Hazard Pay: To Pay or Not to Pay, that is the Question

BY Syretta Williams
4/30/2020 - HVAC Employment , COVID-19

As HARDI continues to touch base with its members while supporting them through dealing with COVID-19, questions were raised regarding the topic of paying employees hazard pay.  Understandably, employees and employers alike are concerned about their safety and health as they continue daily operations which may lead to exposure and contraction of the virus.  After noticing a trend with this topic, HARDI reached out to Pam Krivda, HARDI’s HR Consultant, for advice on the question:

Screen Shot 2020-04-30 at 10.41.14 AM

According to Krivda, you likely have no legal obligation to pay additional or hazard pay due to the coronavirus but communicating this “no” to the employee is a whole other matter. The employee expects a response and while what you know may be true about the organization’s obligation to pay, you also know that as a leader, you must make the right decision for your organization and communicate your decision with tact. With appropriate care and messaging, your employees can leave the conversation being even more supportive of your organization than they were before.

While this posting is not meant to advise on paying or not paying hazard pay wages, it is meant to help assist organizations come to the right decision for them and communicate that to their employees.  When considering if your organization can accommodate the additional wage expense and communication tactics, think about the following:

1. What is the current financial “health” of your organization? While the organization may be willing, is it ABLE to pay hazard pay wages AND do your employees understand the financial ramifications of their request?

Often, employees think that their organization makes a ton of money and therefore has very deep profit pockets.  When the truth of the matter is, money truly does not grow on trees and profit margins, especially in distribution organizations, are quite small.  There may be little room for additional unaccounted for expenses such as hazard pay once all other expenses have been paid.

According Brian Loftus, HARDI’s Market Research and Benchmarking Analyst:

      • In Distributors organizations there is about a 2-3% pre-tax profit margin, meaning that only 2.5 cents of every dollar of sales is pre-tax profit.
      • For a mid-size distributor ($40 million in annual revenues), their pre-tax profit is $1 million. To achieve that $1 million of profit on an average order size of $500, that distributor processes 80,000 orders a year.  That means for every $500 order, the profit is $12.50. 

In terms of pricing from your suppliers and to your customers, your margin for error to cover all other operating costs is already slim. A lot of things must work together perfectly to achieve that $12.50 of pre-tax profit from that $500 order. If one of those orders does not earn $12.50, or the item is sold at cost or lower, then it takes a lot of other successful orders to cover that shortfall.  It is a delicate balance without the extra, unplanned additional expense of hazard pay.

Working under the circumstances of COVID-19, some distributors indicated in the second round of HARDI’s Weekly Pulse Survey results, that 71% of their weekly sales were down more than 5% compared to 54% reporting decreased sales from the prior week. Distributors also reported that 42% of them were experiencing various requests from their customers on payment term extensions or changes.  Many organizations also reported the need to make employment changes where they have had to reduce hours, lay off employees, reduce compensation or furlough employees in an attempt to retain as many employees as they can during this time and continue operations.

Brian advises that another way to consider the ability to provide hazard pay is to think in terms of sales minus cost of goods sold equaling gross profit.  Managers manage by their gross profit, not their sales.  The gross profit is what they must work with to pay their expenses.  Wage expenses are more than half of a distributor’s gross profit.  It is roughly 55% of gross profit dollars.  Many other costs are predictable like rent or can predict closely like utilities.   Wage expenses are the expense item that a manger can manage.  That could mean they are able manage that expense line and pay hazard pay or not.  If the top line is softer in this current environment, then the gross profit will be smaller also, which will lead to wage expenses being above 55% of gross profits to close to 60% or more.  To manage that wage expense line so there is enough money left for the other expenses, that logically means cutting FTE (full time equivalent) to be able to pay hazard pay plus the other bills.

All of that to say, while organizations may be willing to make accommodations where hazard pay is concerned as they realize the increased risk that their employees face, they may not be able to pay as some organizations are facing additional financial challenges that their employees may not be aware of.  Making the decision to provide hazard pay may mean that organizations must make cuts or reductions elsewhere.

2. After evaluating the above items for your organization, think about, how you will share this information with your employees?

It is important to ensure that this information is shared from the top down appropriately so that all parties know the facts and understand the “why” behind the decision if it happens to be that your organization is not in the position to provide hazard pay.

      • Leadership should align with its people leaders on a transparent, genuine and concise message
      • Develop a response to close this communication and understanding gap with your employees on your position of hazard pay
      • Reassure employees that the organization has their best interest and safety at heart
        • Help employees understand what the organization is willing to do to provide a safe and secure work environment
      • Ensure that there is a format or feedback loop where employees’ concerns can be voiced, and solutions or responses can be provided by the organization
      • Make sure that the organization has planned for what to do when these measures do not seem to satisfy the employee, where separation terms may need to be considered

3. Lastly think about if more training and development is needed for the employee or the manager to deal with this pandemic and work through their situation together.

Providing additional training to the employee can assist in reassuring them that again, the organization is doing everything it can to ensure that they are working in a safe environment without putting them or its operations at risk. Empower employees to provide additional suggestions on safety measures that may improve their current work environment after they conclude their training.  Not only will the additional investment in the employees’ training show that the organization cares about them individually, the employees may have undiscovered insights on safety gaps since they are on the front lines.  Lastly, soliciting their feedback will make them feel more secure and valued by the organization which can lead to retention.

Managers can benefit from additional development to support them on how to deal with managing in a crisis, a situation that they may have little to no prior experience or exposure.  Leading people is not an innate skill rather it must be learned and leading in a crisis is no exception. Organizations should evaluation their people leaders’ skills and determine if they could use some development in leadership competency areas such as Change and Culture Management, Employee Engagement and Motivation, HR Basics, Team Building and Communication to name a few.  In support of this additional training needs that organizations may be facing, HARDI developed the Business Continuity Track offering these and 16 other business competencies to help managers and employees gain access to pertinent training topics during this time.  This track can be accessed through members’ normal HEAT.U subscription or as a part of the 30-day free trial subscription offer, expiring on May 11, 2020.

As a preview to courses in the Business Continuity Track, under the Change and Culture Management competency, review the short course called Change Survival Toolkit: Unplanned Change or Managing Stress and Anxiety During COVID-19  under the Safety, Sanitation and Wellness competency where learners are provided training on how to agilely adjust to an unplanned change and strategies to manage their stress and anxiety while dealing with COVID-19.

Hopefully, this posting will help your organization find a better means to communicate with your employees regarding difficult topics like paying employees.  These are tough times where hard decisions have to be made where a lot of factors must be weighed when considering willingness and ability to pay.  For additional assistance on this or other compliance, HR or training and development matters be sure to Ask Us, seek assistance through HARDI’s HR Consulting Services (one of our new 5 Keys of Peak Season) or contact Syretta Williams.  We are all in this together.