2014 - Worker Misclassification More Important Than Ever

Friday, June 14, 2013

Worker misclassification, the classification of a worker as an independent contractor rather than as a common law employee has numerous advantages for both the contracting entity as well as the contractor. For the contracting entity, there is usually no payment of various federal, state, and local employment related taxes. Generally, there is no requirement to meet the Fair Labor Standards Act (FLSA), Employee Retirement Income Security Act (ERISA) or a host of other laws and reporting requirements. The independent contractor often has the ability to choose which jobs are accepted and when, where, and how the work is done. Failure to comply with FLSA and ERISA has the potential to carry significant penalties.

Beginning in 2014, worker misclassification exposes some employers to additional risks under the Patient Protection and Affordable Care Act (PPACA). In general, most employers with 50 or more full-time and full-time equivalent employees (FTE) who average 30+ hrs/wk are required to offer those employees affordable health care, which meets certain essential standards of medical care. The issue of worker misclassification comes into play when the employer counts those workers to determine if they meet the 50 employee (full-time equivalent) threshold of a “large” employer. If the employer has incorrectly classified those workers as independent contractors and it is later determined those workers were common law employees, the employee might face penalties under PPACA but also FLSA, ERISA and possibly other federal, state or even local laws.

Under PPACA, counting employees is not as simple as counting just the number of heads at some point in time. IRS’ own frequently asked questions and answers point to some of the possible misunderstandings. The 50-employee threshold may be met with 100 employees working 15 hours per week, how so, 100 ees times 15 hrs/wk equals 150 hrs/wk divided by 30 hrs/wk equals 50 full-time equivalent employees. Any combination of full-time and part-time employees could render the employer a “large” employer and thus subject to the Employer Shared Responsibility mandate.

By misclassifying a full-time or part-time worker as an independent contractor, later deemed a common law employee, the employer may have to recount the workforce to determine if they in fact met the 50 FTE threshold of the Employer Shared Responsibility mandate. Knowing how the regulatory agencies have “fixed” similar situations in retirement plans, the employer might be obligated to correct the situation by making the affected employees whole. Needless to say, the possibility of such a corrective action could be expensive, time consuming, distractive, and harmful to the employer’s public image. Talented employees have the option to work for several employers; those same employees may exit and/or shy away from any employer with a reputation of worker misclassification.

Management, financial, labor, and legal issues dealing with any governmental interaction requires knowledgeable and professional level assistance and guidance. Employers should consult with the appropriate level of professional counsel prior to undertaking changes to their worker classification processes and procedures or employee benefits plans.