Two recent developments are a good reminder that companies who have independent contractors are under increased scrutiny and face a high bar in establishing that independent contractors are properly classified as such — and not employees.
On July 15th, the Department of Labor issued a guidance saying that most workers qualify as employees under the Fair Labor Standards Act (FLSA) regardless of what the worker and the company may have agreed to. The guidance doesn’t announce a new test for independent contractor status. Instead, it starts with the “economic realities” test for independent contrator status that courts regularly use and a reads it together with a broad view of the FLSA’s definition of employ to reach a conclusion that most independent contractors are misclassified and should, instead, be treated as employees.
The DOL’s guidance was close on the heels of a decision by the Seventh Circuit Court of Appeals, which reversed the lower court and ruled that FedEx delivery drivers are employees under Kansas state law, not independent contractors. In making its decision, the 7th Circuit certified the question of whether the drivers were employees under the Kansas Wage Payment Act to the Kansas Supreme Court. The Kansas Supreme Court, applying a 20-factor test, found that the drivers were employees because FedEx, among other things, assigns drivers their routes; requires them to check in with FedEx managers at the start of their day; regulates their appearance; and decides whether to hire a driver after the driver submits resumes and references like any other employee.
So what are the consequences of misclassification? Companies that misclassify employees as independent contractors face penalties for failing to pay employment taxes, for failing to withhold taxes from pay, for failing to comply with wage and hour requirements (such as overtime), for failing to contribute to unemployment compensation, and for failing to comply with other employment-related laws. In addition, the Affordable Care Act opens companies that misclassify workers to significant penalties — both based on failure to offer coverage to the required portion of the workforce and where a misclassified worker obtains coverage on an exchange.
In light of these developments, we strongly recommend that any company that has independent contractors work with counsel to determine if these workers are properly classified. A thorough review now could save you lots of money, time, and aggravation later.
Last week, the IRS announced the waiver (for 2014 and the first half of 2015) of the penalty for “small” employers that reimburse employees for individual health insurance premiums. To the IRS, “small employer” means an employer that normally employs fewer than the equivalent of 50 full-time (30 hours/week) employees. You can read the entire notice here.
We have previously posted about the IRS and DOL position that employer reimbursement of employees’ individual health insurance premiums—either inside or outside of a public exchange—are “group health plans” that violate the Affordable Care Act’s insurance market reforms (links to our related posts follow this one). This latest IRS notice confirms their previously announced position, and clarifies that even a reimbursement program that treats the reimbursement as taxable gross income to employees (“after-tax”) violates the ACA if the employer makes the payment only as reimbursement for health care and not to employees who do not have those expenses.
We expect the ACA rules and deadlines to continue to evolve, so we are advising our clients to stay tuned and check in with legal counsel if in doubt over compliance requirements and non-compliance penalties. We will continue to keep you posted as news develops.
Last week, the U.S. House of Representatives passed the Save American Workers Act (H.R. 2575), a bill that would change the definition of “full-time” work under the Affordable Care Act’s employer mandate from 30 to 40 hours per week. However, it remains to be seen whether the Senate will approve the measure (many commentators are saying it won’t) and the White House has promised to veto it.
Currently, covered businesses must provide health insurance for their full-time employees, with the ACA defining “full-time” as thirty hours or more a week. The Save American Workers Act would raise the threshold for full-time status to 40 hours per week, thus decreasing the number of employees to whom employers are required to provide insurance.
The bill, which had the support of some Congressional Democrats, has the support of many business groups, including the National Retail Federation, National Restaurant Association, and the U.S. Chamber of Commerce, who said the ACA’s full-time work definition goes against longstanding practices and would cause harm to both employers and employees if allowed to stand.
The IRS recently issued two new Q&As to underscore that arrangements allowing employers to reimburse employees on a pre-tax basis for premiums used to purchase individual health coverage, either inside or outside of a public exchange, violate Affordable Care Act’s insurance market reforms. While duplicative of previous IRS publications on the subject, these Q&As are in plain English.
This rule applies only to individual premiums and not to pre-tax plans like HRAs and FSAs.
To drive the point home, the IRS notes that employers offering such an arrangements will be subject to a $100/day per covered employee penalty.
If you are like most employers, you have been diligently revising your health benefit plans and working with your insurance providers to make sure your Summary Plan Descriptions comply with the Affordable Care Act. After those revisions are in place, if your handbook and intranet contain benefits-related information, you will need to make revisions there too.
For example, if you exclude “part-time” employees from your health plan, make sure to define that exclusion in your handbook. If your definition of “part-time” is different for health benefits than it is for other purposes (hours, compensation, or vacation for example), be sure to make a clear distinction and consider using a term other than “part-time” when referring to health benefits to avoid possible confusion. The level of detail you include will depend on your preference, but as with other benefit plan discussions it is best to avoid heavily detailed information about your benefits in a handbook.
Any handbook or intranet description of benefits should include language that:
Emphasizes that the handbook only summarizes benefits and directs employees to plan documents for detailed information.
States that the plan documents control if there are inconsistencies between them and the handbook or intranet.
Makes it clear that eligibility for participation in any plan is governed by the terms of that plan’s documents and specifies whether or not a waiting period applies and what it is.
States that the benefits described in the handbook may be modified or discontinued at the company’s sole discretion.
A year ago, the Department of Labor (DOL) released model general notice and model election notice forms for providing COBRA notices to employees in anticipation of the availability of alternative individual health insurance coverage becoming available beginning January 1, 2014 through the new health insurance exchanges or marketplaces created under the 2010 health reform law. But the interplay between electing COBRA coverage or coverage under the new marketplaces is complicated, and confusion has resulted among those eligible for COBRA coverage.
So, on May 2, 2014, the Department Of Health & Human Services announced a special open enrollment period of May 2, 2014 through July 1, 2014, under the federal marketplace allowing an individual currently on COBRA to voluntarily end COBRA coverage and get coverage through the federal Marketplace, if otherwise eligible for the federal marketplace coverage. State marketplaces are encouraged, but not required, to also offer a special enrollment period.
At the same time, the DOL issued proposed regulations removing older model notices from appendices to the COBRA regulations and providing that the approved notices and future changes to the notices will be posted on the DOL website. This will allow faster updating of the notices when needed because amendment of the regulations themselves will not be required. The most recent model notices on the DOL website are here: model general notice and model election notice.