As was the custom in most industries, Acme offered a voluntary investment plan that was designed to provide benefits for workers, both hourly and salaried. Participants allowed Acme to deduct as much as 25% of the gross amount of their wages, which was then invested in one or more of a family of mutual funds. The risk profiles for the various options ranged from very aggressive to very conservative.
For the first three months after enrollment in the program, the funds were held in a deferral account. The 90-day term, equivalent to a new employee’s probationary period, applied equally to longer-term employees who elected not to sign the plan enrollment documents when first hired. During the first three months, any earnings the employee’s account accrued weren’t credited to the account — it was deferred. On the 91st day, subsequent earnings went into the employee’s account.
The Acme investment plan included a provision that allowed the whole investment account to be forfeited to Acme should the employee either quit or be terminated for cause during the first three years of participation in the investment plan.
For the past dozen years, Ellis Dechrip had been a divisional vice president in charge of Acme’s line of agricultural products. The job paid extraordinarily well, considering the effort he needed to expend. He was a good delegator and his staff had a talent for making things happen that achieved successful outcomes. He and his family lived well, perhaps extravagantly, by contemporary standards. But, Ellis felt trapped by the golden handcuffs — he earned much more money at Acme than he could ever receive if he changed jobs.
As the national economic conditions began their descent into the cellar, Ellis suddenly felt a sense of urgency about his future. Also, he was privy to certain corporate information that made him question whether Acme could survive even a moderate financial or market upset. This uncertainty prompted his enrollment in the employee investment plan 18 months ago, even though Acme stopped making matching contributions. Despite contributing the maximum amount the investment plan allowed, the market volatility had reduced his total portfolio to only about $170,000.
Acme’s upper management also was concerned about corporate survivability and initiated aggressive cost-cutting measures. Every pay period, there were layoffs at every level in the company, deferred maintenance in the plant, as well as eliminating contract workers and consultants. Acme needed the fastest possible ways to conserve cash.
As a result, morale was low among those left standing. Nobody had assurance that they wouldn’t be among the next group to get pink-slipped. Another consequence was that the remaining employees had new assignments and much more work to accomplish, but now at a more frenetic pace. Tempers were short, mistrust was high and confusion constant. Teamwork vanished from the environment.
Much of Ellis’ work now involved implementing the cost-cutting measures emanating from the boardroom. Despite his now much-longer work week, he realized that he was falling behind in his execution of those top-brass expectations. With so much more work landing on his desk, things fell into cracks. He found that he wasn’t able to complete everything in a timely manner. Nor was he able to devote sufficient attention to any one project. When one of his ideas for cutting costs actually turned into an expensive mistake, he was fired for cause.
When Acme refused to give him the balance in his investment account, Ellis initiated a class-action law suit on behalf of dozens of similarly situated former employees. In it, he argued that the investment plan was illegal and that the requirement to forfeit his direct contribution to the plan violated state labor law.
How could this situation have been avoided? When does a company have the right to keep an employee’s payroll deduction placed in an investment plan? Is it ever wise to invest through an employer’s plan? Should only financially savvy people get involved in employer-based investment plans? What sort of due diligence is practical for an employee exploring an investment plan? How can those in similar situations cope with distressing economic losses in their accounts?
A maintenance consultant says:
Acme could have done a number of obvious things. It needs to stay profitable and the economy needs to remain sound. Acme must do the right things to survive. Ellis should have gone beyond just taking boardroom cost-cutting ideas by getting the people on the shop floor directly involved in cost-reduction measures. Any cost-cutting measures emanating from the boardroom can be dangerous. It’s a bad sign if those measures banish teamwork from the work environment. Fear used as a motivation factor won’t serve as motivation for finding new ideas and more productivity from remaining people.
A company has no right to keep an employee’s payroll deduction placed in an investment plan. In my opinion, the plan was illegal. To have Ellis start the program, get fired and forfeit $170,000 also is unethical, even without looking it up in the law books. Investing through an employer’s plan makes sense if the plan is administered by a sound investment firm and if employees have complete visibility of their account status. But as we’ve experienced personally, your account’s market value can decrease by 50% very quickly.
One doesn’t need to be financially savvy to get involved in employer-based investment plans. But, employees should clearly understand the plan’s fine print and, most importantly, the risk involved. One should read the agreement carefully and get legal advice if there are questions. Research the plan administrator carefully, as well as the specific funds the money is going into.
Ralph W. "Pete" Peters
The Maintenance Excellence Institute
An academician says:
An overarching issue here is how a company can ride out a recession or a downturn in the demand for its products. The general strategy is to take care of your employees because these are the people who were with you in good times. They have the proven job skills and the market knowledge that will pull you through the recession. These are the people who will give you a competitive advantage as the market starts to recover.
There are many ways to accomplish this difficult goal. Some companies shut down the plant for an extended period. Witness, for example, the auto industry. Some companies go to a four-day work week. Some companies assign line workers to projects that improve the facility, or to work on other products. Some companies have asked for volunteers either to go on a furlough or to leave voluntarily. And, yes, many companies have stopped paying their contributions to employee 401(k) plans.
The point of all this isn’t to elaborate on the things companies can do in a market downturn, but rather to point out that Job No. 1 in a market downturn is to make sure you retain the key people who can keep the operation going. It will be critical in moving the business quickly when the market turns around. In strategy terms, yes, you have to cut costs, but don’t destroy your capabilities in doing so.
Acme doesn’t seem to get this point. Its approach to the recession is to cut costs as quickly as possible, and management doesn’t seem to understand the part about preserving capabilities. In fact, some Acme actions and policies seem to undermine employee capabilities.
I really don’t understand some of these policies. Why should Acme have any control over the investment plan? Such control merely adds costs and alienates employees. Most plans are outsourced and the employer has little work to do and has minimum costs. The operation of the plan is really between the employee and the plan administrator.
And the provision that Acme can keep the employee’s contribution if the employee quits or is fired is (at least in my mind) more typical of the sweat shops of Southeast Asia. In fact, the anti-sweatshop codes and legislation are designed to ensure that employees receive all the pay coming to them and that an employer can’t have questionable policies that divert employee contributions into the company’s account.
Does Ellis have a case? I hope so. I also think he should scream to the Labor Department and the anti-sweatshop and the unions to join his case.
Professor Homer H. Johnson, Ph.D.
Loyola University Chicago
An attorney says:
No law requires employers to provide employees with benefits — that includes paid vacations, medical insurance and retirement or savings plans. An employer’s decision to provide any benefits to its employees, apart from the intangible rewards, such as recruiting advantages and lower turnover, is purely gratuitous.
What an employer can’t do, under many state laws, is to fail to pay employees the promised wage and to make deductions from paychecks. As with any law, many exceptions to the prohibition on wage deductions exist. An employer can (in fact must) deduct from wages to pay income and social security taxes. Beyond that, an employer may lawfully deduct from wages when authorized by the employee to do so and when such deductions are for the benefit of the employee.
Acme’s scheme of requiring employees to forfeit not only company contributions to the voluntary investment plan but their own contributions, drawn from their wages, constitutes an unlawful deduction from wages and also violates the requirement that an employer pay its employees the promised wage.
For employees less well compensated than Ellis, the forfeitures scheme could pose another legal problem. An employee paid at or slightly above the legal minimum wage who allocated 25% of those wages to the voluntary investment plan would, as a result, be paid less than minimum wage in violation of the wage hour laws.
Acme’s financial woes, it would appear, have only just begun.
An employer and an employee can agree to divert a portion of the employee’s wages into a plan for the employee’s retirement or future financial security, but that money can’t lawfully revert to the employer upon the employee’s departure.
Julie Badel, partner
Epstein Becker & Green, P.C.
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