Over the years, we have often blogged about the threat of employee misclassification. The new Affordable Care Act significantly increases the risks associated with incorrectly designating a worker as an independent contractor.
To quickly review: to be classified as an independent contractor, the individual must control the choice of work, conditions under which the work is performed, and relationship with the client. The IRS and individual states have established classification parameters. In recent years, government agencies at all levels have stepped up their enforcement efforts to curb the loss of funds resulting from non-payment of income taxes. There has also been an uptick in the number of workers who challenged own status – filing claims with the government that their improper classification denied them of access to health insurance and other benefits. These complaints inevitably result in an audit into the employer’s processes. The penalties levied on an employer who erred in deciding and applying the criteria for employee classification are deliberately of a prohibitive nature. Should the matter escalate and a determination is made that more than one worker has been misclassified, the employer may end up facing huge penalties, if not bankruptcy.
Savvy employers make sure that they are not on shaky ground before classifying anyone as an independent contractor and they follow all the laid down rules and guidance to ensure that the worker’s classification can withstand the strain of an audit. Not only do they verify the case in detail, they also maintain impeccable records which are needed when they are called upon to justify the classification criteria applied.
Now, what happens under the mandate of the Affordable Care Act when an employer is found to have misclassified the worker? Under the Act which will become effective in 2015, an employer with more than 50 employees has to offer health insurance coverage to at least 95% of all employees. Failure to do so would attract potential penalties of $2000 per employee. This penalty would be payable on the total employee population, not just the ones who were not covered.
The combination of these two mandates covering employee classification and healthcare requires employers to carefully consider three factors:
When engaging anyone to work for you in any capacity, weigh your options. Will the need be ongoing, justifying the addition of a permanent employee, or temporary? If a resource is needed for a specific assignment, or for a short term, would an agency contractor be a better choice? The attractive savings from reduced tax and benefit requirements come with such huge attendant risks, you must determine in every case whether the potential risk is worth the return.
Mail (will not be published) (required)
× five = 30
Thanks for Subscribing to DCR Blog.