WHAT DO THE CHANGES MEAN TO THE INSURANCE OF PAYROLL?
What often happens when a loss occurs is that more staff are needed to do the work of the damaged machine etc than before. This can mean additional overtime or the hiring of additional staff.
In some cases, the staff in one city or town are moved to another plant owned by the same company or a competitor, and a nightshift is run to keep up production. Even here penalties, including nightshift, meal and living away from home allowances, increase the labour cost as a percentage of Turnover.
As an aside, it is often the staff considered low level and expendable who prove their value in these circumstances. The receptionist who knows all the customers by name, or the store man who picks the orders and labels them by hand, when the computer is destroyed and cannot list the location of the order or print the delivery labels.
When arranging or reviewing the insurance program, when it comes to Payroll insurance, the person responsible may suggest that in the event of a major loss, they would simply let the staff go. This is a naïve approach, and ignores the ongoing requirements of the business. More importantly, it completely underestimates the investment the company has made in the workforce. By letting staff go, the business is hit with a ‘triple whammy’.
Firstly, competitors pick up the staff who are thankful for a job and bitter at their old employer. This moves the skills from the insured business to a competitor, at a time when the insured business is already vulnerable. Secondly, there is an expense in both time and money terms in recruiting new staff when the business is gearing up again, assuming new staff are available. Thirdly, the time and monetary expense does not stop with the initial stage of locating, interviewing, carrying out reference checks etc, but in the time and expense involved with inducting and training the new staff in the culture and procedures of the insured business. All this has to be done at a time when management is stretched and stressed due to the consequences of the loss, the reinstatement, and business recovery process.
What often happens in taking the ‘let them go approach’ is that there is no distinction made between the wages of the different types of staff. It is also common for the business owners’ own wages not to be insured or, in the case of larger businesses, the working directors and/or management salaries are not insured fully. For example, in a recent case, only 10% of wages were insured. The businessman who was the sole director of the company, and his wife, drew salaries that equated to 30% of the payroll. The level of cover selected did not account for any other key staff that the business needed to retain. As a result, the business was grossly under-insured. The business produced no income for 8 months and, as a direct result, the manager and his wife first were evicted from their apartment due to non-payment of rent, and then the business itself went into liquidation. In this case, the stress led to the failure of the marriage, and ultimately the liquidation of a once profitable business.
If staff are retrenched, the insurance will only cover part of the cost of termination. That is, the ‘wages in lieu of notice’ component. It will not cover the past expense of accrued annual leave, long service leave or, in some industries/companies, accrued sick leave. These past expenses have to be paid by the Insured. The cash flow implications for the business is that revenue is falling or stopped due to the insured event, but cash requirements go up. Financing may be difficult with the loss of the business assets. In some cases, it may be better to keep the staff, as Insurers will pay ongoing wages and salaries if full payroll insurance is in place.
Directors and senior management also need to consider their corporate and social responsibilities. To illustrate, we will touch on a major loss suffered by a company that was grossly under-insured on wages. Even though the company needed the staff for the business to recover quickly, they had no alternative but to retrench over 50 staff members. This occurred in a mid-sized country town where the insured business was the second largest employer. With no prospect of other employment, the incidence of domestic violence skyrocketed. The forced layoffs had a very bad effect on the whole town. Many of the staff were rehired a few years later, however, it has not been possible to recapture the level of staff loyalty that the company previously enjoyed.
The reality is that when a loss occurs and management is confronted with all the issues of business recovery, the decision not to insure wages is regretted.