KERN BUSINESS JOURNAL
October / November 2015
Independent contractors must be truly ‘independent’ By Holly Culhane
hese workers are members of the growing “1099 Economy.” The number is IRS code for self-employed. Some employers call them “independent contractors.” However, an increasing number of people, including federal regulators, are calling them “employees.” The U.S. Labor Department’s recently issued Fair Labor Standard Act guidance is sounding a loud warning to the nation’s employers that they Holly Culhane must be very cautious when it comes to classifying workers as independent contractors rather than employees. Labor Secretary Thomas Perez declared misclassification to be a serious problem because it deprives workers of overtime and protections, such as unemployment insurance and workers’ compensation. It also deprives state and federal agencies of required payroll taxes. Tammy McCutchen, a former Labor Department attorney who now represents employers, told The Wall Street Journal recently that the federal directive “essentially declares war on the use of independent contractors in certain industries.” The advisory letter was written by David Weil, the Labor Department’s wage and hour administrator. It was distributed in the wake of a recent California ruling that Uber taxi service was improperly treating a driver as an independent contractor. While the ruling applied to only a single driver, the handwriting seems to be on the wall for other employers in the growing “sharing economy” that includes ride-hailers Uber and Lyft, Luxe ondemand parking and a variety of delivery companies. While some are fighting to hold onto their independent contractor arrangements, others have voluntarily converted their independent contractors to employees to avoid legal challenges. One notable employer, the San Francisco-based home cleaning services company Homejoy, announced it would shut down. Depending on who is counting, approximately 50 million American workers are classified as nonemployee contractors, freelancers or temporary workers. The number is expected to grow to 60 million by 2020. “We very much believe that misclassification is a problem that has been growing,” Weil told the Associated Press. “It undermines all the legitimate employers who are doing the right thing … but they are put at a competitive disadvantage.” Employers argue that classifying work-
ers as independent contractors is appropriate in today’s economy. Startup companies need to be flexible and control costs. Independent contractors allow workers to work for more than one employer concurrently and on a short-term, part-time basis to meet specific needs. Representatives of workers, who are increasingly challenging the classification in court, argue that the independent contractor arrangement is simply a device to save money at a workers’ expense. The Labor Department’s 15-page advisory letter, which includes industryspecific examples, clarifies the limits on independent contractor arrangements. It emphasizes the importance of the “economic realities” of a worker’s employment rather than a label that has been attached to a position. Basically, the ability to classify a worker as an independent contractor boils down to answering these questions: Does the worker play a key role in the employer’s business? Is the work entrepreneurial? Does the employer control what he or she does? Consider a driver with a well-known, nationwide delivery company. The driver wears the company’s uniform, drives a company truck and follows a route set by the company, but he is treated as an “independent contractor.” Likely, the company’s arrangement will not be sustained under the Labor Department’s recent directive. But if this is not enough to rein in the practice, a bill recently introduced by two U.S. senators – Robert Casey of Pennsylvania and Al Franken of Minnesota – may deliver a fatal blow. The Payroll Fraud Prevention Act of 2015 would amend the Fair Labor Standards Act to require workers be told if they are being classified as an employee or independent contractor and the consequences of the classification. Further, employers would be required to inform workers of their rights to file grievances about their classification. Employers would face penalties, including the payment of lost wages and damages, for misclassifying workers. Employers who use independent contractors are being placed under intense scrutiny by state and federal regulators. They are also being targeted by an increasing number of worker lawsuits. Now is the time to analyze the arrangement, seek the advice of a labor law attorney or CPA and ensure that independent contractors are, indeed, independent. Holly Culhane is president of the Bakersfield-based human resources consulting firm P.A.S. Associates and P.A.S. Investigations. She can be contacted through her website www.PASassociates. com and through the PAS Facebook page.
Understanding how Affordable Care Act affects small businesses By Joel A. Bock
he size and complexity of the Patient Protection and Affordable Care Act — commonly referred to as the Affordable Care Act or “Obamacare” — has necessitated that businesses take into consideration its complex provisions and requirements as part of the process for offering a health care arrangement to its employees. A common misunderstanding amongst smallbusiness owners is that the provisions of the Affordable Care Act are inapplicable to them if they have fewer than 50 Joel A. Bock full-time equivalent employees. This is not only incorrect, but unfortunately can lead to a substantial tax. Guidance issued by the IRS in Notice 2013-54 lists the following question and answer:
Q: “The HRA (Health Reimbursement Arrangement) FAQs state that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. May other types of group health plans used to purchase coverage on the individual market be integrated with that individual market coverage for purposes of the annual dollar limit prohibition?” A: “No. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the annual dollar limit prohibition. For example, a group health plan, such as an employer payment plan, that reimburses employees for an employee’s
substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However the employer payment plan will fail to comply with the annual dollar limit prohibition because (1) an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.” The practice of reimbursing employees for premiums they pay for health insurance (referred to as employer payment plans) either through a qualified plan in the Health Insurance Marketplace or outside the Health Insurance Marketplace may be subject to a $100 per day excise tax per applicable employee (i.e., $36,500 per year, per employee). For example, if an employer with five employees who was not otherwise required to provide health insurance to his employees was operating an employer payment plan, then that employer could be subject to the IRC §4980D excise tax of $182,500 per year (i.e., five employees x $100 x 365 days). Generally, these provisions would have been applicable to small businesses beginning Jan. 1, 2014; however, on Feb. 18, 2015, the IRS issued transition relief in the form of Notice 2015-17. The transition relief states that the IRS will not assess the IRC §4980D excise tax on small businesses (i.e., fewer than 50 full-time equivalent employees) until after June 30, 2015. If you believe that these provisions may be applicable to your small business, please consult your insurance and tax advisors to determine how these laws impact your specific situation. Joel A. Bock, CPA, MST is a partner in Daniells Phillips Vaughan & Bock, a Bakersfield accounting firm.