Topics. The Obligatory Lawyer Joke. Why use independent contractors rather than employees? Common reasons and consequences for

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1 EMPLOYEES, INDEPENDENT CONTRACTORS AND THE PATIENT PROTECTION & AFFORDABLE CARE ACT Presented by Randolph T. Barker, Esquire BERRY MOORMAN Professional Corporation Topics Why use independent contractors rather than employees? Common reasons and consequences for misclassification Suggestions for assuring proper classification and minimizing risk The Obligatory Lawyer Joke 1

2 A Dead Horse? Classification of Employee vs. Independent Contractor is an evolving issue that continues to confuse seasoned HR professionals Traditional IRS 20 point test streamlined Increased investigation and enforcement activity Allocations to hire more DOL and IRS enforcement personnel PPACA regulations make it more difficult to defend IC classifications Why Use Independent Contractors? Tax Administration and Savings Income Tax Withholding Exception Social Security Taxes Medicare Taxes Insurance Savings Unemployment Workers Compensation Health and Other Benefits More Reasons Not obligated to comply with FLSA wage and hour requirements (e.g., minimum wage, overtime, record-keeping and anti- retaliation provisions) Not hungry for Alphabet Soup? ADA, FMLA, Title VII, ADEA, etc. do not apply to IC s Reduces number of FTE s under PPACA ( Obamacare ) and corresponding taxes 2

3 Understanding Terms Employee: Anyone who performs services for you where you control the ends and means. Thus, an employer has the right to control the nature of the work and the manner in which the services are performed. Employee freedom of action is irrelevant. Hypotheticals Cable TV installers who use their own tools and vehicles to travel to and complete installations Temporary staffing agency personnel perform cleaning and other hospitality functions for hotelier. Snow removal truck drivers Freelance Bakers Cleaning crew members who do their work on evenings or weekends, as they choose and complete a list of tasks using company-provided specialty chemicals and tools HR consultant who manages FMLA compliance for ABC Corp. Additional Terms Independent Contractors: The general rule is the company defines an outcome, and the contractor o controls o entirely e how to achieve that outcome (and the resources used) 3

4 Traditional IRS 20 Point Checklist 1. Must comply with the employer s instructions about the work. 2. Receives training from or at the direction of the employer. 3. Provides services that are integrated into the business. 4. Provides services that must be rendered personally. 5. Cannot hire, supervise, and pay his or her own assistants. 6. Has a continuing relationship with the employer. 7. Must follow set hours of work. 8. Works full time for an employer. 9. Does his or her work on the employer s premises. 10. Must do the work in a sequence set by the employer. IRS 20 Point Checklist (Cont.) 11. Must submit regular reports to the employer. 12. Is paid regularly on the basis of time worked. 13. Receives payment for business or traveling expenses. 14. Relies on the employer to furnish tools and materials. 15. Lacks a major investment in implements (tools) to perform the service. 16. Cannot make a profit or suffer a loss from his or her services. 17. Works for one employer at a time. 18. Does not offer his or her own services to the general public. 19. Can be fired at will by the employer. 20. May quit at any time without incurring liability. IRS Streamlined Approach Boils down 20 points to degree of behavioral control, nature of relationship, and economic realities Behavioral Control: Directs both objective and means to achieve it, training, performance evaluations, etc. Nature of Relationship: Duration, project-specific, employee benefits, key function of business, exclusivity (together, perception of the parties) Economic Realities: Investment (e.g., time and tools), risk of loss, frequency and nature of payment (e.g., flat fee), unreimbursed expenses 4

5 Common Reasons for Misclassification Sole interest is avoiding tax, insurance and other benefit obligations to employees. Definitions can differ by state. Tests under federal regulations and court decisions can cause confusion. For example: IRS: 20 Points, as streamlined Federal Discrimination Statutes: Control and Economic Realities NLRA and ERISA: Agency principles FLSA and FMLA: Control and Economic Realities Classification Challenges Contractor-Initiated Tax sticker shock with 1099s Upset with lack of fringe benefit eligibility Union files grievance under CBA Government-Initiated Audit PPACA Reporting (The act allocates substantial funds to hire enforcement personnel to address misclassification) Common Consequences Civil and potential criminal liability Taxes and penalties (trust fund) FLSA wage and hour penalties (overtime, unreimbursed expenses and willfulness claims) Penalties under workers compensation and unemployment insurance laws ERISA violations if improperly excluded from a benefit plan (retroactive exposure) Intellectual property ownership confusion Lawsuits under civil rights laws Large Employer status and excise taxes under PPACA 5

6 Tips Conduct a comprehensive internal review of all staffing arrangements, including current employee classification system and all independent contractor relationships. Consider proposed classifications in light of industry and position classification standards. Document these relationships with guidance of counsel. Train management regarding the nature of these relationships and protocols for managing them. All independent contractor relationships should be controlled by written agreements on a form prepared by legal counsel. More Tips Maintain a record of hours worked/reported by independent contractors to challenge invoices and defend against potential suits. Require independent contractors to acknowledge in writing that they (a) are not eligible to participate in any employee benefit plans or to receive any benefits under the plan(s), and (b) waive any right to participate in or receive any benefits of the plan(s) should they later be determined to have been eligible. Monitor changes and trends with state and federal legislation, regulatory changes and court decisions that could impact classification protocols. Form SS-8? Almost always results in employee classifications. Hypothetical Responses Cable TV Installers: Employees (DOL v Cascom, SDOH, 8/29/13 - $1,474,266) Hotel Staffing Agency: Employees ($47,000 settlement with Midwest Lodging, Mason, Ohio, 8/15/13) Snow Removal Truck Drivers: Employees (DOL v Barlen Contracting, EDMI, 10/4/10 - $173,000) Bakers: Employees ($63,000 settlement with Sheila s Bakery, Detroit, 9/12/2012) Cleaning Crew and HR Consultant: What would you want to know before deciding? 6

7 The Moral of the Story All factors must be weighed in making a classification. Some might suggest IC while others might suggest otherwise. Consider and document the nature of the relationship, the degree of control, and the financial risk to the contractor. If you are wrong, act promptly to correct status to avoid willfulness claims and take advantage of available amnesty programs. Thank You! Randolph T. Barker BERRY MOORMAN Professional Corporation 900 Victors Way, Suite 300 Ann Arbor, Michigan (734) (734) rbarker@berrymoorman.com 7