Friday, January 18, 2013

Avoiding ACA Mandate Can Bring Misclassification Woes

By former Associate Jack Blum

The Affordable Care Act (ACA) will require in 2014 that employers with fifty or more full-time employees provide each worker with health insurance or face a potentially steep fine. With the Treasury Department’s recent announcement that employers’ 2013 staffing levels will be used to determine the mandate’s application, yesterday’s Wall Street Journal highlighted one tactic that many small businesses might consider in an effort to avoid the ACA’s employer mandate: hiring independent contractors.

Employers considering this approach must take heed of the fact that calling a worker an “independent contractor” is not the end, or even the beginning, of the analysis of that worker’s status, and can get the employer into more difficulty. The employee-independent contractor determination is heavily fact-intensive and depends on both the terms and conditions of the worker’s contract and the actual on-site working conditions. If the “independent contractor” is working at your business location, under the supervision of your managers, alongside your employees, with your equipment, and subject to the same rules and policies as your other employees, then there is at least a strong possibility that your “independent contractor” is actually considered an employee under the law.

The Treasury Department’s most-recent proposed regulations on the employer mandate retain the traditional, common-law test to determine whether a worker is an “employee” for purposes of the employer mandate. Under this test, the ideal independent contractor performs specialized work on a per-job basis, exercises his or her own discretion and is not subject to the employer’s direction or control in performing the work, and operates his or her own independent business that also services other clients. The more a given employment situation departs from that model, the more likely it is that the worker will be found to actually be an employee.

While the ACA gives an employers an incentive to not classify workers as “employees,” other laws punish employers for misclassifying workers as “independent contractors.” The Maryland Workplace Fraud Act, for example, subjects employers to liability for actual damages and civil penalties of up to $5,000 for misclassifying employees as independent contractors, and misclassification can also be penalized by the relevant tax, unemployment insurance, and worker’s compensation authorities across jurisdictions.

First Published: The Law Firm of Paley Rothman Law Blog