Affordable Care Act (ACA) Independent Contractor Provision

With the “full time equivalent workers” provision of the Affordable Care Act (ACA) comes new enforcement initiatives for workers classified as independent contractors. The IRS and Department of Labor have made the issue of misclassification a priority item, with this new legislation additional resources have been provided to agencies for enforcement. It is important for employers to look closely at any worker that may fall into suspicion.

Under ERISA (Employee Retirement Income Security Act) an employee is simply defined as “any individual employed by an employer.” The ACA contains similar language defining an employee. In determining whether an employee is an independent contractor, it is recommended to consider both the IRS and FLSA (Fair Labor Standards Act) testing.

The IRS Common Law Rules are based upon the degree of control and outline three areas of concern:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

There are sometimes exceptions to the Common Law Test which are outlines in the Reasonable Basis Test which will look at the following exceptions:

  • The employer has not treated the worker or similar workers as an employee.
  • There is a recognized practice in the employer’s industry of treating similar workers as independent contractors.
  • There are court decisions for treating similar workers as independent contractors.
  • The IRS has ruled in a “published ruling” that the workers are independent contractors.
  • The company has received a specific ruling from the IRS that the workers are independent contractors.
  • A past IRS employment audit of the employer did not disallow the worker’s treatment as an independent contractor.

Penalties for misclassification include payment of all employer and employee taxes and under the ACA employer mandate, other penalties are certainly likely.