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Is Your Program A Ticking Timebomb?
Continued . . .
A life insurance company in South Carolina awarded its employees with gift $5 and $10 gift certificates to local department and discount stores without taxing them. The assumption was that they shouldn't be taxed, since they weren't being awarded cash. The Internal Revenue Service took a different view. Citing numerous laws and sections of the tax code, they argued that gift certificates are merely disguised compensation. The insurance company was forced to research and document every gift certificate awarded to every employee over a 4-year period since their incentive program began. When the smoke cleared, the original $65,000 worth of gift certificates cost this company well over $180,000 in taxes, penalties, interest, and legal fees to resolve the dispute.
These two stories make it clear: What you don't know can hurt you.
Is your incentive program a ticking time bomb? Thousands of companies are at risk from either an OSHA or IRS audit in these areas. Here are the basic things you need to know to stay out of hot water...
Successful program examples without injury hiding:
The USA Waste episode has produced a whole new way of looking at safety rewards and recognition. Many safety managers for the first time are questioning their safety incentive programs. They're asking some healthy questions, such as:
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Does our incentive program promote injury-hiding?
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Is our program doing us any good? Is it effective?
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What behavior changes can we point to and measure as a result of this program?
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Are we rewarding safe statistics or positive behavior?
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Are we vulnerable to an OSHA fine in the area of injury-hiding?
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Isn't there some way we can shift to rewarding good behaviors that make safety happen?
The goal: shift to a totally proactive mentality instead of a reactive one. Safety managers are abandoning the age-old practice of rewarding solely for working a period of time without injury, and instead are rewarding for behaviors that make safety part of the process.
One safety director summed it up this way: "For twenty years we've rewarded departments that worked 90, 180, and 360 days with no lost time. We'd hand out their cash bonuses, but our hearts weren't in it. I know several cases where some of the most unsafe departments got an award, while those that tried harder didn't make it, because of something beyond their control. We need a way to reward safe behavior because that, in the long run, will put our numbers where they need to be."
It was in response to this that we developed a manual-based system some 20 years ago to provide a simple way to reward and recognize employees for following safe procedures, wearing PPE, and other proactive behaviors. This system is a way for a manager to stop, look an employee in the eye, and say, "Thanks, you're doing a great job, putting safety first. Keep it up!"
A new step in that progression is a system allowing a manager to scan an employee's bar code and then scan off all the safe behaviors and unsafe behaviors that employee demonstrates. The unit accumulates the data and provides management reports to show which individuals, teams, and departments are exhibiting safe behavior on a daily basis. Incentive awards are then made based on how proactive you are at safety. This is a new paradigm in safety incentive design. Instead of rewarding a team because those workers simply didn't have an injury, you can measure and reward individuals, teams, and sites based on what they did to make safety happen!
OSHA
Incentive Guidelines
OSHA has divided incentive
programs into two categories: Traditional and Non-Traditional.
They favor non-traditional incentives and oppose traditional
incentive programs.
Traditional programs are based on awards tied to working a period of time without an injury. Non-Traditional programs are based on awards for proactive behaviors such as safety suggestions, training, and observed safe behavior.
Many safety managers are quickly phasing out the old traditional programs in favor of non-traditional ones.
Beating the Fraud Factor
But carefully rewarding safe work achievements is still a viable factor. Smart safety managers know there is an enormous fraud factor attached to worker's compensation. In this area, the incentive program is the only effective counterbalance to this abuse. It works where training, behavior-based safety, and all other approaches fail, because the unscrupulous employee thinks twice before ruining an award for other employees.
One company I spoke with had tried training, behavioral safety, and other techniques with some success--and finally was ready for incentives. I asked the manager whether he felt incentives really were needed.
"Absolutely!" he said. "Last month, we had a lost time injury. The employee was out of work for a week. He claimed that he hurt his knee at work, getting a splinter in it, didn't report it, and that later it had gotten infected and swollen up, resulting in a lost time injury."
Incentives work where all other approaches fail, because the unscrupulous employee thinks twice before ruining an award for other employees.
After investigating the injury, this safety manager discovered:
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The injury occurred while the employee played basketball on his own time (the splinter was from the wooden basketball court).
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He decided he'd report it as a worker's comp case because his medical cost was lower.
The
worker's compensation system creates an environment where this kind
of abuse flourishes. Unfortunately, neither training nor the best
behavior-based safety program can eliminate this type of abuse. But
incentives can, and do, stop fraudulent abuse of worker's comp. This
safety director was convinced an incentive program was the only
answer for him.
"Before our incentive program, people ran to the doctor when they got any excuse," said Marie Huber, former Safety Director at Heartland Foods. "After our program, they thought twice about it and would let us treat many injuries in house, which drastically lowered our medical costs."
Common Myths about Taxes and Employee Awards
Here is a list of the most common inaccurate beliefs that we encounter as we talk with managers at Fortune 500 companies....
Myth Number One: "Gift Certificates don't have to be taxed since they are not cash, right?"
WRONG.
The IRS tax code section says...
"For purposes of paragraphs
(b)(2)(iii) and (iv) of this section, the term "tangible
personal property" does not include cash or any gift
certificate...
Similarly except as otherwise provided in paragraph (d) of this section, a cash equivalent fringe benefit (such as a fringe benefit provided to an employee through the use of a gift certificate or charge or credit card) is generally not excludable under 132(a) even if the same property or service acquired (if provided in kind) would be excludable."
This is why Toyota spends $1,000,000 on Sears gift certificates per year, and pays $920,000 in income taxes so the $1,000,000 will not have to be taxed to the employees...can you believe $920,000 lost to taxes?
Myth Number Two: "As long as you keep it under $400 per person per year, the government lets you award whatever you want tax free, correct?"
WRONG. The tax code limits these "qualified award plans" as follows: "Awards must be tangible gift items, no cash or gift certificates or gift cards are allowed. Awards for safety can ONLY be awarded to 10% of your employees a year, e.g. if you have 500 people, only 50 can win something."
That doesn't do you much good if you're trying to reward everyone (a fundamental ingredient in good incentive programs).
Myth Number Three: "Aren't logo'd gifts tax free?"
Actually, the tax code is quite clear here too. Logo'd gifts UNDER $4 US in value are tax-free. Anything OVER that is taxable. Whether or not it has a logo is immaterial.
Developing a tax-free incentive program--without injury-hiding.
Carefully structuring an award program to navigate around the legal landmines allows you to develop a program that is tax-free AND legal. Using an incentive consultant will help ensure you make sure that you avoid tax trouble.
In the same vein, proper development of incentive program rules is a critical piece. Here again, using an incentive consultant will put you on the "fast track" and help you develop rules based on the best practices of other firms without reinventing the wheel.
We applaud managers who vigorously question the status quo and are not afraid to shake things up as they look for other ways to improve their safety and recognition process.
As someone once said, "Sacred Cows make the best hamburgers."
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