Independent Contractors and the Affordable Care Act | DCR Workforce Blog

Independent Contractors and the Affordable Care Act

affordable healthcare actOver 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:

  1. Does the addition of the misclassified workers to the employee roster brings down the healthcare coverage provided to a number which falls below 95% of the total?
  2. Does the addition of the misclassified worker affect the total number of employees of the company?  The ACA only applies to companies with 50 or more permanent employees. The government has clearly stated that its enforcement efforts will initially focus on those companies that manipulate the size of their employee base to stay below that threshold.
  3. It is possible that there may be a spike in the number of individuals working under an independent contractor relationship to claim that they have been misclassified and demand permanent employee status to be given access to healthcare insurance benefits.  This increases the necessity of employers to ensure that contractual agreements and work structuring reinforces the independent relationship.  Hiring managers should be trained on proper handling of independent contractors, all work agreements should be written or reviewed by your HR or Procurement organization, and detailed records must be maintained to support you in case of a challenge or audit.

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.

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.