The Affordable Care Act and the Impact on Contingent Labor Management

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1 White Paper The Affordable Care Act and the Impact on Contingent Labor Management The Patient Protection and Affordability Care Act (ACA) is a complex law, and its directives around staffing relationships buyer (company) and supplier engender uncertainties on the part of both buyers and suppliers of contingent talent. It is important that companies and suppliers coordinate to ensure they have the correct systems and processes in place to avoid misclassification of workers, understand the employer mandate and what is required, and are prepared to pay the consequences if they fail to adhere to the stipulations set forth in the ACA. This White Paper examines six issues that should comprise every ACA checklist for companies and suppliers and maps out recommended next steps for organizations uncertain what to do next. Most companies and staffing suppliers breathed a sigh of relief last summer when enforcement of the Pay-or-Play mandate within the Patient Protection and Affordable Care Act (Affordable Care Act or ACA) was delayed until January 1, As many discovered, the ACA is a complex law, and its implications on contingent workforce management are significant. With the ACA now in effect, buyers (companies) and staffing suppliers must ensure they are ready for its implementation and enforcement. Organizations companies and suppliers that are not prepared find themselves facing a logistical nightmare and substantial penalties. Even those who thought they were ready may find themselves scrambling or worse unaware to meet certain criteria. Find a Trusted Advisor Companies must coordinate with their suppliers or rely on a third-party advisor such as an MSP to ensure that sufficient systems and processes are in place to demonstrate proof of compliance and ownership of responsibilities in the event of an audit PRO Unlimited, Inc. Page -1-

2 1. The ability of the buyer to control the manner and means by which the particular result is to be accomplished 2. The skill required 3. The source of the instrumentalities and tools 4. Location of the work 5. Duration of the relationship between the parties 6. Whether the worker has the right to assign additional projects to the hired party 7. The extent to which the worker may decide when and how long to work 8. The method of payment 9. The role of the worker in hiring and paying assistants 10. If the work is part of the company s (buyer) regular business 11. Whether the company (buyer) is in business Who Is An Employee? The Common Law Test is used by the IRS to determine whether a worker is an employee or independent contractor. It originally consisted of 20 factors, which was reduced to 13 in The provision of employee benefits 13. Tax treatment of the worker Unless a company is already engaged with a managed service provider (MSP) or staffing agency that as the employer of record offers benefits commensurate with or exceeding those stipulated within the ACA, there are few scenarios where the impacts can be averted. Companies must collaborate with their MSP or, if they do not have one, staffing suppliers. Required Checklist While the following checklist is not comprehensive, it encompasses some of the more significant aspects of the ACA that companies need to know and moreover ensure that their suppliers have checked off: 1. Organization Size Organizations with more than 100 full-time employees must comply with the ACA in 2015 (total full-time employees is counted based on numbers from 2014), while those with 50 to 99 full-time employees have until 2016 (based on 2015 numbers). As a result, companies with 100- plus full-time employees that use contingent labor need to ensure that the classification of those workers whether self-sourced or through a third-party supplier is accurate and documented with a traceable paper trail. 2. Classification of Workers A contingent worker may or may not be on a company s (buyer) payroll. They may or may not receive a W-2 from the company. They may or may not be offered coverage under the company s benefit plans. And based on the answers to the 13 factors in the Common Law Test (see sidebar), they may or may not be an employee PRO Unlimited, Inc. Page -2-

3 Building upon the IRS Common Law Test, the ACA spells out a number of worker classificalons (employees and non- employee): Seasonal. Workers are considered seasonal employees if the typical length of employment is less than six months and the period of employment begins at approximately the same time each year. Even if seasonal employees average 30-plus hours per week, many employers do not need to offer them healthcare coverage. Part -me. Workers qualify as part time if they work less than 30 hours per week, and employers are not required to offer them healthcare coverage under ACA. Employers determine full- or part-time worker status via two options. The first is a monthly measurement model. Here, workers qualify as parttime employees if their monthly hours of service are less than 130 hours per month or 30 hours per week. The look-back measurement method is the second qualification approach. For a specified measurement period, up to 12 months (must be a consecutive timeframe based on the employer s choice), employees qualify as part time if they work an average of 130 hours per month or 30 hours per week. Measurement periods can vary in length as long as employers are consistent in Steep PenalLes Failure to comply or demonstrate compliance with the ACA can result in steep penalties. applying the same timeframe for all employees in the same category. Variable. Employees count as variable if an employer cannot reasonably determine if the worker is expected to work 30 or more hours per week at the start of employment. Regulations for classifying employees as variable include, though are not limited to, if the worker is replacing an employee who was or was not a full-time employee, classification of comparable roles elsewhere within the organization (as full time or variable), and whether the job was advertised, communicated, or documented as one requiring 30-plus hours of work per week. For workers who average more than 30-plus hour of work per week during the initial measurement period, then the employer must offer the worker coverage for the same timeframe. Short term. Workers even if full time during the duration are deemed as short term if they work less than 90 days, and employers are exempt from offering them coverage. But for those working longer than 90 days, employers must offer coverage unless they are classified as seasonal or variable. Temp agency employees. Staffing agencies must classify their workers as variable or full- time employees using criteria such as 1) whether the individual has the right to reject temporary job placements, 2) if there are periods in which no placement offers are extended and thus there are gaps in service, and 3) if placements last fewer than 13 weeks. If yes is answered in response to the above, then the worker likely qualifies as variable. However, if that is not the case, then the worker should be classified as full time, and coverage must be extended to them PRO Unlimited, Inc. Page -3-

4 Independent contractors. The final category of workers under the ACA are independent contractors. The Common Law Test (see sidebar on page 2), which consists of 13 factors (or questions) that break into three basic control areas: behavioral, financial, and legal. Depending how these 13 factors are answered, the IRS classifies workers as either employees or independent contractors (viz., contingent workers). Diagram 1. Number of Full-Time Employees and the Employer Mandate Employee Size and beyond 1-49 (full time) N/A N/A (full time) N/A Employer must offer coverage to 95% of FTEs and dependents to age (full time) Employer must offer coverage to 70% of FTEs and their dependents to age 26 Employer must offer coverage to 95% of FTEs and their dependents to age Employer Mandate Companies must not only understand the employer mandate for themselves, but for their suppliers since noncompliance with ACA on their part may place the responsibility of coverage on the company. The ACA mandate consists of two components. The first requires employers to offer minimum essential coverage (MEC) to at least 70 percent of their full-time employees and their dependents in 2015 (which increases to 95 percent in 2016). Those employers that fail to do so pay penalties of $2,000 per full- time employee, excluding the first 80 in 2015 (and 30 thereafter) if any full-time employee receives a federal premium tax subsidy to purchase health coverage through an ACA exchange. The second defines affordable coverage as the lowest, employee-only cost-model that does not exceed 9.56 percent of household income. The plan 2015 PRO Unlimited, Inc. Page -4-

5 Impact is Unavoidable Unless a company is already engaged with a managed service provider (MSP) or staffing agency that as the employer of record offers benefits that are commensurate with or exceed those stipulated within the ACA, there are few scenarios where the impacts can be averted. must also satisfy minimum value; cover 60 percent or more of total allowed costs (e.g., deductibles, copayments, and other out-of-pocket expenses). Failure to provide affordable coverage (viz., minimum value ) results in a $3,000 annual penalty for each full-time employee who receives a premium tax subsidy or the penalty assigned under the MEC minimum scenario (whichever is less). 4. Co-Employment Co-employment occurs when the IRS classifies the buyer and the supplier as joint employers, and thus both have equal responsibility for all aspects i n c l u d i n g h e a l t h c overa g e o f a w o r ke r s compensation. If proper governance controls are not in place, then the company may be deemed responsible for contingent worker as a full-time employee. The company must pay the worker unemployment benefits, cover past taxes and payments, and remit payment for any and all overtime worked. The company could also incur civil penalties. In addition to the above, companies in coemployment cases are liable for past and future healthcare coverage for that worker, as well as any penalties associated with the misclassification per the ACA. Co-employment is an excellent example of how a single compliance violation may incur much broader risk exposure such as workers compensation and unemployment. To prevent such from happening, suppliers must assume exclusive responsibility for compensation, performance issues, time off, and other HR-related activities. Companies should create a checklist of these activities and work with their managers and suppliers to ensure that no worker is deemed to be in a situation of coemployment. Costs can escalate quickly, for reclassification of contingent workers as full-time employees could push push the minimum essential coverage (MEC) threshold below 95 percent (70 percent in 2015, 95 percent thereafter), thus incurring a $2,000 penalty for every worker not receiving MEC or affordable coverage. 5. Logistics of Execution Companies need to coordinate with their suppliers or rely on a third-party advisor such as an MSP to ensure that sufficient systems and processes are in place to demonstrate proof of compliance and ownership of responsibilities in the event of an audit. These ideally are part of a vendor management 2015 PRO Unlimited, Inc. Page -5-

6 system (VMS) platform used for workflows, business validations, and numerous other tasks. Various factors need to be considered here such as: Documentation during on-boarding that confirms the offer of health coverage and the acceptance or rejection by the worker Validation on the affordability of the coverage (albeit difficult since household income is not always readily available) Revalidation of workers when assignments change or are extended 6. Costs Failure to comply or demonstrate compliance with the ACA can result in steep penalties. Specifically, misclassification of employees as independent contractors or variable or seasonal employees could result in a $2,000 fine per worker (prorated by month). And the costs escalate from there. For example, an MEC compliance organization could become non-compliant if the a reclassification results in fewer than 95 percent of the employee population receiving minimum value coverage. Or, if more than 30 percent of contingent workers are reclassified as full-time employees in 2015 (or 5 percent in 2016 and following), fines apply to full-time workers, not just those reclassified. For example, though not part of the ACA noncompliance penalty, worker misclassification may also result in payroll and withholding Companies (buyers) need to ask their suppliers a number of questions. To prepare for 2015 (assuming the supplier has 100-plus full-time employees), the supplier should have done one of the following: QuesLons for Suppliers 1. Secured new plans that met MEC guidelines under ACA 2. Increased contributions to ensure plans are compliant with MEC and affordable coverage requirements 3. Budgeted for limited penalties due to failure to satisfy MEC and affordable coverage requirements 4. Budgeted for broad penalties associated with no coverage With the enactment of ACA, PRO is finding the cost per contingent worker ranges from $.25 to $2 per hour. Staffing vendors in professional categories are typically absorbing the cost through alternative methods, while those dealing with low-margin and high-volume categories are not able to absorb the full impact due to lower markups and limited alternative cost models PRO Unlimited, Inc. Page -6-

7 Some Key QuesLons for Companies (Buyers) to Ask 1. What policies and systems do your supplier(s) have in place to ensure and demonstrate compliance with the ACA? 2. What pricing structures are in place with your supplier(s) to accommodate higher costs associated with ACA? 3. Does supplier invoicing protect individual worker privacy by masking markups due to acceptance of healthcare benefits (as required by the ACA)? 4. Do your current supplier(s) have ACA-compliant benefit plans? 5. Do your suppliers and you have worker classifications policies and systems in place that are ACA compliant and will avert misclassification issues? liabilities, which the IRS doubles if the violations are found to be willful. In addition, misclassified workers are eligible for pension and profit sharing plans and covered by labor and employment law, discrimination protections, among other labor-related mandates, all at significant cost. Employer Mandate and Penalties Employers subject to the employer mandate are required to offer coverage that satisfies MEC, provides a minimum value, and is affordable. The chart below explains these requirements and the penalties that apply if they are not met: Diagram 2. Employer Mandate and Employer Penalties Questions Penalties Do you offer MEC coverage? Yes No $2,000 per FTE * if one FTE receives federal premium subsidy Does the plan meet minimum value (60% of total costs)? Yes Is the plan affordable (less than 9.56% of income)? Yes No Penalty! No No Lessor Of: 1) $3,000 per FTE receiving subsidy or 2) $2,000 per FTE * * For 2015, first 80 contingent workers are not counted; for 2016 and beyond, the first 30 workers are not included. Penalties are prorated to the month PRO Unlimited, Inc. Page -7-

8 Recommended Next Steps So what should you do in the case that you could not check off all of the six above areas with complete confidence? For companies with fewer than 20 to 30 contingent workers who are employed for short-term assignments and sourced through one or two suppliers (from staffing agencies to freelance marketplaces), the recommendation is that the company s HR, procurement, legal, and finance teams work directly with their suppliers, payrolling provider, and/or legal experts to ensure compliance. What cannot be forgotten here are that the implications of the Final Rule and other elements of the ACA places the onus on the company (buyer) as default when it comes time for demonstration of compliance and issuance of penalties. However, companies with more complex contingent workforce scenarios should look for third-party consultation and guidance. Turn to your current MSP provider or look to engage one if you are not using one today. MSPs have been closely monitoring the ACA and its implications, and they can work with companies to assess their risks, establish the correct policies and processes to ensure adherence and demonstration of compliance, and configure systems (viz., using a VMS platform) to manage and report on ACA compliance to the level of every worker and supplier. Document, Leave a Paper Trail Companies with 100-plus full-time employees that use contingent labor need to ensure that the classification of those workers whether self-sourced or through a third-party supplier is accurate and documented with a traceable paper trail PRO Unlimited, Inc. Page -8-

9 PRO Unlimited Offerings: Able to help in different ways Whether through our Payrolling Services (which are ACA compliant and have been for many years), 1099 Business Validation Services, or integrated, vendor-neutral MSP-VMS Solution, PRO Unlimited possesses the experience and expertise to meet a company s contingent workforce management requirements. This includes understanding the implications of the ACA and ensuring that buyers and suppliers comply and remain in compliance with the law. A recent PRO survey of buyers and suppliers shows they plan to use the first half of 2015 as a look-back period, seeking to identify trends on which they can base decisions on ACA moving forward. For organizations needing help, those struggling to implement the right execution strategies to ensure compliance with ACA, PRO can help. For more details, or call ( ) us today. About PRO Unlimited Follow us on: PRO Unlimited, through its vendor-neutral Managed Service Provider (MSP) and Vendor Management System (VMS) solutions, helps organizations address the costs, risks, and quality issues associated with managing a contingent workforce. A pioneer and innovator in the VMS and MSP space, PRO offers solutions for e-procurement and management of contingent labor, 1099/co-employment risk management, and third-party payroll for client-sourced contract talent Glades Road, Suite 208, Boca Raton, Florida information@prounlimited.com PRO Unlimited, All Rights Reserved