650-266-9700
Employee vs. Contractor – Implications for PPACA Compliance | Johnson & Dugan Insurance
By Niko Washington, Account Executive and Jody Lee, Compliance Manager, Johnson & Dugan
The Patient Protection and Affordable Care Act (PPACA) offers new reasons for employers to be sure workers are properly categorized so that all eligible employees are offered medical benefits that are affordable and meet the minimum value requirements. According to a recent New York Times article the IRS “is emphasizing the distinction between employees and self-employed independent contractors this year”. Employers should be reviewing staffing practices to avoid penalties.
Employee Definition
The definition of an employee, according to Code §4980H of PPACA, is an individual who is an employee that meets the common-law test. The common-law test involves determination of behavioral control, financial control and the type of relationship between the employer receiving the worker’s services and the worker. Factors include how much direction the company provides the worker, control over work hours and location and whether or not the work is exclusively for the employer.
Independent Contractors
The State of California Employment Development Department (EDD) provides an Employment Determination Guide (http://www.edd.ca.gov/pdf_pub_ctr/de38.pdf), which is “used by the proprietor of a business to determine whether a worker is most likely an employee or an independent contractor.”
For any worker that is hired in a capacity other than as a W2 employee, a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (http://www.irs.gov/uac/Form-SS-8,-Determination-of-Worker-Status-for-Purposes-of-Federal-Employment-Taxes-and-Income-Tax-Withholding) can be completed and filed with the IRS.
The policy to hire an independent contractor vs. hiring a W2 employee should be developed with specific guidelines and should be periodically reviewed to track and manage employee classification.
Temporary Employees
When employing temporary workers through an outside agency, identifying how benefits are provided should be part of the agency contract. The contract from the temporary agency should indicate whether medical insurance is provided to their workers, and a separate fee should be billed to the employer for insurance coverage. The employer should verify that the coverage offered is affordable and meets minimum value standards, and that the appropriate benefit eligibility waiting periods are applied. If providing medical insurance is not listed in the contract, then more than likely the temporary agency does not offer medical benefits.
Unfortunately, because temporary employee arrangements vary so widely, there is not a black-and-white determination of whether a temporary employee would be considered a common-law employee. The EDD Employment Determination Guide (http://www.edd.ca.gov/pdf_pub_ctr/de38.pdf) can also be used to categorize temporary workers. Ultimately, the more control the temporary agency keeps, the greater the likelihood the temporary agency is the common-law employer.
PPACA Reporting
Proper employee classification will impact Internal Revenue Service (IRS) reporting required by PPACA. Any worker identified as a common-law employee will need to be included in 1095-C (Section 6056 large employer play or pay requirement) reporting. Therefore, an employer will need to count its contract and temporary workers if the workers are their common-law employees. Further, temporary workers employed directly by the employer are common-law employees who will need to be counted for PPACA reporting purposes.
For additional resources relating to Common-Law Employees and PPACA, contact Johnson & Dugan.
