Affordable Care Act and the Misclassification of Employees

Employers have always faced penalties for misclassifying employees as independent contractors but now, with the Affordable Care Act (ACA), some employers are finding yet another reason to try to skirt around the law.

Under the ACA, employers with 50 or more employees are required to offer health benefits to their workforce. If they don’t make health benefits available by the deadline, the company pays a penalty. You can see, then, how some companies might want to report having fewer than 50 employees so that they don’t have to offer health benefits. One way to achieve this is to classify some of that workforce as independent contractors. But this isn’t right and it will get you into trouble if you do it.

The Consequences of Misclassification

Misclassifying employees is a problem for both the employer and the employee. Read the article for more details but here are the highlights:

  1. The IRS doesn’t like it when employers misclassify employees because that means fewer employment taxes get paid to them. You can be sure the IRS is going to do everything it can to collect the billions of dollars it loses to employement taxes alone.

    “A 2009 study by the treasury inspector general estimated that misclassification costs the United States $54 billion in underpayment of employment taxes.” ~ Your ABA

  2. Contractors are not eligible for worker’s compensation and so if the worker is injured on the job it will be his responsibility to pay the bill. This is how many of these cases are uncovered. The contractor gets injured and files a lawsuit, then the company gets found out for misclassifying employees.
  3. Contractors are not eligible for unemployment. If the so-called independent contractor gets laid off, he will not be able to collect unemployment benefits.
  4. Contractors do not have taxes withheld and have to save up to pay the IRS every April 15th. The workers often don’t do this and so end up under-reporting wages to the IRS so as to avoid paying the full amount owed.
  5. And now, with the Affordable Care Act, there is another reason: These workers don’t get health benefits from their employers and the government doesn’t get their cut. Employers can be fined $2,000 – $3,000 per employee for failing to offer health coverage.

How to Classify Workers Correctly

To understand exactly how to know whether your worker can legally be classified as an independent contractor take a look at our post, Employee or Independent Contractor? – How to Classify Correctly. The distinction can sometimes be tricky but for the most part it’s easy to tell. Just because someone works part time or occasionally doesn’t make them an independent contractor. Briefly, and I quote myself, “Some of the criteria that the courts have used in the past to classify independent contractors include whether the worker:

  • Does work that is temporary. An IC may be hired again and again but is not hired on permanently.
  • Supplies his own materials and tools
  • Controls the hours of his employment
  • Does not receive a steady paycheck
  • Does work that is not integral to the functioning of the company
  • Defines the work that needs to be done and how it will be accomplished
  • Does not gain a large portion of his salary from one company”

Staffing Agencies – A Money Saving Alternative

If a company doesn’t want to hire employees but instead wants contractors, they can go through a staffing agency. It will then be the agency’s responsibility to classify the employees correctly. (Update 1/27/2015: A new California bill was passed making companies responsible for the actions of the staffing agency. You cannot hire a staffing agency who maltreats its employees and consider yourself home free.) This is a little different than hiring the contractors yourself and risking misclassification or tipping over the 50 employee limit. If the employees are actually employed by the staffing agency, then you are really hiring the agency. However, if those employees begin working for you regularly, long-term, and using the company’s equipment, the relationship with this employee at the staffing agency will have to cease, the contractor classification will change, and the person will be hired on as a regular employee. The other option is to terminate the relationship with that contractor and begin using another one, hence keeping you employees under the threshold and your classification in good standing.

The Benefits of Implementing a Company Health Plan

The cost of high turnover

The problem with turning over contractors, however, is that as the contractor walks out the door, so does all of his intimate knowledge and understanding of the company. When you hire new people, you have to train them and start from scratch. It is often more costly to have a high turnover rate than to simply pay the price for great long term employees, even if it means paying for company health benefits.

Health care is a traditional employee benefit

And if you believe in retaining employees, then why not offer health insurance? One of the best employee retention strategies is employee benefits. Employees get pretty excited about things like game rooms and free food these days but that can’t make up for the lack of reduced cost health insurance for their families. Healthcare and retirement savings have always been and probably always will be the top employee perks. They are just standard, traditional offerings for professional employees. Not offering one of those as a benefit is like saying that you are not interested in the employee’s long term commitment to the company. These employees will always have one foot out the door and that is never a good thing in any kind of relationship, especially not one where you livelihood is at stake.

Health Benefits For All

I think the time has come where we don’t have a choice but to offer some kind of health coverage for all of the citizens of this country. The health of the average American is, today, much worse than it was when we were born, when our parents were born, and when our grandparents were born. While it is true that the average life span is increasing that doesn’t mean that people are healthier or happier. In fact, we are simply able to extend our lives with drugs, procedures, and emergency medicine. How many people do you know over 40, or even 30 that aren’t taking some kind of medication?

Rich or poor, people are sick. Heart disease and cancer are the leading causes of death in this country. We suffer from chronic illness and acute illness that is comparable to the suffering of infection in developing nations. Our people need health care as much as they need food to survive in these times. Unfortunate as it is, it is. And the problem is mainly linked to the food we eat and the exercise we don’t get. It’s a lifestyle choice but a choice that the majority of Americans are making. At this point and even more so in the near future, it is not even our choice at all but the choice of our parents and grandparents. The food we eat damages our genes so that even when we may have stellar lifestyle habits, our health continues to suffer. Even when we make the right choices, we still need doctors.

I believe this is the problem of the community rather than the problem of the individual. We have been led into the trap of junk food and inactivity. This is something that we should all take personal responsibility for but we should also realize that temptation, habit, and genes are not always in our favor.

As more health care facilities and communities push healthy habits, maybe we can ease up on the government involvement in our health care but I think that for now, standardized healthcare is just something we are going to have to accept.

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