Absorbing the Costs of Health Coverage for Contingent Workers | DCR Workforce Blog

Absorbing the Costs of Health Coverage for Contingent Workers

healthAlmost all staffing agencies which come under the purview of the Patient Protection and Affordable Care Act (also known as the ACA) will find their direct costs increasing, either because they take on the additional costs of providing insurance coverage or because they decide to pay the penalties in lieu of providing the coverage.  They will also see a significant rise in administrative effort, which will – of course – also increase costs.

A review of the SEC filings of the world’s largest publicly-held staffing agencies demonstrates that this industry operates on small margins. Annual operating profits are typically in the range of 4-7%. Normal business practices require the agencies to pay their workers on a weekly basis, then wait a minimum of 30 days (often much longer) for payment from the client. This requires the maintenance of a line of credit whose interest rate can vary. For staffing firms operating on lean budgets, any additional expenses may prove crippling in their effect.

If a contract exists in which the client has already agreed to bear a share of the costs which result from any regulatory changes and future laws, there is little cause for worry. In the absence of such an agreement, who will be paying these bills? Let us look at these issues, even as we consider the fairness of expecting either the staffing client or staffing agency only – to bear such expenditure. The question that arises is what is fair?

The cost of ACA coverage varies by staffing agency. It would depend upon:

  • Employee participation rate.
  • Number of employees who can be excluded from coverage.
  • Amount of employer contribution.
  • Scope of coverage offered. Many staffing companies historically have had two different benefit plans: one for their permanent employees and a less attractive plan for the temporary workers on their rolls. Going forward, the cost of providing coverage at the same level will prove more expensive.
  • Tax deductibility of premium paid vs. the non-deductibility of excise tax payable at $3000 per uninsured employee.
  • The worker eligibility rate. Agencies that specialize in providing resources for short term assignments will see fewer workers that qualify, while those who place highly compensated technical and professional workers on longer-term assignments will have greater exposure.
  • The administrative costs of evaluating workers, managing the additional efforts associated with payroll calculations and payments, record keeping and reporting.

So far, this post has focused on the negative effects of ACA. It must be noted that there are some intangible benefits for staffing agencies and their clients. Historically, the absence of health benefits has been a major obstacle to individuals who would prefer the more flexible work arrangements offered by temporary work. When agencies provide health coverage as per the ACA’s mandate, they increase the number of talented workers willing to consider a temporary assignment. Contingent workers are also more likely to stick with the same agency when finding work, as movement from one agency to another may disqualify the worker from benefits under ACA. Immediate redeployment of a worker improves a staffing agency’s earnings while reducing recruiting expenses.

One final word of caution. As discussed in our previous posts, if the staffing buyer is deemed a joint employer with the staffing agency, both will be subject to the ACA. The IRS has stated its intent to carefully screen the use of agency-supplied contractors in order to surface “ACA end-runs”. This would be a good time to offer training to all hiring managers on “do’s and don’ts” for contingent worker hiring and management. Inadvertent actions leading to claims of misclassification or joint employment could result in penalty exposure to the staffing buyer by triggering either the “no-coverage offered” or “insufficient coverage” penalty.

The ACA renders it impossible for employers to avoid their responsibility towards providing healthcare to their workers. There is no doubt that both staffing firms and their clients face a tightrope walk, as the staffing companies see reduced margins while clients fear that sharing the burden reduces the benefit of engaging a contingent worker. DCR will be monitoring this issue and will provide you with updates in future.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.