Performance Report.
As you can see, for the firms that are offering complex advisory1 services, they are focused mainly on Virtual/Outsourced CFO and application/software services. HR advisory is a tiny portion of the offerings from these firms. This lack of interest will allow firms that want to differentiate themselves a chance to do so by offering HR services.
Now let’s look at a table that further makes a case for HR advisory:
|Advisory services||Rated as a top service||Rated as 1 of top 3||Rated as 1 of top 5|
|Budgeting, cash flow forecasting, business planning, etc.||56%||88%||96%|
|Biz performance benchmarking||6%||40%||68%|
|Accounting software implementation||5%||25%||48%|
|Capital raising, financing||0%||8%||20%|
This table is from the same Xero report and is titled, “Most attractive advisory services for revenue growth.” As you can see, none of the firms surveyed believe HR advisory will be a top service for revenue growth. Only 5% believe it will be a top 3 service, and less than 20% think it will be a top 5 service.
For any firm that wants to focus on HR advisory services, they will have very little competition. And that’s a good thing.
HR advisory services
Now that that’s settled, let’s get into the actual stuff you can do to serve your clients some sweet HR advisory action. Alright? Alright.
HR fitness test
If you’re going to advise your client on their human resources function (or lack thereof), it’ll be essential to know what its current state is. And the best way to do that is to perform an assessment with an HR fitness test. The HR fitness test will help identify the critical HR areas where your clients will need some help.
Here’s how to do it:
- Quiz clients on their knowledge of HR topics that their company should be familiar with. Don’t make it complicated; something as simple as 10 questions * 10 points each = 100%.
- Have the test cover the topics most critical and relevant to each client. Here are some examples of topics this fitness test can cover:
- Employee performance and termination
- Employee leave
- Compliance (e.g., I-9s, mandatory policies)
- Wage and hour issues
- Identify the knowledge gaps, educate them on why they’re important, and make some recommendations for taking action (with your help, of course). If they score 100, great, they’re doing well, and you’ll have to dazzle them some other way. But if they score 70 or below, that seems like an obvious sign they could use a little help.
If you’re just getting started offering HR advisory services, then don’t be afraid to consult with an HR professional to help you build these fitness tests. Or, hey, maybe you want to hire one to be part of your team. Whatever you decide to do, the HR fitness test is a great way to get things started.
If employee handbooks sound like something that people don’t read and then toss in the trash/bottom drawer, then you’re not far off!
Employee handbooks are a missed opportunity that you can help clients take advantage of. Developing a useful handbook will help them stay proactive, and actively engage employees on their very first day.
What topics should an employee handbook have in it? Glad you asked! Here’s a hit list for a lean, but precise, employee handbook:
- The company—Name, history, values, mission, vision.
- Employees—Introductory or probationary period, definitions of what a full-time employee is, who’s eligible for benefits, how issues are reported internally, and more.
- Pay and performance—When employees are paid, when performance reviews occur, etc.
- Benefits—This will cover the all benefits offered by the business, the holidays it observes, who’s eligible for health insurance, and much more.
- Other policies—This will vary from business to business, but all kinds of things could be covered here. Things like nepotism, background checks, social media, and harassment in the workplace are all examples of other policies that every business could consider.
As a business grows, an employee handbook grows too. For this service to be truly successful for both you and your clients, you will want to perform regular reviews (e.g., once a year) and updates to keep their employee handbooks current with all the changes to laws and best practices.
Tracking labor law changes
We’re accountants, so we’re all-too-aware that businesses have to comply with a multitude of jurisdictions. Cities, states, counties, mosquito control districts—you name it—there’s probably a taxing authority out there that your clients have had to deal with.
The same goes for labor laws. Every state has its own laws, policies, and regulations that govern how businesses interact with their employees. And not only is there a plethora of jurisdictions, but there are also countless topics to track. Everything from COBRA insurance to child labor to family leave. How does someone keep up with it all?
I have no idea.
But it strikes me as reasonable that accounting firms, who have gotten pretty good at tracking tax law changes, could also do an excellent job of tracking the changes in labor law. Chances are, if you have a client with business interests—ergo, tax obligations—in multiple states, they might have some labor compliance obligations, too.
Admit it, it makes sense.
Up until this point, I’ve been making a lot of suggestions that include a lot of words. Virtually all the accountants I’ve encountered got into the field explicitly to avoid working with words. Don’t worry, don’t worry, we’re done with most of the words.
Yes, we have some suggestions for how you can crunch some numbers that will keep your clients informed on some critical HR issues.
Here’s the hit list:
- Cost Per Hire
- Employee Turnover
You don’t have to offer analysis on all of these items; they are just a few foundational areas where you can provide some insight and also help your client run a tight ship.
Let’s take a quick look at each.
Cost per hire
Do you know all the costs that go into hiring a new employee? Even if you think you have a pretty good idea, the real question is: Do your clients know all the costs that go into hiring a new employee?
I’m sure many of your clients are well on their way to being the next hot entrepreneur that everyone loves to quote and retweet, but I have a hunch that some of them are just trying to keep up with the day-to-day. That means they probably don’t have a lot of time for further analysis.
Here’s where you come in. You can review a client’s activities around hiring and ensure that all the expenses related to hiring a new person are captured. Here are a slew of things off the top of my head:
- Cost of posting the position
- Recruiter fees
- Assessment test
- Background check
- New hire materials & supplies
- Hourly wage
- Time spent reviewing apps, phone screens, interviews, checking references, onboarding
And this might not cover everything! But you get the idea: You add everything up, and you’ve got the cost per hire. Calculating a more precise cost per hire will help your client understand how much they really spend and allow you to recommend improvements to their process to tighten it up.
Anyone with even a modicum of knowledge about industries like say, restaurants, will know that the cost of absent employees is no small matter.
By examining a specific time, you can give your client a good sense of whether or not their employee absenteeism rate is rational, or the sign of something going terribly, terribly wrong.
Here’s a quick example. Let’s assume your client is a construction company and has:
- An average of 12 employees in the second quarter of 2019.
- There were 64 work days during this period, and
- 15 worker days lost.
Here’s the calculation:
25 worker days lost / (12 employees * 64 total work days) = 3.25%
As you can see, the calculation isn’t complicated. But what’s important, of course, is the context. Is 3.25% a reasonable absentee rate for a construction company? Is it reasonable for the city, state, or region? What does your client think?
This is your opportunity to make further inquiries and determine if more investigation or analysis is needed. You may find that your client has a manager that’s difficult to work with, or that they’re hiring people that are unreliable.
Whatever the case may be, you’ll be helping a client get to the root cause of something potentially disruptive, and that is causing a large number of employees to leave.
Keeping with the employee theme, many businesses that pay an hourly wage have to stay on top of the amount of overtime their people are working. In some instances, of course, overtime can’t be avoided, but others, it’s a sign of something else going on.
You can examine overtime in a couple of different ways: by employee or by project. So let’s say you’re looking at one employee who is working on four different projects:
|Project||Hours worked (in a 40 hour work period)||Rate per hour|
In this example, we find:
- Average regular rate of pay: $15
- Overtime rate of pay: $22.50
- Regular wages: $600
- Overtime wages: $157.50
- Total wages: $757.50
- Breakdown of employee time by project:
- Project #1: 10.6%
- Project #2: 14.9%
- Project #3: 42.6%
- Project #4: 31.9%
Okay, so here we are again: Pretty simple calculations, but WHAT DOES IT ALL MEAN? Were the 20 hours spent on Project #3 reasonable? If not, why not? Can the employee explain why the extra time was needed? Was it caused by something outside of their control?
Additionally, you could look at this on an employee basis. Let’s use the same table but change the projects to employees, and change up the hours:
|Employee||Hours worked (in a 40 hour work period)||Rate per hour|
This time, we find:
- Regular hours worked: 160
- Overtime hours worked: 27
- Avg. regular rate of pay: $15
- Avg. Overtime rate of pay: $22.50
- Regular wages: $2,400
- Overtime wages: $607.50
- Total wages: $3,007.50
When examining this on an employee basis, obviously the questions can be far more numerous, but it may be necessary to learn how employees are performing. In either case, analyzing overtime can be a great way to provide insights for your clients.
Like absenteeism, employee turnover is something that most employers will expect. But how much is too much?
In this example, last year, your restaurant client had:
- 1 voluntary separation
- 5 involuntary separations
- An average of 25 employees during the year
Your findings are: 1) a 4% voluntary separation rate; 2) a 20% involuntary separation rate; 3) Total turnover of 24%.
Noticing a theme? Simple math problems that need your business instincts. Make some inquiries, try to identify root causes, share insights, make recommendations. Seems basic, but your clients stand to benefit greatly.
Affordable Care Act
I know what you’re thinking. “I’ve read all this stuff, and you’re going to hit me with ObamaCare now? NOW?”
Don’t worry, we won’t go too deep. Just a few things and we’ll move on. I promise.
1. ACA: Full-time equivalent
The Affordable Care Act’s Reporting Requirement and Employer Mandate only apply to employers with 50 or more full-time equivalent (FTE) employees. These employers are called applicable large employers (ALEs) under the Act.
Sooooo, calculating the number of FTEs will be very important for your clients that hover around that 50-employee mark.
To paraphrase some copy from some clever Don Draper type: Figuring out your full-time equivalent is so easy, a caveman can do it. Seriously. There are countless FTE calculators online, and blog posts online explaining how to do it. But, and you may be noticing a theme here, context will be critical for any business.
- If they’re under the 50-employee threshold, do they plan to stay there forever?
- What if they have 40 employees and are hiring at a steady clip?
- How much will the employer mandate ending up costing them?
- Do they have a plan to absorb that cost?
- Can they plan to adjust the prices of their goods or services to correlate with that?
This is stuff you can do! You can help clients keep an eye on their FTE and plan for the future accordingly.
2. ACA: Safe Harbor
The ACA requires health insurance plans subject to the employer mandate to be “affordable.” What does “affordable” mean? Under the ACA, it means that employers may not charge more than a certain percentage of an employee’s income.
This rate is calculated and announced by the IRS annually and is 9.86% for 2019. Because employers often don’t know their employees’ household incomes, the Act provides three safe harbors to qualify as “affordable:
- W-2—If the employee’s health coverage premium is not more than 9.86% in 2019 of Box 1, the coverage is considered affordable.
- Rate-of-pay: Multiply an hourly worker’s lowest pay rate during the calendar month by 130 hours. If their health coverage premium is not more than 9.86% of this amount, the coverage is considered affordable.
- Federal poverty level: Take the Federal Poverty Line (FPL) for a household of one in the current plan year, and divide it by 12. If your employees are not paying more than 9.86% of the FPL for their health coverage premiums, the coverage is considered affordable.
Helping your clients avoid violating the affordability requirement will protect them from incurring severe penalties. Remind them that the penalty for non-compliance is $3,750 per employee in 2019.
3. ACA: Penalties
It bears repeating: non-compliance with the Affordable Care Act is an expensive proposition. Helping your clients avoid that non-compliance could be an invaluable service to them.
Here are just a few things that businesses need to stay on top of:
- Their number of full-time employees
- The number of full-time employees who are offered health insurance
- Whether or not the health plans they offer meet affordability requirements
- Average number of part-time hours worked by part-time employees in a month
The Affordable Care Act is an intimidating thing. The scope is significant, and the rules are complicated. Most business owners are ill-equipped to deal with it.
However, you, my dear accountant friend, are an expert at dealing with dense material that makes other people shudder in fear.
If you feel like advising on ACA issues is something you can do, it could be offered as a total package. The three ideas above are an excellent example of a trifecta of things you could track for clients on an ongoing basis, saving them the headache of doing it themselves.
Protecting the SUI rate
Finally, we’re going to discuss how you can help your clients keep their SUI rates in check.
“Wait, what’s the SUI rate?” you might be saying. Well, many states tax employers to fund their state unemployment insurance (SUI). The SUI tax rate is specific to a particular business, and it’s based on the “wage base” set by each state, along with the number of former employees who have filed for unemployment benefits in the past.
In most cases, the more former employees who have collected unemployment benefits your client has, the higher their SUI tax rate will be.
For example, let’s say an employer in California pays three employees an average of $45,000 (where the wage base is $7,000) and has a current SUI rate of 6% (California’s lowest SUI rate is 1.5%). This costs the employer $1,260 per year. Now, if this employer improved their practices, it could reduce its SUI rate to 1.5%, and save over $3,000 in the process. These savings will only increase as the business continues to hire more people.
Here’s a table to illustrate the example:
|No. of Employees||Current SUI Rate||Future SUI Rate||Avg. Salary||Estimated Current SUI Cost||Theoretical Future SUI Cost||Potential Savings|
That’s what we mean by “protecting the SUI rate.” But, how do you do that?
Well, many employers are surprised at how easily a former employee can establish a successful unemployment claim. The biggest misconception many employers have is that terminating an employee for substandard performance will disqualify the individual from receiving unemployment benefits.
The reality is, in most states, unless the employee’s behavior rises to a level of “misconduct,” they will be deemed eligible for unemployment benefits. Ergo, terminating an employee for “poor performance,” “incompetence,” or “inability to perform the job,” will almost always result in the state unemployment agency deeming the former employee eligible for unemployment benefits, which may adversely affect a business’s SUI rate.
To further complicate things, not only does an employer have to demonstrate that the employee’s behavior constitutes misconduct as defined by state law, but they have the burden of proving that the claimant either knew or should have known that they could lose their job as a consequence of the behavior. That means it will be crucial for your clients to develop documentation that clearly illustrates these points, to successfully contest unemployment claims and protect their SUI rate.
So what’s a business owner to do? Here are some best practices for both before and after terminating an employee:
- Provide the employee with a written warning regarding the misconduct—Although no law requires notice before termination, doing so may assist in defending a potential unemployment claim. Also, if employees have been led to believe that specific steps will occur prior to termination, the employer should make a good faith attempt to follow those steps, or else risk losing the unemployment claim.
- Distribute an employee handbook and obtain signed acknowledgment forms— Employers have a much better chance of successfully defending an unemployment claim if they can cite the policy that was violated. Distributing an employee handbook is an excellent way of demonstrating how employees were made aware of the policy, and the consequences of noncompliance.
- Investigate all workplace complaints—In most states, if an employee resigns with “good cause,” they will be eligible for unemployment benefits. If the individual can demonstrate that they complained of a serious workplace concern, but the employer took no action to address the allegation or retaliate somehow against the claimant, the former employee is generally eligible for unemployment benefits.
- Remember the “reasonable person” standard—This is a common guideline used when making unemployment decisions. Considering whether a reasonable person would terminate an employee given the circumstances prior to making the termination decision is a crucial step in the process.
- Treat employees fairly and consistently concerning termination decisions— Remember, the state personnel processing unemployment claims are themselves employees, not employers, and they will have opinions about what they consider fair treatment. It is essential to keep this perspective when terminating employees.
- Submit all unemployment-related paperwork on time—If a business fails to return the state unemployment division’s request for information relating to the reason for the termination or separation, they could be considered a “disinterested party,” and the claimant may automatically receive unemployment benefits. Be sure to keep your address with the state unemployment insurance agency up to date so there are no delays receiving requests for information.
- Include documentation that supports your case—Copies of the signed employee handbook that shows the company rule that was violated, copies of corrective action, copies of performance reviews that prove that the employee was aware that their job was in jeopardy and didn’t correct the behavior by the agreed upon deadline.
- Appeal the decision if you disagree—If you disagree with the initial determination, remember you have the right to appeal. Simply submit the appeal paperwork on time and request a telephone hearing.
- Prepare for the appeal hearing—Seems obvious. A client will be wasting everyone’s time by showing up with a defense, of “This is a crock,” or “They’re full of it.”
- Attend the appeal hearing—Yeah, important. I’m sure you have clients who would need to be told.
There’s no secret to advising clients about protecting their SUI rate. The processes need to be developed, implemented, and followed. If they do all those things, then they will be in great shape. Thanks to you, of course.
HR advisory services are an incredible opportunity for accountants who want to pursue this as an area of expertise. It will make a real difference in the lives of both your clients and their employees. That’s what people mean when they yak about “creating value.”
So get out there and do it. You’ll make some money too. Which is nice.