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As part of a package to avoid the dreaded Fiscal Cliff, Congress chose not to extend the “payroll tax holiday,” effectively decreasing employees’ paychecks by 2 percent.  Could this change create your own “fiscal cliff” by causing employees to depart in search of fairer compensation?

The payroll tax holiday began in 2011 in an attempt to stimulate the economy by increasing take-home pay by reducing the employee’s contribution for payroll taxes by 2 percent, from 6.2% to 4.2%.  The employer’s share remained unchanged at 6.2%.  Now that employees will see a decline in their take-home pay, it may push some employees to search for better compensation.

Regardless of changes to the tax code, employers should review the competiveness of their pay and benefits at least annually.  To attract and retain top performers, the total compensation package should be in line with competitors in your industry, taking into account regional variations in cost-of-living.  A pay raise may be in order if wages have been stagnant for years, unions are expected to target your employees, or your wages are below industry standard in your region.

It also is important to know what your employees think about your compensation package.  Are your employees drawing appropriate comparisons between themselves and other employees who really are not comparable?  For example, employees in the construction industry earn high hourly rates, but often suffer from work shortages, reducing annual compensation.  Comparing hourly rates alone would not give the full picture.  Other industries offer relatively low pay but outstanding benefits.  That is why comparable comparisons are key.  Communicating with your employees about how they view their compensation can help you address concerns and provide an opportunity to draw relevant comparisons.

Employers may also wish to take this opportunity to remind employees about benefits, such as health savings accounts or 401(k) plans, that allow employees to divert pre-tax dollars to specialized accounts.  Since these contributions are made with pre-tax dollars, the 6.2% payroll tax will not diminish the value of these funds.  Other company perks are an important part of a compensation package, but employees may tend to focus more on the paycheck.  It is amazing how many times employees demand a benefit only to find they already have it!  Reminding employees of their full benefit package can improve their perception of their compensation package without adding costs.

Finally, you may wish to notify your employees of the change in the tax rate so they are not surprised by their decreased paychecks.  Many payroll companies are automatically including notices about this change with employees’ paychecks.  As you distribute the first payrolls of 2013, you may want to include such a notice so that employees will understand the decreased pay is a result of Congressional action, rather than a decision made by your company.

Brody and Associates regularly advises its clients on all labor management issues and provides various training programs.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.