Independent contractor misclassification penalties under the Affordable Care Act.

AuthorCastillo, Mario K.
  1. BACKGROUND ON EMPLOYER MANDATE PENALTIES II. BACKGROUND ON INDEPENDENT CONTRACTOR CLASSIFICATION III. INDEPENDENT CONTRACTORS AND THE AFFORDABLE CARE ACT A. Independent Contractors and the Initial ALE Determination B. Independent Contractors and Complex Corporate Structures C. Appropriately Staffing Independent Contractors D. The Employer Mandate's Strong Penalty and Independent Contractors E. The Employer Mandate's Weak Penalty and Independent Contractors IV. CONCLUSION President Barack Obama signed the Patient Protection and Affordable Care Act ("ACA") into law on March 23, 2010. (1) Today, more than three years later, the ACA remains one of the most politically divisive issues currently facing our nation. (2) It is so divisive in fact that it led to the first federal government shutdown in seventeen years. (3) Moreover, healthcare management disagreements also caused, in part, the 1996 federal government shut down. (4)

    The present controversy in Congress is described as follows: The ACA's centerpiece is the creation of an individual responsibility to carry a particular level of medical insurance called minimum essential coverage or pay a financial penalty (the "individual mandate"). (5) Conversely, certain employers have a parallel responsibility to offer a particular level of medical insurance, a qualified healthcare plan, to full-time employees or also pay a financial penalty ("the employer mandate"). (6) As originally enacted, both the individual and employer mandates were set to begin on January 1, 2014. (7) This changed on July 2, 2013, when the Obama Administration announced that the employer mandate penalties and reporting requirements would be delayed until January 1, 2015. (8) Republicans also wanted the individual mandate to be delayed until January 1, 2015. (9) This is the controversy in the U.S. Congress that led our nation's federal government to shut down this past fall. While the date by which individuals had to purchase coverage was extended for a few days, (10) the individual mandate nevertheless took effect on January 1, 2014, as scheduled.

    The employer mandate delay was received with a sigh of relief by the employer community. (11) Nevertheless, many employers are still not taking the necessary steps to both remain competitive in their particular labor markets, and to avoid government audits, investigations and lawsuits. Every company is unique. No company has the same owners, the same employees, or faces the same challenges with the benefit of the same resources. Notwithstanding these differences, some industry wide guidance is available for energy companies hoping to successfully navigate the ACA and remain competitive for labor. (12)

    The media's coverage of the employer mandate has almost exclusively restricted itself to how that mandate will affect low-wage, unskilled labor markets. (13) Such coverage does little to aid most energy corridor employers who, for the most part, do not operate out of low-wage, unskilled labor pools. (14) How such employers react to the employer mandate should be completely different from how an employer in the energy industry reacts. An appropriate employer reaction accounts not only for what the law says, but also what labor marketplaces dictate.

    Some reports indicate that while overall employment has increased roughly one percent over the last few years, oil and gas employment has increased at a rate of forty percent over the same period. (15) However, the labor supply is not keeping up with employer demand. 16 As it relates to their workforces, oil and gas employers are largely worried about a labor shortage. (17) These employer concerns are evidenced by increased salaries, bonuses, and increases in other fringe benefits offered to employees. (18)

    While some employers may be taking steps to skirt offering employees healthcare benefits, the same response from an oil and gas employer could be disastrous given the current labor marketplace in which the latter competes for labor. Aside from salary, healthcare is often cited as one of the most important variables in a skilled employee's decision to accept a job offer or remain employed with a particular employer. (19) In a highly competitive market for employees, the question is not whether employers can afford to offer full-time employees coverage, but instead, whether they can afford not to do so.

    It is clear that to remain competitive in such a currently fiercely competitive labor market, energy companies are going to have to offer employees robust benefits as they compete with each other for employees. (20) It is also clear that it is far more likely that a worker performing services for a particular energy company may be misclassified by that energy company as an independent contractor, thereby rendering that misclassified worker ineligible for benefits under the ACA. (21) Therefore, independent contractor relationships need to be reviewed with increased vigor during 2014 to ensure that any particular company's response to the ACA has been adequately tailored. (22) The goal of this Article is to justify that renewed vigor.

  2. BACKGROUND ON EMPLOYER MANDATE PENALTIES

    The Affordable Care Act's employer mandate requires certain employers to offer certain benefits to its full-time employees or pay a nondeductible penalty to the IRS for noncompliance. (23) Employers that employ more than fifty individuals must undertake some rather arcane calculations to determine if they are required to comply with the employer mandate because of their size. (24) I will assume for this Article's purpose that all employees are full-time employees and dispense with arcane calculations involving full-time equivalents and part-time employees. (25)

    The Affordable Care Act refers to an employer that has at least fifty full-time employees or their equivalent as an Applicable Large Employer ("ALE"). (26) An ALE must offer all of its full-time employees a qualified healthcare plan, or pay a nondeductible penalty to the IRS. (27) An employer has essentially three options once it learns it is an ALE: (1) offer a qualified healthcare plan to all full-time employees, (2) offer some lesser healthcare plan to all full-time employees, or (3) offer nothing to those full-time employees. (28)

    If an employer chooses the second or third option, the full-time employee can go to an exchange to obtain coverage. (29) Depending on the employee's income, the employee may qualify for a government subsidy to help defray the cost of buying health insurance coverage without the employer's help. (30) If a full-time employee obtains a subsidy, regulators will audit the employer who employed that full-time employee during the month for which a subsidy was authorized. (31) Regulators will then impose a penalty commensurate with whether the employer elected the second or third option outlined above.

    The employer mandate penalty tied to an employer's second option is called the "weak penalty." (32) The employer mandate penalty tied to an employer's third option is called the "strong penalty." (33)

    The weak penalty gets its name because it is the less severe of the two and is reserved for employers that at least try to comply with the ACA to some extent. An affected ALE has to pay a yearly penalty of $3,000 (or a monthly penalty of $250) for every full-time employee that obtains a government subsidy. (34) The reason this penalty is called the "weak" penalty is because the employer will only have to pay for each full-time employee that actually obtains a subsidy on an exchange. (35) In other words, if only one full-time employee obtains a subsidy, that employer pays $250 for every month that the employer employed that otherwise eligible full-time employee.

    The strong penalty gets its name because it is the more severe of the two penalties and is reserved for employers that do nothing. Under this penalty, an affected employer adds all of its full-time employees and then subtracts thirty--then multiplies each remaining full-time employee by a yearly penalty of $2,000 (or $167 a month). (36) For example, if an employer has fifty full-time employees, that employer would subtract thirty employees (leaving twenty), and then multiple that twenty by $2,000, for a total penalty of $40,000. Thus, the penalty is $40,000 if just one full-time employee from that business obtains government help on an exchange. Unlike the weak penalty, with the strong penalty there is a domino effect that determines a penalty based not just on the full-time employee that went to the exchange, but on all full-time employees employed by that particular employer. (37)

    The incentive to offer something, rather than nothing, should be clear. If an employer has fifty full-time employees and one of those employees obtains a subsidy for a full year, the yearly penalty would be $40,000 under the strong penalty, but only $3,000 under the weak penalty. The same employee's action produces a $37,000 difference in employer mandate penalties, depending on which of the three options mentioned earlier the employer ultimately undertakes. Note that this is the smallest possible ALE. As the employer's size grows...

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