In a recent post, we discussed the Department of Labor’s successful partnership with state enforcement authorities – in enforcing independent contractor classification requirements. Now, the proposed budget for 2014 sets aside $14 million, of which $10 million is for states and $4 million is allocated to the DOL’s Wage and Hour Division, to aggressively pursue worker misclassification.
How we classify workers has always been a matter for serious attention and concern. As employers increasingly use blended workforces, comprised of fulltime hires, contingent workers and independent contractors, the concern and focus grows. With the Affordable Care Act’s (ACA) mandate on coverage responsibility (and penalties for violation) linked to the definition of ‘employee’, it is important for employers to make sure that they classify their independent contractors correctly. The Act’s use of the word ‘employee’ is rather ambiguous as is its allusion to the definition of the word under the ERISA (Employee Retirement Income Security Act of 1974) which defines an ‘employee’ as any individual employed by an employer.
We have discussed in earlier posts how, when we classify a worker as an independent contractor, the person is not counted among the number of employees a business has. Under the ACA’s ‘shared responsibility’ provision, the number of employees determines whether an employer is responsible for providing health coverage to employees and their dependents. A failure to provide adequate and affordable healthcare would result in the employer facing penalties linked to its total number of employees. Starting 2015, if a single employee of a business obtains a premium tax credit to help pay for health coverage purchased through an exchange, the employer could come under the scanner and face penalties for violating the ACA’s ‘shared responsibility’ provision.
The ACA looks at the cumulative number of hours worked by all “employees” in a company (which is defined as a business and all of its controlled affiliates), and divides it by 120 to determine the number of full time equivalent employees working for it. This means that a business which has 30 employees working 20 hours each week will be deemed to have 30*20*4/120 or 20 employees. This test itself applies to full time and part time employees – but not contingent workers.
So, it is important for the classification to be absolutely error-free, to avoid the ramifications from the ACA’s mandate being violated. If it is deemed that some employees were improperly classified as independent contractors, and the re-calculation of full-time equivalents exceeds a threshold affecting the requirement to provide health insurance, the company could face stiff penalties. All employers should regularly conduct some level of self-assessment to ensure that the worker and the job assignment meet all requirements for IC classification. A reassessment should be conducted each time the statement of work changes and periodic checks will verify that the working conditions are solely determined by the worker. A true independent contractor performs his services, using tools of trade which are not owned by the client, and is under no obligation to provide any details as to how the results were accomplished. Any assistant hired by the independent contractor will be managed and paid by the IC only, and not the business. Other factors include the extent to which the independent contractor’s livelihood depends upon the business as well as how important the worker’s services are to the business.
Although historically federal and state IC compliance initiatives focused on the really large businesses, we expect to see a shift as small and medium business are the ones which are more likely to classify workers as temporary in order to avoid the ’50 employees’ threshold that determines the need to be compliant with the ACA and other regulatory requirements. For these companies, an audit and a subsequent penalty for violating either the ACA or the independent contractor classification requirement could result in the failure of the company. We encourage all companies, but particularly those small and mid-tier firms who are dependent on temporary help, to seek professional assistance in understanding and adhering to all worker classification regulations.
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