CONTINGENT WORKERS AND

EMPLOYEE BENEFITS: HOT TOPICS

Daniel N. Janich & Thomas H. Mug

Guest Speaker:

James Kosciolek February 13, 2014

INTRODUCTION

“To compete in the future, organizations will need

to push talent management beyond the confines

of the enterprise wall to include the new extended

workforce: a global network of outside

contractors, outsourcing partners, vendors,

strategic partners and other nontraditional

workers. . . Even top-level managers and

executive teams are being replaced by temporary

CEOs, CFOs, CEOs and other highly skilled

troubleshooters.” Accenture 2013 Report: “The

Rise of the Extended Workforce”

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CONTINGENT WORKERS ARE HERE TO STAY

TREAD CAREFULLY!!!

Increase in use of contingent workers today comes

from:

Competition in the fast moving global market

which demands that businesses adopt a “just - in

– time” staffing model

60% of mid-size and large enterprises plan to

increase hiring of contingent workers in 2014 (The

Future of Work Report by Tower Lane Consulting)

Impact of the Affordable Care Act (ACA)

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WHAT IS A “CONTINGENT WORKER”?

History and roots of the contingent worker in the

United States

Extent of contingent workers in the U.S. workforce

Benefits of the contingent worker

Flexibility

Cost savings

Recruiting

Disadvantages

Loss of employee loyalty and morale

Confidentiality

Training

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NON-EMPLOYEE = CONTINGENT WORKER

Contingent worker is any individual working in a

capacity other than as a common law employee:

Independent contractors: self-employed workers or

freelancers paid directly by service recipient

Leased employees: hired and paid by staffing company that

contracts with service recipient to provide workers for a fee;

considered common law employees of the leasing

organization

Seasonal, temporary and part-time employees: hired for a

limited duration as common law employees, independent

contractors, or leased employees

Leased employees

Temporary or seasonal employees

Full- or part-time workers paid directly or through outside

agency

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IMPORTANCE OF

EMPLOYEE CLASSIFICATION

Income Taxes, FICA and Withholding

Applicability of Certain Employment Federal

Laws

Tax-Qualified Retirement Plans

Welfare Benefit Plans

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IMPORTANCE OF EMPLOYEE CLASSIFICATION TO

RETIREMENT PLANS

Retirement Plans

Improper inclusion of independent contractors or

exclusion of employees is considered a failure to

comply with the "exclusive benefit" rule of IRS Code

§401(a)(2).

Plans may be disqualified for improperly including

independent contractors or excluding employees.

Exclusion of employees creates liability for additional

benefits.

Errors may be corrected, albeit at a cost through IRS

correction programs.

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IMPORTANCE OF EMPLOYEE CLASSIFICATION TO

WELFARE PLANS

Welfare Plans

Welfare plans may allow non-employees to participate.

However, unlike employees, non-employees will be

subject to income tax on value of benefit.

Under ACA not covering misclassified workers could

lead to imposition of disastrous penalties.

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COMMON LAW EMPLOYEE: “RIGHT TO CONTROL”

COURT TEST

ERISA’s (§3(6)) ambiguous statutory “definition” of

“employee” is unavailing - “any individual employed

by an employer”– we need to look to:

The common law test used by the Courts to determine

“employee” status for ERISA

National Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992)

Supreme Court adopted the common law agency test relying

in part on the Restatement (Second) of Agency and the IRS

20-factor test.

A subjective multi-factor test was applied, focusing on the

(the hiring party’s right to control and the manner and means

by which the work is performed)

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COMMON LAW EMPLOYEE: IRS FOCUS

For tax and retirement plan purposes the IRS

considers the following when examining the

business:

Behavioral control: The company has the right to direct and

control how and where the worker does the task for which

the worker is hired.

Financial control: The company has the right to control the

business and economic aspects of the worker's job.

Type of relationship: How the company and the worker view

their mutual relationship (the intent regarding control over

the work).

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COMMON LAW EMPLOYEE: “RIGHT TO

CONTROL”: IRS 20 FACTOR TEST

Level of instruction.

Amount of training.

Degree of business

integration.

Extent of personal services.

Control of assistants.

Continuity of relationship.

Flexibility of schedule.

Demands for full-time work.

Need for on-site services.

Sequence of work.

Requirements for reports.

Method of payment.

Payment of business or travel expenses.

Provision of tools and materials.

Investment in facilities.

Realization of profit or loss.

Work for multiple companies.

Availability to public.

Control over discharge.

Right of termination.

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Revenue Ruling 87-41, 1987-1 C.B. 296:

MISCLASSIFICATION ISSUES ARE ADDRESSED IN:

Litigation: Individual or class action suits for benefits

by contingent workers

IRS/DOL Audits: Misclassification issue in the cross-

hairs. (IRS anticipates hiring thousands of new

agents to investigate ACA compliance)

Domino Effect: Audits may trigger collateral

investigations by federal or state authorities for

non-compliance with other federal and state

statutes, such as immigration, labor,

unemployment, workers’ compensation.

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LITIGATION INVOLVING

WORKER CLASSIFICATION ISSUES

Theories of liability under ERISA

Independent contractor cases

Vizcaino v. Microsoft Corp., 120 F3d 1006 (9th Cir. 1997) – Claim

for benefits by “freelancers” following IRS audit determining

employee status.

Issues include the ability exclude a class of employees from

receiving benefits and the validity of waivers of benefits.

Leased employee issues

Seasonal and temporary employee issues

Exclusion of part-time employees

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WHAT CAN EMPLOYERS DO TO MINIMIZE

LIABILITY FOR RETIREMENT BENEFITS

In written agreements with independent contractors,

use clear, plain language identifying worker status

and ineligibility for plan benefits.

Include knowing waivers of benefits with written

acknowledgements.

Leased employee arrangements should satisfy

§414(n)(2):

Such workers will not be reclassified as common law

employees.

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WHAT CAN EMPLOYERS DO TO MINIMIZE

LIABILITY FOR RETIREMENT BENEFITS

Ensure that benefit plan language clearly excludes independent contractors and leased employees from plan eligibility. Include provision that reclassification of independent

contractors or leased employees will not result in retroactive eligibility.

Ensure that treatment of contingent workers is distinct from that of regular common law employees. Review company operations and assigned job duties of regular

employees and contingent workers.

Implement program that documents type of work performed by contingent workers, how it is performed, what support is provided, and how they are supervised.

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ACA BASIC CONCEPTS

“Shared responsibility (pay-or-play employer mandate):” : a “large employer” must provide a minimum level of health insurance coverage to its employees and their dependents.

“Large employer:” a business and all of its controlled group have an average of at least 50 full-time equivalent employees (FTEs) during the preceding calendar year.

FTE: 1 FTE = 120 hours worked/month (total hours worked by all personnel: full; part-time and other employees).

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ACA BASIC CONCEPTS:

“PAY-OR-PLAY” PENALTIES

Penalties (“pay-or-play”): Starting in 2015 a “large employer” that fails to provide affordable and adequate health insurance coverage faces penalties based on the number of its actual full time employees – ACA defines “employee” by reference to ERISA.

During 2014 employers must ascertain who their

full time employees are. Analysis must include re-

evaluation of independent contractors

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ACA BASIC CONCEPTS:

PAY-OR-PLAY PENALTIES (CONT.)

“No coverage” - §4980H(a) Penalty:

If an employer does not offer minimum essential

coverage to all full-time employees (and their

dependents), the employer must pay an annual tax of

$2,000 for each full-time employee (less the first 30), if at

least one full-time employee obtains federally- subsidized

coverage through an "Exchange.”

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ACA BASIC CONCEPTS:

PAY-OR-PLAY PENALTIES (CONT.)

“Unaffordable Coverage”-- §4980H(b) Penalty:

Employers offering "minimum essential

coverage" to all full-time employees and

dependents but at least one full-time employee

obtains federally-subsidized coverage through an

Exchange, the employer must pay an annual tax

of the lesser of: (1) $3,000 per subsidized full-time

employee; or (2) $2,000 for each full-time

employee (less the first 30 full-time employees)

Both penalties are determined on a month-by-

month basis. The tax is not deductible.

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ACA FINAL IRS REGULATIONS (ISSUED

FEBRUARY 10, 2014) – TRANSITION PROVISIONS

In 2015, rules apply to employers with 100+ full-time

employees. (Employers in the 50-100 range need to

certify eligibility for transition and need to meet

requirements, including not reducing the current

workforce and maintain previously offered coverage).

In 2016 the rules apply to all employers with 50+ full

time employees.

In 2015, to avoid penalties, employers with 100+ full

time employees must offer coverage to 70% of their

full-time employees and their dependents.

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ACA FINAL IRS REGULATIONS (ISSUED

FEBRUARY 10, 2014) – TRANSITION PROVISIONS

In 2016, to avoid penalties, employers with 100+

employees must offer coverage to 95% of their full-

time employees and their dependents.

Employers with non-calendar year plans are to start

implementation of the mandate at the start of their

2015 plan year, rather than on January 1, 2015.

Ability to use shorter time frame in 2014 (at least six

months) to ascertain whether the employer is subject

to the mandate in preparation for 2015.

Requirement to provide coverage to dependent

children delayed until 2016.

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ACA AND CONTINGENT WORKERS

Both “small” and “large” employers may be

motivated to reduce the number of full time

employees through the use of contingent workers:

Small employers may want to keep the number of

full time employees under 50, so that they would

not have to provide health insurance

Large employers that do not want to provide health

insurance, may want to reduce the number of full

time employees to minimize penalties

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ACA INCREASES MISCLASSIFICATION RISKS –

PROCEED WITH CAUTION!!!

Unintended consequences of misclassification:

Substantially increased risk of DOL and IRS scrutiny

Potential “Domino” effect of scrutiny from other

governmental agencies

Potentially very high penalties if independent contractors

are reclassified by the IRS as employees

Potential for need to modify business practices

NOTE: The Final Regulations do not provide section

530 safe harbor relief because employers need to

ascertain who their employees are based on the

common law standard

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ACA and PART-TIME EMPLOYEES

Trend: 15% of “Large” and 20% of small employers

plan to adjust hours so that fewer employees will

qualify for health care coverage:

Reclassifying full-time employees as part-

time: Sodexo, Ball State.

Capping the number of hours worked by part-

timers: Seaworld capped part-time hours to

28 from 32.

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ACA AND PART-TIME EMPLOYEES (CONT.)

Cutting health care benefits for part-timers:

Target, Home Depot, Trader Joe’s, Forever 21

are cutting health care benefits for part-

timers.

Trader Joe’s and Target offer low paid part-

time employees $500 towards purchase of

insurance.

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ACA AND PART-TIME EMPLOYEES(CONT.)

Sodexo: reclassified full time employees (30

hr/week for 6 weeks) as part-time in a workforce

“realignment.” DOL “preliminary review”

concluded: “Given the facts as we understand them,

this change in scheduled work hours and

subsequent pay reduction does not appear to

violate either the law or a contract.”

• Reclassified workers are considering unionizing

Ball State: is re-examining its workforce with an

eye towards cutting hours.

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STAFFING AGENCIES AND ACA

IRS presumes temporary staffing agencies are the

common law employers of their leased workers.

IRS – True common law employer is ultimately

responsible for pay-or-play compliance.

Risks – Possibility that user of staffing agency be

deemed “true” common law employer obligated to

offer coverage to employees of staffing agency.

Recommendation: Include indemnification for

“pay-or-play” penalties in contract with staffing

agency.

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STAFFING AGENCIES AND ACA (CONT.)

Final IRS Regulations: New Rule applicable when

the staffing agency is not the common law

employer: For an offer of coverage to an employee

performing services for the agency and the agency makes

an offer of coverage to the employee on behalf of the

client under the agency plan, the offer is treated as made

by the client for pay-or-play purposes only if the fee the

client would pay to the agency for an employee enrolled

in health coverage is higher than the fee the client would

otherwise pay the agency for the same employee if that

employee did not enroll in health coverage.

•

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WHAT EMPLOYERS NEED TO DO TO MINIMIZE ACA

LIABILITY

Exercise prudence when reclassifying regular

employees as non-employees.

Preserve attorney-client privilege during the planning and

implementation process of review and reclassification –

consultants and other professionals should be hired by

counsel.

Identify legitimate business considerations for

reclassification.

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WHAT EMPLOYERS NEED TO DO TO MINIMIZE ACA

LIABILITY (CONT.)

Review current contingent worker status to ascertain whether they are in fact common law employees for ACA purposes.

Convert Section 530 workers to independent contractor status under a written contract

Review and amend health plan language to insure definitional consistency.

Review state laws regulating insurance coverage to ascertain what full-time status means for coverage purposes.

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ADDITIONAL RESOURCES

Daniel N. Janich: “Contingent Workers and Employee

Benefits” – Chapter 37 of ERISA Litigation (BNA Books,

4th ed. and Cumulative Supplement 2012)

Daniel N. Janich: “Without Proper Planning, Contingent

Workers Pose Serious Legal Risks to Employer Benefit

Plans” in Employee Benefit Plan Review, July 2011

“Employers Beware: How Do You Protect Against The

Significant Legal Risks Posed by The Use Of Contingent

Workers?” (Firm newsletter Employee Benefits &

Executive Compensation Update - Winter 2009)

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DISCLAIMERS

These materials, and the oral presentation accompanying

them, are for educational purposes only and do not

constitute legal advice or create an attorney-client

relationship.

Any information in this presentation is not intended and

cannot be used for the purpose of avoiding any penalties

that may be imposed on any person under the Internal

Revenue Code.

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