Why Understanding the definition of Independent Contractor is Important to the ACA

by Michael Haberman on October 22, 2013 · 0 comments


 

The IRS and the USDOL provide definitions of independent contractor.

The IRS and the USDOL provide definitions of independent contractor.

I was at a healthcare summit today that was focused on the Affordable Care Act (ACA, also known as the PPACA and ObamaCare). In the discussion on compliance the presenters spent some time on a question that many businesses are asking “Can I make my employees independent contractors and not worry about the ACA?” The answer will help you understand why the definition of independent contractor is important to the ACA.

What companies are covered?

The law requires that employers, who employee 50 or more full time employees (or 50 or more full time equivalents), must offer insurance coverage to their full time employees. (This is the employer mandate that has been delayed until January 1, 2015.) We have seen many companies around this threshold of 50 try to consider what they can do to avoid this threshold of insurance coverage. Some companies have opted to reduce the hours of their employees to fewer than 30 hours per week, with 30 being the threshold to being defined as “full time.” The problem with this solution is that the company may still get caught by the calculation of FTE.

Make them all independent contractors

Some employers have thought that changing the status of employees to that of “independent contractor” will save them from the ACA threshold. Indeed it would if you could do that. Unfortunately the IRS, the DOL, your local DOL and your local Workers’ Comp authority would not like this and would be all over you rear end. If these workers are independent contractors all these agencies have difficulty collecting the appropriate taxes and thus are unable to support the administration of those agencies. So they want the taxes collected by the employer.

Standards

The USDOL and the IRS both have standards that must be met in order to consider a person an independent contractor. The IRS standards include definitions of behavioral, financial and contractual relationships. Those standards can be found here.  The USDOL defines that standard thusly:

  1. The extent to which the worker’s services are an integral part of the employer’s business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients?)
  2. The permanency of the relationship (example: How long has the worker worked for the same company?);
  3. The amount of the worker’s investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?);
  4. The nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);
  5. The worker’s opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and
  6. The level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).

Looking through this list it is unlikely that any employer is going to be able to reclassify an employee as an independent contractor. If you are truly committed to trying to avoid the ACA you need to take action soon an decide what levels of business you are willing to work at and what levels of staffing are necessary to maintain that level of business. Trying to remain below 50 FTEs is not easy if you are on the cusp, but if you are going to try now is the time to do it. In 2015 that becomes much more difficult to do.


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