By: Nancy E. Joerg, Esq.
The Affordable Care Act ("ACA") adds another layer of danger, confusion and potential liability for those companies wanting to use independent contractors across the United States.
WIDESPREAD USE OF INDEPENDENT CONTRACTORS: There is widespread use of independent contractors across America in hundreds of business categories such as limousine drivers, messenger couriers, salespeople, architects, cable installers, dentists, landscapers, teachers, truck drivers, computer programmers, accountants, home health care workers, realtors, photographers, massage therapists, nail technicians, drywall installers, carpet installers, and many other job categories.
Now, the Affordable Care Act (also called ObamaCare) adds more fear and anxiety as many companies contemplate the increased use of independent contractors.
THE ACA MAY TEMPT EMPLOYERS TO MISCLASSIFY WORKERS: The ACA (i.e., ObamaCare) mandates that any employer with 50 or more full time equivalent employees is responsible for providing health insurance. Employers who hover around the 50 employee threshold may be tempted to intentionally misclassify workers (meaning incorrectly classify employees as independent contractors) to get around new expenses placed upon companies by the ACA.
On this troubling point, a U.S. Department of Labor spokeswoman recently said "The ACA is going to significantly affect the way employers hire and make hiring decisions, and it definitely increases the desire to hire more independent contractors and the temptation to misclassify them." (emphasis added)
It was front page news when the U.S. Supreme Court upheld the constitutionality of the Affordable Care Act (ACA). Now companies have difficult hiring choices to make in reaction to the passage of this historic and complicated new law.
Employers can decide to comply with the ACA, or they can pay penalties under the ACA, or they can intentionally structure their workforce so as not to be subject to the ACA.
REQUIREMENTS OF THE ACA: There is a boatload of new legal requirements under the ACA. The thrust of the ACA requires that "large employers" offer a medical plan that provides minimum essential health benefits to their full time employees (or pay a penalty effective January 1, 2014).
Simply put, the ACA requires "large employers" to provide a comprehensive set of medical benefits including prescription drug coverage. (The ACA does not require non-pediatric dental or vision coverage.)
LARGE EMPLOYER DEFINED: The ACA defines a large employer as an employer with 50 or more full time employees. The ACA defines full time employees as any employees who work 30 or more hours per week.
The ACA does not require employers to provide insurance to part-time employees. However, part-time employees can be crucial in determining whether the employer meets the threshold number of employees (and therefore whether the employer is actually subject to the ACA).
When an employer has 50 full time employees (or a combined total of 50 including the full time equivalent), the employer is subject to the tax under the ACA.
INDEPENDENT CONTRACTORS DO NOT COUNT AS EMPLOYEES: Under the ACA, independent contractors do not count as employees when determining whether the employer meets the minimum threshold as a large employer.
BEWARE: Simply slapping a label on a worker as an independent contractor is not sufficient proof of independent contractor status.
The ACA does not refer to independent contractors specifically. Many commentators and legal scholars are trying to evaluate where independent contractor status fits with ObamaCare. Since independent contractors are not employees under the ACA, they clearly would fall under what is known as the "individual mandate" which requires that all individuals have health insurance.
The ACA will not change anything about the health insurance coverage of an independent contractor, but by January 2014, independent contractors will be required to purchase health insurance for themselves or pay a penalty (unless exempt due to low income or religious beliefs). Therefore, independent contractors will not be entitled to any benefits under the ACA (other than the individual mandate of the ACA to have health insurance).
UNDER THE ACA, FULL TIME EMPLOYEES WORK 30 OR MORE HOURS PER WEEK: The ACA does not give a general definition of employee. As stated above, the Act does announce that full time employees work 30 or more hours per week.
IRS CONTROL AND DIRECTION TEST MAY BE USED IN DEFINING INDEPENDENT CONTRACTOR AND EMPLOYEE STATUS: Under various IRS proposed regulations, the definition of employer and employee seem to be based on the common law definitions as defined in ERISA.
If indeed the IRS definition of independent contractor is used for the ACA (and we do not know this for sure as of the drafting of this article), then the famous 20 factor common law test that the IRS uses (also called the control and direction test) will be the way that decisions will be made regarding the definition of independent contractor status under the ACA.
While we nervously wait for the IRS to speak up definitively about how it will define and decide who is an independent contractor and who is an employee for ACA purposes, it is logical to follow the IRS system (built up over many years) of applying the control and direction test to a worker at issue.
So, if your company uses an independent contractor flooring installer, for example, and you want to know whether that flooring installer would be considered an independent contractor or an employee for ACA purposes, apply the 20 factor test as found in caselaw, regulations, and in the IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
IRS FORM SS-8: IRS Form SS-8 is the questionnaire that IRS auditors use when they evaluate a Company's usage of independent contractors (to decide whether a certain kind of independent contractor is truly an independent contractor or is really an "employee," under the IRS definition). IRS Form SS-8 form is constructed around the 20 common law factors.
By filling out an IRS Form SS-8, you will gain a fairly strong feeling as to whether that worker would do well under the IRS 20 factor test.
Note that IRS Form SS-8 is a wonderful self-audit tool, but the correct answers may not be self-evident. The questions are often vague and tricky. There are many hidden issues tucked into this questionnaire. Therefore, review your responses to the IRS Form SS-8 with a professional who has a great depth of experience in evaluating independent contractor status.
If a company decides that they want to use independent contractors, instead of employees, this is a business decision that must be carefully made---and skillfully implemented. A company should never merely change the "labels" of its current workforce. That would almost always be a huge mistake, thereby exposing the company to great liability and unnecessary risk.
STRENGTHENING THE INDEPENDENT CONTRACTOR RELATIONSHIP: Once a company decides to use independent contractors (or increase its use of independent contractors), a detailed plan of action should be created. This action plan should cover such subjects as:
- what kind of independent contractors will be used,
- what kind of work will the independent contractors do,
- what business expenses will the independent contractors cover,
- what kinds of licensing and insurance will be required of the independent contractors,
- what location will the independent contractors work from,
- what business name(s) will the independent contractor be paid under,
- what risk of loss will the independent contractors bear,
- how can an unsatisfactory independent contractor be legally terminated,
- who will provide tools, equipment, materials, transportation, computers, cell phones, software, product, etc.,
- who will pay for certification and training,
- will rent be involved,
- will traditional employee benefits be included in some manner,
- will there be a non-compete,
- will the relationship be exclusive, etc.
There are a tremendous number of issues to be worked out when planning a solid, legitimate independent contractor relationship. Through careful planning, the risks of establishing independent contractor relationships can be dramatically reduced, though never totally eliminated. It is a mindful process of strategic planning---where, step by step, the risk of reclassification is lowered to extremely low levels.
WEBSITE EVALUATION: One major area in strategic planning is the company's website. How will the company refer to the independent contractors on its website? Certainly not as the "staff". Not as "the team". Not as "our people". Remember that auditors, government agents, government investigators check out companies they are targeting by scrutinizing websites. So, the company's website becomes part of the independent contractor battleground. It deserves much care and thought. Each word helps or hurts independent contractor status. Legal challenges almost always include a word by word analysis of the company's website.
Of course, once the independent contractor relationships have been conceptualized, then these well thought out ideas need to be incorporated into a very precise and detailed independent contractor agreement. Again, every word can help or hurt the proposed classification status.
Another area to plan, when deciding to use (or increase use of) independent contractors, is the kind of independent contractor the company will use. There are many choices here. The lowest risk for the company is usually to limit the selection of independent contractors to those independent contractors who are incorporated (and stay incorporated, in good standing).
CONCLUDING THOUGHTS: There is no question that the ACA is going to shape our economy in many ways. One of those ways may be that some companies will intentionally keep their employee base below 50 employees, and some companies may strategically lay off employees in favor of independent contractors (in a determined effort to stay below the 50 full time employee threshold).
In all likelihood, the ACA will create a more widespread use of independent contractors across the United States. Also, more companies will hire remote workers and classify them as independent contractors.
There is much that we don't know at this point in time about how the ACA will be enforced-how independent contractors will be defined under the ACA and all of the related issues involved with problems with misclassification of workers under the ACA.
However, there is no question that companies who use independent contractors must review the structure of their independent contractor relationships. Companies must carefully review their websites, independent contractor agreements, independent contractor relationships, any documentation and manuals involving independent contractors, etc., so that if there is a legal challenge to the independent contractor status of certain workers in the company, the Company will have a strong legal defense.
For a free copy of the list of the 20 factors and IRS Form SS-8, contact Wessels Sherman Legal Assistant Tammy Nelson at 630-377-1554 or via email at: email@example.com.
For consultations on limiting your liability in the use of independent contractors, contact Attorney Nancy E. Joerg, who enjoys a nationwide reputation in assisting companies who use Independent Contractors of all types. Nancy Joerg can be reached at Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at firstname.lastname@example.org.
Questions? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at email@example.com.
Areas of Practice: Nancy Joerg represents employers in administrative actions and audits before the Equal Employment Opportunity Commission, the Illinois Department of Human Rights, the Cook County Commission on Human Rights, the Illinois Department of Employment Security, the Illinois Department of Labor, and the U.S. Department of Labor.
Nancy Joerg represents employers in all types of independent contractor matters, discrimination charges, unemployment insurance hearings, Employee Classification Act complaints, IDES audits, employee termination issues, and wage & hour issues (including exempt/non-exempt status for overtime, deductions from wages, and state and federal wage claims). Nancy Joerg effectively counsels and advises clients concerning preventive efforts such as the preparation and review of severance and release agreements, independent contractor owner-operator agreements, independent contractor-based manuals and websites, employee handbooks and personnel policies, anti-harassment training, sex harassment investigations, and the development of strategies to help ensure exemptions from overtime.
Nancy Joerg is the Managing Shareholder of the St. Charles, Illinois office of Wessels Sherman