Affordable Care Act Amplifies Risk of Misclassifying Employees

by Jan Cottingham  on Monday, Sep. 2, 2013 12:00 am  

From left: Chris Doolittle of BKD LLP, Missy McJunkins Duke and Amber Bagley of Cross Gunter Witherspoon & Galchus.

Health care reform is increasing the importance of the correct classification of employees, employment lawyers and others say.

That’s because the “employer mandate” of the Patient Protection & Affordable Care Act requires businesses with 50 or more full-time employees (or their equivalent) to offer those workers health insurance. If employers misclassify their employees — as independent contractors, for example — they could find themselves not only facing sanctions under wage and hour laws, but costly penalties under the ACA of from $2,000 to $3,000 per misclassified employee.

Heightening the risk is an IRS crackdown, now in its third year, on worker misclassification, particularly in the area of independent contractors.

The temptation to classify an employee as an independent contractor instead of a traditional employee is always present. Independent contractors don’t cost their employers payroll taxes, unemployment insurance or worker’s compensation insurance. Under the Affordable Care Act, the temptation to under-report full-time or “traditional” employees is even greater.

Employment lawyers, accountants and human resource professionals are warning businesses to resist that temptation.

Chris Doolittle, a senior manager at BKD LLP in Little Rock, said he’s particularly worried about businesses on the cusp of the 50-employee ACA requirement. “If a few independent contractors get reclassified into full-time employees, it could pull [such businesses] under the law and subject them to penalties. That’s my concern.”

He gave the example of a business with 45 full-time workers. “They think that they’re not under the definition of a large employer and then all of a sudden they’re surprised when an IRS exam comes along and several independent contractors are reclassified as full-time employees,” he said.

“Let’s just say the years under audit were ’17, ’16 and ’15 — and all those years the health care law was in effect. Well, you could have multiple years all of a sudden where you’re surprised by the health care penalty.”

Doolittle cited the Kiplinger Tax Letter of Aug. 2, published by the financial media company. “The stakes on worker classification will get higher, thanks to health reform,” it said. “After 2014, firms with at least 50 full-time employees must offer a reasonable level of affordable health insurance or large penalties will be due. If the reclassified workers push the company over 49 employees, that triggers the employer insurance mandate.”

(To view a PDF chart breaking down the national workforce by traditional, self-employed and independent status, click here.)

The IRS isn’t the only government agency cracking down on businesses that try to skirt laws protecting full-time traditional employees. The U.S. Department of Labor, as part of the Middle Class Task Force led by Vice President Joe Biden, also has employee misclassification in its sights.

The laws about independent contractors can be confusing, said Missy McJunkins Duke, a lawyer with Cross Gunter Witherspoon & Galchus of Little Rock. “There’s an IRS test, there’s a test under the Fair Labor Standards Act (the wage and hour law), there’s a test for unemployment purposes under Arkansas law (Workforce Services), there’s an ERISA test and there’s an Arkansas workers’ compensation test,” Duke said. “So there may be somebody who for workers’ comp purposes or unemployment under Arkansas law might be an independent contractor but under another test, they may not be.”



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