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Who Are My Employees Under the Affordable Care Act? The Answer May Surprise You

Original article from United Benefit Advisors

By Kathleen R. Barrow

For a business, the first step to compliance under the Affordable Care Act (“ACA”) is to determine whether the business is an “applicable large employer” obligated to provide minimum essential, affordable coverage with minimum value to its full-time employees. Assuming the answer to that determination is “yes,” the second step is to decide whether Section 4980H, which was added to the Internal Revenue Code by the ACA, may expose that business to penalties because the business either fails to offer its full-time employees minimum essential coverage under an eligible employer- sponsored plan, or fails to provide full-time employees affordable coverage with minimum value under such plan.

The inquiry into whether a business is an “applicable large employer,” and the determination of the nature and amount of exposure to penalties under Code section 4980H thus requires, as a threshold matter, that the business identifies who, among its various workers and service providers, are “employees.” The analytical process attendant to this identification may be taken for granted by companies who consider their “employees” to be the persons who are listed on their payroll records. The ACA, however, mandates that businesses both answer the question “Who are my employees?” with care, and that businesses rely upon factors that many companies do not presently consider when deciding which individuals to treat as independent contractors, rather than employees.

For the worker classification analysis, the recently published Proposed Regulations under ACA ignore common multi-factor tests set by state statutory law, state common laws, and state and federal courts construing the Fair Labor Standards Act. The Proposed Regulations rely instead upon the Treasury Regulations promulgated under the specific provisions of the Internal Revenue Code governing payroll taxes. These Regulations adopt a federal common law analysis to determine who is an “employee.”  The Regulations require a company to focus upon whether the worker or the company controls the nature of the work that must be done and manner in which the work shall be accomplished.

To help companies apply this common law test enunciated by the Regulations, the Internal Revenue Service (“Service”) has produced Publication 15-A, Employer’s Supplemental Tax Guide (January 29, 2013). Publication 15-A divides the evidentiary facts that dictate whether a worker is an employee or independent contractor into three categories: (1) facts that show the company exercises behavioral control over the worker; (2) facts that demonstrate the company has financial control over the worker; and (3) facts demonstrating the parties’ relationship.

These three categories of facts are further explained by Publication 15-A as follows:

Facts Showing Behavioral Control: Evidence of facts indicating the company provides instruction to the worker as to when and where to work; what tools or equipment to use; where to purchase supplies; who among workers should perform what task; and which of many tasks comprising the job should be undertaken in what order indicates whether an employment relationship exists.

Facts Indicating Financial Control: Evidence of facts demonstrating whether the worker incurs his or her own business expenses; the extent to which the worker makes a significant investment in the place of work and tools of work; and the degree to which the worker advertises his or her services to other non-related companies indicates whether an employment relationship exists.

Facts Demonstrating the Nature of the

Parties’ Relationship:

Evidence of facts demonstrating whether the relationship between the worker continues indefinitely; whether the workers’ services are an integral aspect of the company’s regular business activity and key to the company’s ability to render services or provide products to customers; and whether a written contract for services exists between the parties is determinative of the question whether an employment relationship exists.

The crux of the answer to the question whether a worker is an independent contractor or employee under the categories of facts enunciated by Publication 15-A is that a worker who is an independent contractor operates his or her own independent business and is hired by business to perform a service or provide a product that fulfills a unique need of the business at a certain period of time. This kind of worker dictates the price for which services or products will be provided to the business, rather than the business setting the price it will pay for a service or product. The relationship of the worker to the business is temporary and ancillary to the business, rather than integral to it.

Given the analysis chosen by the United States Treasury and the Service under the Code’s payroll tax provisions, it may surprise companies that individuals they have habitually treated as independent contracts are “employees” for purposes of the ACA’s mandates. The choice to focus upon the analysis common to the Service’s treatment of workers for purposes of payroll taxes means, for example, that companies who habitually hire workers from temporary staffing agencies and leasing companies must now consider whether they have an obligation to count these workers as “employees” for purposes of the ACA determination of “large applicable employer” and whether they must offer them minimum essential, affordable coverage with minimum value to these workers who provide services “full-time” as defined by Code section 4980H and the Proposed Regulations published under that Code section.

The Proposed Regulations, in particular, cause uncertainty for businesses that utilize workers under a leasing or other written agreement with a third party by expressly stating the provisions of Code section 414(n)(2) do not cause workers who are “leased employees” as defined by this section to be deemed “employees” of the company receiving the services of these workers. This means that, unless additional guidance is issued by Treasury, leased workers may be the common law employee of either the leasing company or the business receiving the workers services, or both, depending upon the results of the analysis under “common law” applicable to federal payroll taxes.

At the end of the day, therefore, a company deciding whether to “pay or play” under the ACA must first turn its attention to the workers who provide services to it and, most likely, examine the nature of its relationships with these workers in a new way.  Given that the Proposed Regulations provide for a “look back” to 2013, both when counting employees for the “applicable large employer” determination and for purposes of deciding which employees are “full-time” for purposes of the ACA’s minimum essential coverage mandates, now not later  is the time to start this “fresh look.”