As you know, days before the Independence Day holiday the White House announced (by blog) that the employer mandate obligations to be enacted under the Affordable Care Act would be delayed until 2015.
These include the obligations to offer coverage to full-time employees and to inform the government which coverages were being bought and by whom. Many employers breathed a sigh of relief, and some of you might have joined them in feeling liberated, however temporarily.
Many of you, though, are dismayed, thinking the time you have spent helping your clients navigate the new world of employer mandates has been wasted. The extension should, however, allow your clients to be better prepared for 2015. But they should start to focus now on whether they are improperly categorizing anyone as an independent contractor.
When the mandate comes in 2015, businesses that have 50 or more full-time employees (defined as anyone who is expected to be paid for at least 30 hours of service per week or 130 hours of service per month) or full-time equivalent employees generally will be required to offer qualifying healthcare coverage to at least 95% of their full-time employees. Any employer who fails to do this must pay an annual $2,000 penalty for each full-time employee (including those who received offers of coverage) if any of its full-time employees receive a federal subsidy for enrolling in an exchange-provided healthcare plan.
Businesses that wrongly label workers as independent contractors, rather than full-time employees, will face big fines. The Affordable Care Act uses the “common law employee” test, but the law imposes penalties that could make independent contractor penalties imposed in the past look like loose pocket change. The ACA penalties will be based on the size of the employer’s full-time workforce. They will be imposed whenever the employer retroactively changes a contractor’s status to employee and the employer failed to offer qualifying coverage to 95% of its full-time staff. Moreover, the magnitude of these potential penalties could be compounded because they tend to increase on a monthly basis when errors remain undiscovered.
Under the “common law employee” test, the primary question is whether the employer controls what work is done as well as how it is done. If the worker controls how it is done, he can be considered an independent contractor. An independent contractor is answerable to the business only for results.
The IRS recently issued guidance regarding the manner in which it applies the test, focusing on three primary criteria: behavioral control, financial control and the type of relationship between the employer and worker.
Behavioral Control. The behavioral control criterion focuses on whether the business has a right to direct and control how work is done through instructions or training. Generally, the more control, the greater likelihood that the worker will be considered an employee. If the business has the right to control the details of a workers’ performance, he or she is more likely an employee. Employees generally are subject to a business’s instructions about when, where and how to work, including where to buy supplies and services, what equipment to use and what order to follow when doing the work. And unlike independent contractors, employees usually receive training to perform a certain job in a certain manner.
Financial Control. Financial control focuses on whether the employer has a right to control the business aspects of the worker’s job. Factors considered include: reimbursement of business expenses; the extent of the worker’s investment; the extent to which the worker makes his or her services available to the relevant market; how the business pays the worker; the extent to which the worker can realize a profit or loss. For example, an independent contractor is more likely to invest in his own equipment, be available to work for others in the relevant market and make a profit or loss.
Type of Relationship. In evaluating the type of relationship that exists, regulators will consider whether: a contract defines the relationship the parties planned to create; the business provides the worker with employee-type benefits such as health insurance and vacation pay; the worker was hired for an indefinite length of time rather than for a specific project or period; and services performed by the worker are a key aspect of the company’s regular business. Notably, the IRS has indicated that “how long the person plans to work with the business” is “foremost” in the agency’s determination of independent contractor status.
Consider advising clients that classify workers as independent contractors to review those classifications now to ensure they can withstand scrutiny once the mandate takes effect in 2015. Your clients also should be documenting the basis for any independent contractor classifications so they are well positioned to defend any classification challenge.