Long before the ACA was a Senate cloakroom concept, the IRS had a burr under its saddle about employee misclassification, because payroll withholding tax collections vary directly with W-2 employee payrolls. Employer incentives run in the other direction, including minimum wage, overtime, union organizing, OSHA, benefit plan eligibility and EEO duties owed to one’s own employees, but not (in most cases) to others’ employees, or to self-employed individuals. So, the IRS has scrutinized close cases brought to its attention, using what it calls the “common law employee” test. In its view, a person supervised by and working at the pleasure of an employer, with no real P&L risk/reward in the engagement, almost always is the employer’s tax and benefit plan employee, regardless of what the employer calls him or her. On occasion, Congress has stepped-in on employers’ behalf, such as to bar the IRS to hold all leased workers to be the leasing customer’s employees, solely due to the lease agreement, and to stop the IRS from retroactively re-classifying contractors as employees, as long as the employer had a reasonable (if mistaken) basis for the contractor classification.
When the IRS published its proposed employer mandate rule in January 2013, it referenced one of its tougher expressions of the “common law employee” test, found in a 1970 revenue ruling. Quickly and dirtily, if a retail store hires a labor contractor to wrap packages during the Christmas rush, does not choose, does not supervise, does not pay and does not even know who is doing the work in its wrapping room, then the workers are not store employees. We took this as a stern warning of strict IRS scrutiny of ACA “employee” vs. “contractor” classifications.
With regard to employee leasing arrangements, the 2013 proposed rule conceded that the mere fact of the arrangement would not make leased workers the ACA employees of the leasing company’s customer, but neither would they be presumed to be solely the ACA employees of the leasing company. The IRS also declined to presume the “variable hour” status of temporary staffing workers. Not much more was said on the subject. Much trepidation ensued. Most especially, we feared that an employer that leased more than 5% of its workers could owe the § 4980H(a) tax if it failed to cover them in its group health plan (which could make the plan an uber-regulated Multiple Employer Welfare Arrangement, “MEWA”) or the leasing company covered them, assuming that the IRS would take that as satisfying the customer’s coverage obligation. And might the IRS require both the leasing company and its customer – viewed as joint employers – to offer coverage to the same leased employees? Absent clarification, the future of employee leasing seemed to be in doubt. The final rule elaborates on both issues – i.e., who has the employer mandate obligation and what the IRS will examine to determine if a staffing firm has correctly classed its workers as variable hour employees.
The final rule first warns that the IRS will not tolerate two specific employer mandate evasion scams that involve employee leasing. In one, the staffing firm’s customer hires the employee part-time, directly, and, in the same work seek, leases the same employee, part-time, from a staffing firm – i.e., 2 x 20 = 40 hours. In the other scam, two staffing firms each assign the same employee to the same employer for half of each work week; again, 2 x 20 = 40. Anything that looks like it might be or become an evasion scam probably will be punished. As if to add emphasis, the final rule deems the Congressional command against retroactive IRS reclassification of reasonable mistakes inapplicable to employer mandate enforcement.
The good news is that the final rule treats a staffing firm’s (or PEO’s) offer of coverage to a leased employee as fulfilling the employer mandate obligation of the firm’s customer employer, even if that customer is the common law employer of the leased employee, provided that the staffing firm adds a surcharge for employees enrolled in that coverage, apparently as evidence that the staffing firm’s group health plan is genuine. No comment about the possible MEWA implications appears in the final rule.
As for the variable hour status of leased employees, the IRS will look at these facts to determine if a variable hour classification was reasonable at the time of first hiring by the temporary staffing firm:
- Whether others receiving the same sorts of placements from the staffing firm retain their right to reject any assignment;
- Whether they typically have stretches when they receive no placement;
- Whether the duration of placements varies;
- Whether placements typically last less than 13 weeks.
Correctly classing such workers as “variable hour” employees permits their full-time coverage offers to be delayed for a bit more than a year from hiring (while their full time status, or not, is being measured), one of the few exceptions to the 90-day waiting period rule.
Summing it all up, your reliance upon workers who are not your W-2 employees is about to be scrutinized as never before. To avoid employer mandate taxes, you must either amend group health plans to cover leased workers (with MEWA risks) or you must assure that your leasing firm offers qualifying coverage and be prepared to pay extra for workers who are covered. This IRS final rule, along with the employer mandate postponement, allows employers to use 2014 to study their employee classifications and leasing arrangements, and to amend them so as to minimize adverse ACA consequences. Use this time wisely.
Tomorrow, in Part III of this series, we’ll explore how the IRS employer mandate final rule may affect labor negotiations.