Contingent workers 2-12v2


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This presentation addresses employee benefit plan exposure arising from employer use of a contingent workforce. Included is a discussion of employer liability arising from use of independent contractors to avoid or minimize ACA's "play or pay" coverage requirements.

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Contingent workers 2-12v2

  1. 1. CONTINGENT WORKERS AND EMPLOYEE BENEFITS: HOT TOPICS Daniel N. Janich & Thomas H. Mug Guest Speaker: James Kosciolek February 13, 2014
  2. 2. 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” 2
  3. 3. 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) 3
  4. 4. 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 4
  5. 5. 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 5
  6. 6. IMPORTANCE OF EMPLOYEE CLASSIFICATION  Income Taxes, FICA and Withholding  Applicability of Certain Employment Federal Laws  Tax-Qualified Retirement Plans  Welfare Benefit Plans 6
  7. 7. 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. 7
  8. 8. 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. 8
  9. 9. 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) 9
  10. 10. 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). 10
  11. 11. 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. 11 Revenue Ruling 87-41, 1987-1 C.B. 296:
  12. 12. 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. 12
  13. 13. 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 13
  14. 14. 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. 14
  15. 15. 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. 15
  16. 16. 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). 16
  17. 17. 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 17
  18. 18. 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.” • 18
  19. 19. 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. 19
  20. 20. 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. 20
  21. 21. 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. 21
  22. 22. 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 22
  23. 23. 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 23
  24. 24. 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. 24
  25. 25. 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. 25
  26. 26. 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. 26
  27. 27. 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. 27
  28. 28. 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. • 28
  29. 29. 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. 29
  30. 30. 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. 30
  31. 31. 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) 31
  32. 32. 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. 32