Benefits for Professionals LJT, Architects, a small architectural firm organized

Question

Benefits for Professionals

LJT, Architects, a small architectural firm organized as a sole proprietorship, serves clients in the New York metropolitan area. Anticipating a good year, Len Elmore, the principal, hopes for a gross of between $300,000 and $400,000. In an architectural practice, revenue is produced by providing a variety of services that range from creating a design and generating the construction documents used by a contractor in executing the project to visiting the site periodically to verify that construction is progressing according to specifications. Architects are also responsible for coordinating their work with that of the engineers and other consultants associated with projects. Many small architectural firms such as LJT, Architects, have no permanent employees. They hire workers for a particular project with the understanding that they might remain after a particular phase of the project is completed but they might also be laid off. Employees are usually needed for the functions of design, development, and production of construction documents, which include approximately 50 to 70 percent of the services provided under a standard architectural agreement.

Firms acquire the personnel needed for these projects in several ways. They hire personnel on a full-time permanent or temporary basis or on a part-time basis to moonlight (i.e., as a second job). An employee might also be borrowed from another firm whose contracted work has been completed with no new work foreseen immediately. Len believes that hiring fulltime temporary or permanent employees gives him more control over the production aspect of his practice. At this time, Len does not follow any formal personnel policies. He prefers to “work things out” as issues and problems arise. When hiring, he will agree verbally to certain broad terms of employment, compensation, and benefits common to local professional offices, such as two weeks’ vacation per year. He usually insists on a two-week to one-month probationary period during which the salary paid is slightly less than normal. A spot check of some of his colleagues leads him to believe his salary rates are comparable with those of similar employers. Because the nature of the employment tends to be temporary, Len suggests a contract arrangement with his employees, in which no taxes are withheld and no government-required bene- fits are provided. Len’s plans for expansion include adding employees until his staff numbers 10. For him, this is the best staff size to provide high-quality professional services. However, the employment situation is easing for workers in architectural firms; more newspaper ads seek applicants, and fewer callers contact Len for jobs. Those coming for interviews ask more than “When do I start?” Many ask about vacations, sick leave, paid holidays, medical insurance, and profit-sharing plans. Others want to know about the possibilities of advancement with LJT, Architects, and about such long-range benefits as pensions and education leave. In view of the situation, Len has decided to look into providing his employees with a benefit package. At the same time, however, he fears his practice may be too small to begin providing these benefits, which may prove to be extremely expensive. He has set aside money from his own earnings to provide these extras for himself and has difficulty understanding why his employees cannot do the same.

QUESTIONS

1. What recommendations would you make to Len?

2. How much do you think your recommendations would cost?

Explanation / Answer

1. In my opinion as Len’s firm is a small firm and he need to concentrate on profit in the initial period to stay in the business. From the beginning if Len spend a lot of money into employee benefits plan it would become a burden for him and he may incur loss in his business. I think he can spend on basic employee benefit plans that are made mandatory by the government which include unemployment compensation, worker’s compensation, and social security which include retirement benefit, disability benefit and health insurance.

Len can opt for a 401k plan for pension plans in which the contributions are tax deductable up to a limit. Employees defer a portion of pay into the plan and employers will match the employee contribution to some extent. Using the part C medical advantage plan for health insurance would reduce the cost. Len can opt for a group life insurance for all the employees. Len can opt for health maintenance organization in the beginning to lower the costs associated with medical services for his employees. HMO provides medical services at fixed cost.

Len can provide payment for time not worked only for unavoidable conditions like sickness. The payment for time not worked pay the employees for certain time that include recognized holidays, vacations, and days missed because of sickness, jury duty and funerals represented. The cost would be one fourth the cost of all benefits. Typically an employee must meet a certain length of service requirement before becoming eligible for paid vacation and the time allowed for paid vacation depends on the employee’s length of service. Hence the Len can offer the vacation benefit after completing a certain period of service.

2. Len need not spend much on employee benefits that are legally required. The retirement plan of 401K depends on employee contribution which is tax deductable for an amount up to $15000. Hence it would not cost much for Len for a size of 10 and would give provide tax benefits. Hence the cost would be reduced. Unemployment compensation is paid through taxes paid by the employer and Len need not spend extra. Using health maintenance organization help to lower the costs associated with medical services for his employees. The group life insurance plan provides minimum coverage of $10000 to $20000 for the employees. Limiting the payment for time not worked would help Len to save more as it takes one fourth of total benefits. For disability benefit 20 credits needs to be earned before getting disabled and Len need not provide from the beginning.

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