Independent Contractors

Jed, employed by Drysdale LLC, a janitorial contractor, recently began working nights at the Commerce Bank, supervised by the Bank’s Chief of Security.  Jed’s family had health insurance until his wife lost her job early this year.  Drysdale didn’t offer insurance, so Jed bought a policy through Healthcare.gov.  With the federal subsidy, his premium is less than $50 monthly.

About six weeks ago, Drysdale got a Marketplace notice of the subsidy granted to Jed.  After consulting its lawyer, Drysdale amended its standard contract to negate any indemnity obligation to customers for ACA taxes and penalties imposed on the customer with respect to Drysdale employees.  The Bank noticed the change and inquired.  Drysdale explained, using Jed’s example, that the Bank could have ACA obligations to Jed independent of Drysdale’s obligations to Jed.

On July 5, the Bank asked for a replacement after Jed was found asleep in a computer closet.  Drysdale removed Jed from the Bank and has not reassigned him.

Today, Drysdale and the Bank received OSHA notices that Jed (represented by a labor union) had charged them with retaliation in violation of FLSA § 218c, which reads, in relevant part:

218c. Protections for employees

(a) Prohibition

No employer shall discharge or in any manner discriminate against any employee with respect to his or her compensation, terms, conditions, or other privileges of employment because the employee (or an individual acting at the request of the employee) has—

(1) received a credit under section 36B of title 26 or a subsidy under section 18071 of title 42;

[…]

(b) Complaint procedure

(1) In general

An employee who believes that he or she has been discharged or otherwise discriminated against by any employer in violation of this section may seek relief in accordance with the procedures, notifications, burdens of proof, remedies, and statutes of limitation set forth in section 2087(b) of title 15.

(Emphasis ours.)  When Jed applied for his subsidy, he was given three notices of this retaliation protection.  Much to the employers’ surprise, they have only a few weeks to prove that Jed would have suffered the same fate even if they had been ignorant of his subsidy.  But Jed says that he and the Security Chief had a deal: If Jed finished his work an hour early, he could nap before leaving for his day job.  And OSHA’s rules say that Jed’s proof “burden may be satisfied, for example, if the complaint shows that the adverse action took place shortly after the protected activity, giving rise to the inference that it was a contributing factor in the adverse action.” 29 CFR § 1984(e)(3).  Very probably, OSHA will issue a preliminary order reinstating Jed who, by the way, is now a union organizer.  A damages trial will follow some months later.

Why is this the Bank’s problem?  Because DOL enforces this law, and DOL’s “employee” definition is even broader than the definition used by the IRS.  You may “employ,” for this purpose, a worker whom the IRS would recognize as an independent contractor.  Jed’s supervision by the Bank’s Chief of Security goes a long way toward proving that the Bank was Jed’s joint employer.

Why is this Drysdale’s problem?  Because it opened the Marketplace subsidy notice envelope.  As we explained in several prior articles, there are ways to appeal subsidy errors without acquiring notice of the identities of subsidy recipients who might be among your employees.  If you have not established those procedures yet, now would be a very good time to do so.

 

Nearly three years ago, having spent hundreds of hours immersed in ACA minutiae, we anticipated that clients would not react well to fees for services that consisted principally of telling them that they had asked the wrong question. So we decided, against tradition and much conventional wisdom, to sink lots of unpaid partner time into this education project. A casual reader of this blog should learn basic ACA terms and concepts, so that he or she can converse effectively with advisors. A regular reader should be able to identify, during such a conversation, a purported ACA expert who’s a poseur. Sadly, they abound. A colleague should find this a thought-provoking reference to ACA rules and guidance documents. Those are our goals.

Substitute nothing you read here for legal or other professional advice about any specific situation. ACA rules and sub-regulatory guidance change frequently and whimsically. Occasionally, the three main enforcement agencies (DOL, HHS, IRS) disagree. Sometimes, they publish a new rule unaware of a related, existing rule. Part of our service to you is to alert you to what we see coming. We usually have guessed right, but we often are guessing. And of course, apparently insignificant factual details can turn out to be determinative. If you regard this blog as cheap – i.e., free – legal advice, you’re rolling the dice at your own risk and the risk might be far bigger than you realize.

Finally, we invite constructive comments, including reasoned criticism, but not rants. We delete hissy-fits and block commenters who seem to be unable to comment otherwise. That goes triple for political hyperbole. Sometimes, we must explain political realities in order to explain a regulatory reality, but we try to be objective. You should, too.

It’s the “silly season” on the Hill and a busy season for ACA regulators. This article gives you brief notes about Notice 2015-87, information reporting relief and the § 4980I delay buried in the omnibus spending bill.

IRS Notice 2015-87 first answers questions on the periphery of earlier guidance effectively killing stand-alone HRAs. Most notably, an HRA or employer payment plan may be used to reimburse (or to pay directly) premiums for individual policies that provide only excepted benefits – e.g., stand-alone dental or vision plans.

Notice 2015-87 also clarifies that plan-integrated employer HRA contributions that may be used to pay premiums or employee cost sharing obligations under the group health plan are counted to reduce the employee’s share of the premium for purposes of affordability determinations under Code § § 4980H and 5000A. The same is true of some, but not all, employer cafeteria plan flex contributions. IRS forecasts future regulations on related treatment of “opt-out” payments made to employees who decline group health plan coverage.

Which brings us to a federal contractor conundrum. The Service Contract Act and Davis-Bacon Act require certain federal contractors to pay prevailing wages and benefits. The benefit obligation may be satisfied either by benefits or by cash in lieu of those benefits. Until this Notice, employers paying cash in lieu of benefits were exposed to double burdens. Here’s the temporary relief offered a p. 16 of Notice 2015-87.

Treasury and IRS continue to consider how the requirements of the SCA, the DBRA, and the employer shared responsibility provisions under § 4980H may be coordinated. However, until the applicability date of any further guidance, and in any event for plan years beginning before January 1, 2017, employer fringe benefit payments (including flex credits or flex contributions) under the SCA or DBRA that are available to employees covered by the SCA or DBRA to pay for coverage under an eligible employer-sponsored plan (even if alternatively available to the employee in other benefits or cash) will be treated as reducing the employee’s required contribution for participation in that eligible employer-sponsored plan for purposes of § 4980H(b), but only to the extent the amount of the payment does not exceed the amount required to satisfy the requirement to provide fringe benefit payments under the SCA or DBRA. In addition, for these same periods an employer may treat these employer fringe benefit payments as reducing the employee’s required contribution for purposes of reporting under § 6056 (Form 1095-C), subject to the same limitations that apply for purposes of § 4980H(b). Employers are, however, encouraged to treat these fringe benefit payments as not reducing the employee’s required contribution for purposes of reporting under § 6056. If an employee’s required contribution is reported without reduction for the amount of the fringe benefit payment and the employer is contacted by the IRS concerning a potential assessable payment under § 4980H(b) relating to the employee’s receipt of a premium tax credit, the employer will have an opportunity to respond and show that it is entitled to the relief described in this Q&A-10 to the extent that the employee would not have been eligible for the premium tax credit if the required employee contribution had been reduced by the amount of the fringe benefit payment or to the extent that the employer would have qualified for an affordability safe harbor under § 54.4980H-(4)(e)(2) if the required employee contribution had been reduced by the amount of the fringe benefit payment. See also Q&A-26 for certain relief with respect to employer information reporting under § 6056.

Finally, we get a plain English answer to what had seemed for years a simple question – i.e., whether the employer mandate affordability safe harbor (9.5% of household income) is inflation-adjusted. The answer (p. 18, Q12) is “yes.” Thus, the 2015 number is 9.56% and the 2016 number will be 9.66%. Information reporting rules under Code section 6056 will be revised accordingly.

Similarly, the annual assessable payment amounts under Code sections 4980H are inflation-adjusted (p. 20, Q13), so that the $2,000 amount for 2015 is $2,080 and the $3,000 amount is $3,120. For 2016, those numbers will rise to $2,160 and $3,240.

IRS will revise its 4980H “hours of service” rules to clarify that employers need not count as “hours of service” payments made under workers’ compensation and disability plans to former employees. However, disability benefit payments, if funded in part by employee contributions, may count as hours of service if the employee is still on the payroll.

Staffing companies providing labor to educational organizations will face revised § 4980H rules that require them to observe the special employment break period rules that apply to the educational organization, unless the employee is offered full year employment. (P. 23, Q15.)

Bad news for state and local government agencies (p. 25, Q19): If you are deemed a separate employer under applicable state law and you are an ALE, you must have a separate EIN and must report separately on Form 1094-C. The rules about reporting through another Designated Government Entity do not change this. One DGE may report for ten ALEs, but it must file ten 1094-Cs.

It’s not new, but its repetition is welcome: IRS does not intend to penalize 2015 ALE reporting errors made in good faith by ALEs that tried to report correctly, timely in 2016. (That’s Q&A-26, p. 30.) Which brings us to §  202 of H.R. 2029, the omnibus spending bill, which directs IRS to treat information returns as completely correct if the errors involve small dollar amounts. It’s not perfectly clear whether this applies to Form 1095-C, line 15 affordability reporting. Let’s hope.

And, to gift-wrap this, § 101 of the omnibus spending bill delays Cadillac tax (Code § 4980I) accrual from 2018 to 2020 and directs the IRS to re-examine the applicable inflation adjustment formula. Merry Christmas; happy holidays; may the Schwarz be with you.

On July 15, 2015, DOL’s Wage & Hour Division issued Administrator’s Interpretation No. 2015-01, titled, “ The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.” Nothing new there, right? All well-counseled employers know that the DOL takes an especially dim view of avoiding overtime by calling workers “independent contractors.” DOL’s “economic realities” test is tougher than the IRS “common law employee” test. Consequently, you may owe overtime to a worker properly excluded from your W-2 payroll. But, with apologies to Tina Turner, what’s the ACA got to do with it? The IRS, not the DOL, enforces the employer mandate of 26 U.S.C. § 4980H and the coverage offer reporting requirements of § § 6055 and 6056.

If you wondered why Congress dropped the ACA’s anti-retaliation section into the Fair Labor Standards Act (as new § 18C), wonder no more. According to OSHA’s interim final rules for the handling of such retaliation complaints, “The definitions of the terms ‘‘employer,’’ ‘‘employee,’’ and ‘‘person’’ from section 3 of the FLSA, 29 U.S.C. 203, apply to these rules and are included here.” See 78 Fed. Reg. 13,224 (February 27, 2013) and 29 CFR § 1984.101. So, to find the limits of your ACA retaliation claim exposure, don’t consult IRS “common law employee” guidance; instead, read the new DOL Administrator’s Interpretation.

Here’s the executive summary:

The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.

Here are factors that DOL considers critical to this analysis, with associated examples.

A.  Is the Work an Integral Part of the Employer’s Business?

For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.

In contrast, the same construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company’s business, which is indicative of an independent contractor.

B.  Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?

A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs. The worker regularly agrees to work additional hours at any time in order to earn more. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. Rather, his earnings may fluctuate based on the work available and his willingness to work more. This lack of managerial skill is indicative of an employment relationship between the worker and the cleaning company.

In contrast, a worker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients. This worker exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor.

C.  How Does the Worker’s Relative Investment Compare to the Employer’s Investment?

A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company. The worker’s investment in cleaning supplies does little to further a business beyond that particular job.

A worker providing cleaning services receives referrals and sometimes works for a local cleaning company. The worker invests in a vehicle that is not suitable for personal use and uses it to travel to various worksites. The worker rents her own space to store the vehicle and materials. The worker also advertises and markets her services and hires a helper for larger jobs. She regularly (as opposed to on a job-by-job basis) purchases material and equipment to provide cleaning services and brings her own equipment (vacuum, mop, broom, etc.) and cleaning supplies to each worksite. Her level of investments is similar to the investments of the local cleaning company for whom she sometimes works. These types of investments may be indicative of an independent contractor.

D.  Does the Work Performed Require Special Skill and Initiative?

A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly-skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor.

In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.

E.  Is the Relationship between the Worker and the Employer Permanent or Indefinite?

An editor has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house’s specifications, using its software. She only edits books provided by the publishing house. This scenario indicates a permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship.

Another editor has worked intermittently with fifteen different publishing houses over the past several years. She markets her services to numerous publishing houses. She negotiates rates for each editing job and turns down work for any reason, including because she is too busy with other editing jobs. This lack of permanence with one publishing house is indicative of an independent contractor relationship.

F.  What is the Nature and Degree of the Employer’s Control?

A registered nurse who provides skilled nursing care in nursing homes is listed with Beta Nurse Registry in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by Beta. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship.

Another registered nurse who provides skilled nursing care in nursing homes is listed with Jones Nurse Registry in order to be matched with clients. The registry sends the nurse a listing each week with potential clients. The nurse is free to call as many or as few potential clients as she wishes and to work for as many or as few as she wishes; the nurse also negotiates her own wage rate and schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship.

Think twice before replacing the “contractor” or “temp” who identified you as his non-offering, full-time “employer” so that he could obtain subsidized insurance through Healthcare.gov.

This morning, the Supreme Court of the United States, by a 6-3 margin, removed the last legal obstacle to employer mandate tax enforcement. Because the HHS had authority under Code § 36B to subsidize insurance plans bought through Healthcare.gov (according to an IRS rule), those subsidies properly will trigger Code § 4980H employer mandate tax assessments by the IRS starting in early 2016.   If you are accruing liabilities, you need to determine how you’ll pay those assessments and how you might minimize them. You’ll probably need outside help to do both.

We predicted this opinion but we’re not celebrating. We’re especially concerned for state agencies, local governments, smaller large employers and employers that rely on employees leased in full-time status for less than one year. Here’s a simplified comparison of potential § 4980H(a) assessments based on the same payroll numbers for 2014 (ALE in 2015, assessed in 2016) and 2015 (ALE in 2016, assessed in 2017).

200 Full-time W-2 Employees, all offered coverage (90.1%)

20 Full-time Leased Employees, none offered coverage (9.9%)

2016 § 4980H(a) assessment:         $0                     (70% offer transitional relief)

2017 § 4980H(a) assessment:         $360,000+     (95% offer required)

Should this employer fail to file and deliver its required 2015 Forms 1094-C and 1095-C in early 2016, a $44,000 penalty could be assessed for that default, even though no employer mandate tax was owed for 2015.

Many more traps have been laid and few are sufficiently wary.  As Justice Roberts understated it in his majority opinion, “[The ACA] does not reflect the type of care and deliberation that one might expect of such significant legislation.”  Boy, howdy.  Get help.

Update (in response to inquiries):  Some had speculated that the Court might delay the effective date of its decision if it invalidated Healthcare.gov subsidies.  This decision in favor of the subsidies, and therefore in favor of the employer mandate, is effective retroactively.  The mandate was effective for most “Applicable Large Employers” (on a controlled group basis) beginning January 1, 2015.

Update: We’re getting questions and comments that reflect fundamental misconceptions about the employer mandate. We’ll correct two here and save others for a separate article.

State and local government employers are covered, and most will be “large” due to aggregation rules. The IRS “controlled group” and “affiliated service group” rules don’t fit government employers exactly, but similar aggregation principles will apply.

It’s too late to “get small” for 2015. You are “large” or not in 2015 based on your 2014 employment levels (assuming that you existed in 2014). Your exposure to 2016 § 4980H assessments is based on your “Applicable Large Employer” status in 2015 (which is based, in turn, on your 2014 employment) but your “assessable payment amounts” will be based on 2015 employment levels.

Beginning in 2016, Code § 6056 requires large employers to complete, file with IRS and deliver to employees a Form 1095-C for each full-time employee offered minimum essential coverage for each 2015 coverage month.  So, who are your Form 1095-C employees?  Might they include people not on your payroll?

Here’s the relevant IRS rule defining “full-time employee” under Code § 6056:

(6) Full-time employee. The term full-time employee has the same meaning as in section 4980H and § 54.4980H–1(a)(21) of this chapter, as applied to the determination and calculation of liability under section 4980H(a) and (b) with respect to any individual employee, and not as applied to the determination of status as an applicable large employer, if different.

26 CFR § 301.6056-1(b)(6).  And here is the cited sub-section 21 of the § 4980H rules:

(21) Full-time employee—(i) In general. The term full-time employee means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer. For rules on the determination of whether an employee is a full-time employee, including a description of the look-back measurement method and the monthly measurement method, see § 54.4980H–3. The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability under section 4980H and not for the purpose of determining status as an applicable large employer under § 54.4980H–2.

(ii) Monthly equivalency. Except as otherwise provided in paragraph (a)(21)(iii) of this section, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, and this 130 hours of service monthly equivalency applies for both the look-back measurement method and the monthly measurement method for determining full-time employee status.

(iii) Determination of full-time employee status using weekly rule under the monthly measurement method. Under the optional weekly rule set forth in § 54.4980H–3(c)(3), full-time employee status for certain calendar months is based on hours of service over four weekly periods and for certain other calendar months is based on hours of service over five weekly periods. With respect to a month with four weekly periods, an employee with at least 120 hours of service is a full-time employee, and with respect to a month with five weekly periods, an employee with at least 150 hours of service is a full-time employee. For purposes of this rule, the seven continuous calendar days that constitute a week (for example Sunday through Saturday) must be consistently applied for all calendar months of the calendar year.

26 CFR § 54.4980H-1(a)(21).  But that just tells you which “employees” are full-time.  “Employee” is defined in the preceding sub-section 15:

(15) Employee. The term employee means an individual who is an employee under the common-law standard. See § 31.3401(c)–1(b). For purposes of this paragraph (a)(15), a leased employee (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in section 3508 is not an employee.

26 CFR § 54.4980H-1(a)(15).  The IRS uses a multi-factor test to identify common-law employees who have been errantly omitted from an employer’s payroll.  Most often, the outcome hinges on the employer’s right to control how, where and when the worker works.  The referenced rule sums it up this way:

(b) Generally the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee.

26 CFR § 31.3401-(c)(1)(b).  Sub-section (e) then warns:  “If the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the employee is designated as a partner, coadventurer, agent, independent contractor, or the like.”  Code § 414(n)(2), with our emphasis, reads:

(2) Leased employee

For purposes of paragraph (1), the term “leased employee” means any person who is not an employee of the recipient and who provides services to the recipient if—

(A) such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the “leasing organization”),

(B) such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year, and

(C) such services are performed under primary direction or control by the recipient.

Commonly, workers are leased for less than one year, such as in temp-to-perm staffing arrangements.  Section 3508 relates to real estate agents.

A long slog, we realize, but a necessary one to show you why you may have Form 1095-C reporting obligations with respect to people who are not on your payroll.  But so what? Here’s what.  Code § § 6721 and 6722 state the penalties for failure to file and deliver your Forms 1095-C as required by Code § 6056.  We quote just the main penalty statements from the statute:

(a) Imposition of penalty

(1) In general

In the case of a failure described in paragraph (2) by any person with respect to an information return, such person shall pay a penalty of $100 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $1,500,000.

(2) Failures subject to penalty

For purposes of paragraph (1), the failures described in this paragraph are—

(A) any failure to file an information return with the Secretary on or before the required filing date, and

(B) any failure to include all of the information required to be shown on the return or the inclusion of incorrect information.

26 U.S.C. § 6721(a).

(a) Imposition of penalty

(1) General rule

In the case of each failure described in paragraph (2) by any person with respect to a payee statement, such person shall pay a penalty of $100 for each statement with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $1,500,000.

(2) Failures subject to penalty

For purposes of paragraph (1), the failures described in this paragraph are—

(A) any failure to furnish a payee statement on or before the date prescribed therefor to the person to whom such statement is required to be furnished, and

(B) any failure to include all of the information required to be shown on a payee statement or the inclusion of incorrect information.

26 U.S.C. § 6722(a).  So, missing one common law employee when you generate your Forms 1095-C in early 2016 could cost as little as $200.  Missing 100 could cost $20,000.  You’d need to miss 15,000 to reach the $3,000,000 annual cap.  But any audit of such errors might also identify payroll taxes that should have been withheld from the wages of people misclassified as independent contractors.  There could be collateral damage under wage and hour laws and benefit plan participation rules.

Are you planning to complete, file and deliver your Forms 1095-C manually?  Does your automated process cover all Form 1095-C employees?  These are questions that large employers should answer in 2015.

As we have discussed in prior posts, many employers are looking at ways to restructure their workforces due to the ACA.  In addition to ACA issues, a worker who has been misclassified can have negative consequences on the employer’s employee benefits.  The following are just a few of the consequences in a retirement plan:

  • If misclassified, the worker may be entitled to participate in the company retirement plan going back to the date he or she would have been eligible.
    • If the plan is a 401(k) plan, the employer must contribute matching and non-elective employer contributions, just as paid to other plan participants, 50% of the average deferral percentage amount for the employee’s group, and investment earnings on incorrectly omitted plan assets.  The government essentially wants the employer to put the worker in the position he or she would have been if properly classified.
    • If the plan is a defined benefit pension, the employer must make plan contributions sufficient to fund the participant’s accrued benefit in accordance with the plan’s terms.
  • In addition to the cost involved, the plan may be deemed to have violated the minimum participation standards under ERISA.
  • Employers who mistakenly include those employees who are not eligible because they are independent contractors risk the plan’s disqualification for violation of the “exclusive benefit rule” under the IRC.

As with retirement plans, the failure to include a worker qualified to participate in a welfare benefit plan due to misclassification may expose the employer to liability for damages for benefits wrongfully denied and breach of fiduciary duty under ERISA.  Again, this could lead to the welfare plan being disqualified.  Disqualification of a welfare benefit plan under the IRC typically results in the need for employer contributions and, in some circumstances, plan benefits being includible in all participating employees’ income.

On the other hand, inclusion of a worker who is not eligible may result in a company having to reimburse its insurance or reinsurance carrier for benefits paid by the carrier from its general funds.

In addition to the problems in retirement and welfare plans, employee misclassification in a company’s cafeteria plan can cause substantial problems.  The inclusion of just one employee who is not a bona fide employee may disqualify the entire cafeteria plan.  That would result in any and all benefits received by participants from the cafeteria plan becoming includible in income in the plan year in which they are paid.

 

 

“Applicable Large Employers” are exposed, beginning January 1, 2015, to significant new taxes if they fail to offer “minimum essential coverage” to at least 70% of their full-time employees and their dependents.  Employers also must permit full-time employee coverage to become effective within a “90-day” maximum waiting period.  Unlawfully delaying coverage exposes the employer both to the new taxes and to fines of up to $100 per day per affected individual.  Puzzlingly, the enforcement agencies’ (DOL, HHS, IRS) rules on each subject fail to address their potential disruption of temp-to-perm staffing arrangements.  When callers ask for specific guidance, our contact information is taken.  We are reminded of Lewis Grizzard’s joke that the 1988 Atlanta Braves and Michael Jackson had one thing in common: they both wore one glove, for no apparent purpose.

Many employers obtain all new hourly workers from a leasing company that is their W-2 employer for, say, 90 days, at which time the customer moves some to its own payroll.  Is the employee’s first day on the new payroll Day 1 of the maximum waiting period under the customer’s group health plan, or must that plan count the employee’s 90 days with the leasing company?

The rules tell us little more than that an employer’s ACA obligations extend to every person who is its “common law employee.”  The IRS uses a 20-factor “right to control” test to determine whether a common law employment relationship exists.  No one factor determines the result, but if an employer can tell a worker what to do, when to do it and how to do it, then, generally speaking, the worker is that employer’s common law employee.  And an employee may have multiple, joint, common law employers.  If high penalties and lack of clear guidance compel leasing firms and their customers to adopt the most risk-averse rule interpretations, they might shorten the lease term to coincide with the one month “orientation period” of the maximum waiting period rules.  Some leasing firms might not be able to survive in that environment.   Some employers might not find truncated lease terms worthwhile.

If such disruption is to be minimized, leasing firms, their customers and their lawyers need clearer enforcement guidance, and we need it soon.  We’re asking our Congressional representatives to help us get the guidance that we need.  If this matters to you, please consider doing the same.

Recently, we have received requests to re-post prior articles on the 90-day waiting period, the employer mandate final rules (supplemented here, here, here and here), and our pop quiz for ACA consultants.  As we approach our 100th article, some readers apparently find the scroll-down browsing process tedious.  So do we.  Here are two other ways to find the articles that most interest you.

You may search by “Tags” or by search terms.  We have attached all our present “Tags” to this article, appearing just under the author’s name, so that you may see your options.  Click any Tag and the server will show you a list of all articles similarly tagged.  Or, enter your search term(s) in the “Search” box, in the green bar above and to the right of the article, just above “ABOUT THIS BLOG.”  The server then will show you a list of articles that contain your search term(s).

We genuinely seek to help employers, providers, insurers and brokers understand ACA compliance issues, but please remember that the articles posted on this site are not legal advice and should not be substituted for legal advice.  They are offered as educational introductions to the subjects addressed.  ACA legal advice should be obtained confidentially from a lawyer who knows the ACA and who knows all your relevant facts.

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.