From Lexology —
The ACA incorporates the ERISA definition of an “employee” as “any individual employed by an employer.” (29 U.S.C. § 1002(6)). However, this doesn’t clearly define the term “employee” for compliance purposes. Final regulations refer to the common law “employee” definition of “right to control.” (26 C.F.R. § 54.4980H-1(a)(7).) The common law “employee” definition determines whether a worker is an “employee” or “independent contractor” based on whether the agency has the “right to control and direct the worker in the way of when, where, how and what work is performed.”
To help determine whether a worker is an employee under the common law rules, the IRS has identified 20 factors that may indicate whether the employer can exercise enough control to establish an employer-employee relationship. These factors, set forth in Revenue Ruling 87-41, were based on the circumstances that courts have identified and relied upon to assess whether an employment relationship exists. Not all of the factors must be present to find an employee/employment relationship, but the factors are guidelines used to assess whether an individual is an employee or an independent contractor. An employer must weigh the following:
Is the worker required to comply with instructions on where, how and when the work is to be done? Is the worker provided training to perform the job in a particular manner? Are the services performed an integral part of the organization’s operations? Must the services be rendered personally? Does the business hire, supervise and pay assistants to help the worker on the job? Is there a continuing relationship between the worker and the business? Does the organization set the work schedule? Is the worker required to devote his/her full time to the organization? Is the work performed at the company’s place of business or at specific places designated by the company? Does the organization direct the sequence in which work is performed? Are oral or written reports required to be submitted? Are payments to the worker made by the hour, week or month? Are travel and lodging expenses reimbursed? Does the organization furnish tools and materials? Does the worker have an investment in the equipment or facilities? Does the worker stand to realize a profit or loss as a result of the work? Does the worker work exclusively for the organization? Does the worker work predominantly for the organization or are services available to the general public? Can the worker be discharged for reason other than nonperformance of contract provision? Can the worker terminate the relationship without liability?
There are significant consequences which could follow if agencies misclassify a worker as an independent contractor who in fact is an employee. If an independent contractor is misclassified, the agency must, among other things, withhold state and federal income taxes, enroll him/her as a CalPERS member when the worker meets eligibility requirements and provide workers’ compensation insurance coverage. It would also be responsible for offering the employee (and his or her dependents) health insurance to avoid penalties if the employee is considered full-time under the ACA. Indeed, as of January 1, 2015, employers with 50 or more full-time or full-time equivalent employees will have to offer affordable healthcare insurance to at least 70% of their full-time workforce or face fines.
Moreover, if an IRS audit reveals that an employer has misclassified its independent contractors and reclassifies those workers as W-2 employees, the employer could be subject to fines for failing to offer healthcare coverage. That fine is $2,000 per year multiplied by the number of full-time employees (less 30, or less 80 during 2015 only) if the large employer is not offering coverage to substantially all (95%, or 70% during 2015 only) of its full-time employees and their dependents. If the large employer does offer coverage, but this coverage doesn’t meet ACA standards for minimum value and affordability, the employer could be required to pay a fine of $3,000 for each employee who receives coverage through Covered California and obtains a government subsidy. On the other hand, if the worker is truly an independent contractor, the worker will not trigger a potential penalty and will not be considered full-time for any IRS penalty determination. Independent contractors are obligated to make arrangements to pay their own taxes and to provide their own benefits.
Read the full story at What does the Affordable Care Act have to do with independent contractors?
- The Tax Risks of Misclassifying Employees – The National Law Review (natlawreview.com)
- Think Under 50 Employees Definitely Means No Obamacare? Think Again (forbes.com)
- IRS Cracking Down on ‘Independent Contractors’ (blogs.findlaw.com)