PPACA and Worker Mis-Classification as Independent Contractors

Friday, March 07, 2014

 

The Patient Protection and Affordable Care Act require that employers with 100 in 2015 and 50 or more employees in 2016 must provide certain employees with health care or face potential penalties for failure to do so, i.e., “pay or play”.  The recent release by the Internal Revenue Service (IRS) on February 10, 2014 of the final regulations provided further clarification on a number of critical issues including, definition of full-time employees, safe harbors, transition rules, applicable large employer status, and hours of service.  Along with the final regulations, the IRS also released 46 Frequently Asked Questions or FAQ’s and a Fact Sheet to assist employers.  Both the final regulations, FAQ’s, and Fact Sheet seek to clarify who is and is not a “full-time employee”.  This determination as to who is a full-time employee for the purposes of “Shared Responsibility for Employers” is essential to any number of provisions of the PPAA and thus who is offered health care or not as well as when.

 

FAQ # 15 defines a “full-time employee” as, “… an employee is a full-time employee for a calendar month if he or she averages at least 30 hours of [paid] service per week.”  This definition thus begs the question as to who exactly is an “employee”.  The simple answer is any “W2” wage earner is an employee (common-law employee) of the employer and may be broken down into several classifications including, full-time, part-time, seasonal, and variable hour employees.  To complicate matters, employees may move between classifications throughout a calendar year and an employer’s benefit’s Plan Year may not coincide with the calendar year.

 

Individuals who are classified as “independent contractors” are not common-law employees of an employer for purposes of PPACA and are not used in the determination of an employer’s “applicable large employer” status or the calculation of any penalties.  However, this is where the mis-classification of common-law employees as independent contractors becomes an issue.  As with the Fair Labor Standard’s Act, worker mis-classification as an independent contractor may have significant and negative legal and financial outcomes for an employer.  Therefore, it is strongly recommended that employers seek competent and professional legal and tax advice before classifying any workers as independent contractors.

 

The final regulations by the IRS addresses the concern that employers might inappropriately classify otherwise common-law employees as independent contractors.  So strong was the IRS’ concern that the final regulations included, “The Treasury Department and the IRS are concerned that the relief requested would serve to increase the potential for worker misclassification by significantly increasing the benefit of having an employee treated as an independent contractor. Accordingly, the final regulations do not adopt this suggestion.”  XII. Worker Classification and Section, 4980H, page 8567