The Perils of Worker Misclassification and the PPACA | DCR Workforce Blog

The Perils of Worker Misclassification and the PPACA

As an employer, you might be worrying about the upcoming implementation of the Patient Protection and Affordable Care Act (aka PPACA). If you also happen to have any worries with regard to your worker classification program, now is the time to identify anything broken and fix it without delay. Failure to do so may lead to failure on a much larger scale with costs extending beyond the usual back wages, tax liabilities, exposure to employee benefits, contributions to unemployment insurance benefits, fines, employer mandate penalties and so on.  Beginning in 2014, you will also face new penalty measures for insufficient coverage under the PPACA!

Employers with 50 full-time employees (or full-time equivalent employees) could be in the dock for not offering a minimum coverage of health insurance to workers to workers who were misclassified as independent contractors (1099s); not only for missing that coverage but also if the misclassification happened to keep the employee count under 50. The Affordable Care Act will apply the common law test to determine employment status. Any independent contractor who is “under the control of the employer” will be identified as misclassified.

The IRS is determined to ensure that employers do not automatically classify some of their employees as 1099 workers – so as to stay below the mandated number of 50 full time employees. Their enforcement efforts are targeting employers who use a large number of independent contractors with a small ‘permanent’ staff, where replacement of independent workers with staff employees would push them over the 50-employee threshold! Converting a W-2 to 1099 could also lead to trouble, in no time at all! The addition of more full-time employees to the calculation could skew the numbers and result in a large employer being penalized for not providing coverage to 95% of eligible employees as mandated by the PPACA.

The 2013 structure of your organization and your employee classification will determine the offer of coverage when the PPACA goes into effect. So it’s time to take stock and review all processes and even seek external advice if you deem it necessary.

In the event of misclassification being identified in an audit, you as an employer would be exposed to:

  • Penalty at $2,000 per year (per total full time employees less the first 30) for failing to offer coverage, as even the ones who were provided with coverage are included in this calculation
  • Penalty of $3,000 per year for insufficient coverage for each misclassified employee who sought subsidized exchange coverage if the employer’s coverage proved unaffordable or did not provide minimum value

Companies can avoid possible risks associated with the use of contingent workers by using staffing agency-supplied contractors.  As the employer of record for their contractors, the staffing agency assumes all employment responsibilities, including compliance with PPACA.  This strategy eliminates all associated tensions with misclassification audits, fines and penalties.

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.