ERISA INDUSTRY COMMITTEE FOCUSON CALL: EMPLOYER SHARED RESPONSIBILITY, LEASED EMPLOYEES, SERVICE CONTRACT EMPLOYEES

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1 ERISA INDUSTRY COMMITTEE FOCUSON CALL: EMPLOYER SHARED RESPONSIBILITY, LEASED EMPLOYEES, SERVICE CONTRACT EMPLOYEES AND INDEPENDENT CONTACTORS May 15, 2013 Presented by: Alden J. Bianchi Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts

2 4980H and Staffing Code section 4980H assumes applies to applicable large employers that either make or fail to make An offer of minimum essential coverage to its employees under an Eligible employer-sponsored plan Thus, it contemplates two parties, not three What happens when an employer hires workers though a staffing firm?

3 4980H Common Law Employees Under the common law standard, an employment relationship exists When the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished If an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done It is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so.

4 Authority IRS Revenue Ruling 87-41, 20-factor test Nationwide Mutual Ins. v. Darden, 503 U.S. 318 (1992), 13-factor test established by the Supreme Court for tax and benefits purposes Simplified IRS audit guidelines Behavioral control Financial control Legal relationship

5 Whose Employee Is It? Employer/Employee Employer/Independent Contractor Federal tax and benefits purposes State unemployment compensation purposes Other Federal and state employment law purposes Staffing firms Professional Employer Organizations

6 General Consensus Rule Temporary and contract workers placed with client organizations by staffing firms are deemed to be common law employees of the staffing firm Same rule applies to skilled IT, finance, and engineering professional, who are typically placed on longer assignments Workers employed through PEOs are common law employees of the client organization

7 Rational Behind the Consensus Rule Temporary workers generally are recruited by the staffing firm and assigned to supplement a client organization s regular workforce Under PEO arrangements workers are the client s regular workers PEOs retain a key structural component of the early staff leasing arrangements, i.e., the transfer by a client of its existing workforce to the payroll of the PEO PEO clients, not the PEO, generally make the ultimate decision who to hire and fire Nor do PEOs generally assign or reassign workers to other clients as temporary staffing firms do

8 Staffing Firm Business Models Firms that describe themselves as staffing firms often provide a suite of services Permanent placement Temp-to-perm Pay-rolling Master services agreements General staffing is limited to the assignment of temporary and contract workers

9 Problems with the Consensus Rule Blue Lake Rancheria v. U.S., 653 F. 3d 1112 (9th Cir. 2011): PEO was the common law employer (on admittedly unique facts) Pay-rolling by temporary staffing firms is more consistent with the PEO model, but limited to only a portion of the client organization s workforce Possible solution: look for the business purpose

10 Abusive Staffing Arrangements Employing staffing firm s to avoid applicable large employer status Referred to in the industry as 49 Industry position vs. the real world Capping staffing firm workers at 29 hours Referred to in the industry 29 Likely legal in some instances, but is there an economic substance issue?

11 The MEWA Trap A multiple employer welfare plan (or MEWA ) is a group health plan that covers employees of two or more unrelated employers MEWAs have a long and sordid history, principally with state regulators Affordable Care Act gave the DOL broad new enforcement tools

12 The MEWA Issue (cont d) Under the consensus rules A group health plan maintained by staffing firm is not a MEWA, but A group health plan maintained by a PEO is a MEWA Potentially abusive PEO practice: combine multiple small groups to form one large group (most states expressly bar this practice for fear of segmenting the risk pool)

13 The MEWA Trap (cont d) ERISA-regulated MEWAs vs. non-erisa regulated MEWAs ERISA regulated, fully-insured MEWAs shielded from most state laws Commercial (non-erisa regulated subject to full burden of state law) A group health plan that covers nonemployee directors is (at least technically) a MEWA

14 Independent Contractors Corp-to-corp placement of workers who are incorporated, hold a valid Federal Tax ID number, carry all necessary insurances, and are responsible for all of their own taxes Multi-factor test still applies; that an individual is incorporated is merely one factor Works best with professionals; not so much with unskilled workers

15 Service Contract Employees Service Contract Act, state prevailing wage laws, and Davis-Bacon Act all call for: Base or cash portion of compensation and A fringe benefit portion that may be paid in cash or in kind Most employers prefer to pay the fringe portion in kind to avoid payroll taxes Payment of fringes may be dictated by collective bargaining agreement

16 Service Contract Employees (cont d) Question: how is the fringe benefit portion of the wage treated to purposes of Code section 4980H? If paid as a contribution to a group health plan, it s an employer contribution for affordability purposes And what if it is paid in cash pursuant to a collective bargaining agreement?

17 Service Contract Employees (cont d) ERIC position (in comment letter): Fringe portion should be treated as provided by the employer for purposes of determining whether the plan is affordable In most of (if not all) cases, this treatment will result in the cost of self-only coverage being affordable Pension rules are too ambiguous to provide any guidance

18 Questions and Answers Alden Bianchi Member Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, MA Direct: (617) Fax: (617)