Independent Contractors and Health Care Reform

Independent contractors face unique challenges under the Patient Protection and Affordable Care Act (“ACA”).  Most notably, independent contractors (also referred to as “business professionals”) must look at health care reform from both the perspective of their external relationships and their internal business operations.  One the one hand, the ACA has motived many independent contractors to reexamine their relationships with the companies they work with.  At the heart of this analysis, these professionals focus on whether they should be classified as employees of the companies they work with or whether they are truly independent contractors.  Under health care reform, the differences between these classifications are substantial.  On the other hand, independent contractors are evaluating their own business operations to make sure these operations continue to make sense in the current health care reform environment.  Frequently, independent contractors discover that their existing business operations need to be modified to support their health care reform strategies.  Please allow me to discuss these challenges in greater detail.

Employees v. Independent Contractors

Every business professional should evaluate whether he or she is an independent contractor or an employee of the company he or she works with.  Unfortunately, this question does not always have an easy answer.  In most cases, the classification of a business professional hinges on an individual analysis of the specific facts surrounding his or her relationship with the company.

For purposes of the ACA, employees are classified according to common law standards. Under the common law, a number of factors are evaluated to determine whether a business professional is the common law employee of a company.  Generally, these factors weigh the level of control the company has over the business professional.  Ultimately, the determination of whether an individual is an employee or independent contractor is based on a holistic analysis of the relationship between the business professional and the company.  It should be noted that just because a company classifies and pays a business professional as an independent contractor, it does not always mean that the business professional is truly an independent contractor under the law.  Courts typically focus on the substance of the relationship over its form.

Over the last several years, courts across the country have been increasingly asked to determine whether business professionals are employees or independent contractors.  While many of these cases have focused on claims related to tax withholdings, wages and uncompensated work, it is possible that future litigation will focus on the health insurance regulations under the ACA.  Under the ACA, a large employer is required to offer health insurance to full-time employees or pay penalties to the IRS, under certain circumstances.  A large employer is an employer who employs an average of at least 50 full-time equivalent employees during an applicable year.  Furthermore, if a small employer offers health insurance to its employees, it is required to offer the coverage to all of its full-time employees.  As such, future cases may focus on whether business professionals, who have been classified as independent contractors by the companies they work with, are nevertheless entitled to participate in the applicable company’s health plan.  Cases may also consider whether these same business professionals should be included in the company’s calculation of full-time equivalent employees to determine whether the company is a large employer and subject to ACA requirements.

Clearly, many companies may prefer to have current independent contractors remain classified as independent contractors for health care reform purposes.  For business professionals, the answer may not be as clear.  On the one hand, some business professionals may desire to be classified as employees so they can participate in the health plans of the companies they work with, especially if health insurance premiums continue to rise.  On the other hand, some business professionals may prefer to remain independent contractors so they can take advantage of the tax incentives associated with health insurance plans under the ACA.  For example, individuals who purchase health insurance through the Health Insurance Marketplace may be entitled to premium tax credits and subsidies if they meet certain requirements.  However, if the individual is offered affordable coverage through an employer that provides minimum value under the law, the individual is not eligible to receive premium tax credits and subsidies, even if he or she otherwise qualifies for the credits and purchases his or her own insurance coverage through the Health Insurance Marketplace.  In addition, some business professionals that qualify as small businesses may be eligible to receive a small business health care tax credit of up to 50% of the employer’s contribution to its employees’ health insurance premiums.  If a business professional provides health insurance to his or her employees and the company that the business professional providers services to does not, the business professional may lose key employees if the business professional cannot maintain his or her independent contractor status.  Finally, a business professional may have more flexibility and choice in choosing a health plan as an independent contractor.

Ultimately, the determination of whether a business professional is an employee or independent contractor of a company will have a profound impact on the health care reform strategy for that business professional.  As such, business professionals should carefully evaluate their current classification with their trusted advisors and develop a health care reform strategy that is consistent with that classification.

Internal Business Operations

Business professionals should also evaluate their operations to make sure they continue to make sense in the current health care reform environment.  An important part of that process is looking at the structure of the independent contractor’s business. Some business professionals elect not to create a corporate entity for their operations.  This strategy has several potential pitfalls.  First, the existence of a separate business entity is a factor that weighs in favor of the business professional being classified as an independent contractor.  The contracting company pays the independent contractor’s corporate entity and enters into applicable contracts and agreements with that entity.  The business professional’s corporate entity helps substantiate the independence of the business professional from the contracting company.  Second, the corporate entity provides the business professional with a layer of protection from potential exposure and liability related to the independent contractor’s business activities.  Business professionals that do not utilize a corporate entity in their business dealings risk being personally liable for potential claims.  Third, if the independent contractor does have employees, the lack of a corporate entity may have a significant impact on tax matters related to the operations.  On a positive note, some corporate entities do not increase the tax liabilities associated with business operations, yet they provide the protection and independence the business professional desires. Ultimately, if a business professional does not currently utilize a corporate entity for his or her business dealings, he or she may want to speak with his or her trusted advisors about the structure of his or her business operations.

Many business professionals have engaged workers to help them with the operation of their businesses.  For example, in the real estate industry, some workers may be hired to hold open houses and discuss the price and terms with prospective buyers who come to see the property.  Other workers are hired to do more administrative tasks such as bookkeeping, scheduling and/or managing ads and social media.  Regardless of whether a worker is a family member, neighbor or intern, the critical question is: are these workers the employees of the independent contractor or are they independent contractors themselves?  Here, the business professional will have to engage in the same common law employee analysis discussed above to determine whether each worker is an employee or independent contractor.  As noted above, the more control the business professional has over the worker, the more likely it is that the worker is an employee.  If the business professional wants to classify his or her workers as independent contractors, it is possible that the business professional may have to make modifications to the existing relationships with the workers.

The classification of workers as employees may have important implications under the ACA.  While a few employees may not require the business professional to engage in a detailed analysis of whether he or she is a large or small employer under the ACA, these employees will likely trigger other requirements.  First, as an employer, the business professional is required under the ACA to provide notice to his or her employees about the Health Insurance Marketplace and the business professional’s existing health care coverage for eligible employees.  This requirement applies to all employers that have at least one employee.  Second, the business professional may be required to report information to the IRS related to his or her health care coverage and applicable employee data.  Third, even if the business professional does not offer health insurance to full-time employees, the business professional’s employees may, nevertheless, seek guidance from the business professional related to health insurance and the Health Insurance Marketplace.  Finally, if the business professional has employees, he or she will likely want to continue to monitor the health care reform landscape as ACA regulations are continually changing and numerous rules are scheduled to become effective over the next several years.

Conclusion

Ultimately, independent contractors should evaluate their operations to make sure they are consistent with the independent contractor’s overall business and health care reform strategies.  In light of the changes related to the ACA, it is possible that independent contractors may wish to modify their business structure and practices to provide them with greater stability, protection and flexibility.  Independent contractors may wish to discuss their business operations with their team of trusted advisors to develop a strategy that is aligned with their goals and objectives.

To find out more about the Affordable Care Act impacts independent contractors, contact attorney Michael James at mjames@michaeljameslaw.com, 810-936-4040 or www.michaeljameslaw.com. Michael James provides representation and counseling related to all facets of business enterprise and health care matters.

© 2014 Michael P. James, J.D., M.B.A., CSSGB

(The Greater Lansing Association of Realtors has received permission to republish a similar version of this article I prepared for its Realtor members.)

Final Rules Regarding “Pay or Play” Create Important Changes for Employers Under ACA

IRS Final Regulations on Employer Shared Responsibility Released

On February 10, 2014, the United States Department of Treasury issued its final rules concerning the shared responsibility requirements for employers regarding health coverage under the Affordable Care Act.  Although these regulations affect numerous aspects of health care reform and its applicability to various employers, I have identified some of the most important changes that employers should be aware of:

1)     Large Employer Mandate Delayed (50-99 Employees, including full-time equivalent employees): The shared responsibility requirements for large employers, also known as “Pay or Play,” have been further delayed for some large employers.  Employers with 50 to 99 employees (including full-time equivalent employees (“FTEs”)) will not be penalized for failing to provide health insurance to their full-time employees until 2016.  Before this change, employers with 50 to 99 employees (including FTEs) were required to provide health insurance to their full-time employees starting in 2015 or face penalties.

2)     Large Employer Mandate Modified (100+ Employees, including full-time equivalent employees): The shared responsibility requirements for employers with over 100 employees (including FTEs) have also been changed.  Now, these employers are only required to provide adequate and affordable coverage to 70% of their full-time employees in 2015.  In 2016, these employers must provide appropriate coverage to 95% of their full-time employees.  Before this change, the requirement to provide appropriate coverage to 95% of full-time employees was slated to take effect in 2015.

3)     “Pay or Play” Penalties Modified for 2015:  For 2015 plus any calendar months of 2016 that fall within the employer’s 2015 plan year, if a 100+ FTE Employer is subject to the “Pay or Play” penalties for failing to provide health insurance coverage to its full-time employees, the employer must pay a penalty equal to: $2,000 x (# of full-time employees – 80).  Before this change, the employer only received a 30 full-time employee reduction to the “no coverage” penalty, instead of 80.  Starting in 2016, all large employers that fail to provide health insurance to their full-time employees will only receive a 30 full-time employee reduction to the “no coverage” penalty.

4)     Seasonal Employees Redefined: The definition of seasonal employees has been expanded to include workers in a position for which the customary annual employment period is 6 months or less.  Prior to this change, seasonal employees were those individuals that worked 120 days (roughly 4 months) or less during the year.

5)     Certain Hours of Service Performed by Members of Religious Orders are Exempt: In determining whether its members are full-time employees, a religious order is permitted to not count the hours of service related to any work performed by an individual who is subject to a vow of poverty as a member of that order when the work is in the performance of tasks usually required for active members of the order.

6)     Bona Fide Volunteers Do Not Count: Government entities and 501(c) organizations with tax-exempt volunteers do not need to count the hours of service provided by bona fide volunteers when determining their status as a large or small employer under the ACA.

7)     Work Study Program Student Employees Do Not Count:  Educational institutions do not need to count the hours worked by students that are employed in positions subsidized through the federal work study program or a substantially similar program at the State or local level in determining whether they are a large or small employer under the ACA.  However, the hours worked by students employed outside of these programs must be counted by the educational institution to determine whether it is subject to the shared responsibility requirements of the ACA.

8)     Approved Methodology for Determining Adjunct Faculty Hours:  Institutions that employ adjunct faculty are required to use a reasonable method to identify and track the hours of service for adjunct faculty.  The IRS has identified one method that it deems reasonable.  The institution must credit the adjunct faculty member with: (a) 2 ¼ hours of services per week for each hour of teaching or classroom time (this would add an addition 1 ¼ hours for activities such as class preparation and grading) and, separately (b) an hour of service per week for each additional hour outside of the classroom that the faculty member spends performing duties required to perform (office hours and faculty meetings).

To find out more about the Employer Shared Responsibility Requirements, “Pay or Play” Mandate, or how the final regulations impact employers and your business, contact attorney Michael James at mjames@michaeljameslaw.com, 810-936-4040 or www.michaeljameslaw.com. Michael James provides representation and counseling related to all facets of business enterprise and health care matters.

© 2014 Michael P. James, J.D., M.B.A., CSSGB