Employee or contractor? Obamacare raises the stakes

It’s not always clear whether a worker should be treated as an “employee” or an “independent contractor.” But how a worker is classified it makes a huge difference to both workers and businesses – and that’s especially true as a result of the Affordable Care Act, better known as Obamacare.

Generally speaking, employers have a big incentive to treat workers as contractors rather than employees. If a worker is a contractor, then the employer might not have to worry about complying with wage and hour laws, payroll taxes, or unemployment and worker’s comp insurance. An employer might also be shielded from certain types of lawsuits, such as for discrimination, wrongful termination, or personal injuries that the worker causes to third parties.

On the other hand, if an employer treats someone as a contractor who should legally be treated as an employee, the penalties are stiff. Not only can the worker sue for back wages and benefits, but the employer might face enforcement actions and additional penalties from the IRS, the Department of Labor, the Equal Employment Opportunity Commission, and a variety of state agencies.

How common is the problem? The IRS estimates that up to 30% of businesses are misclassifying some of their workers, and a recent U.S. Treasury Department report suggested that the number of workers who are being misclassified each year is in the millions.

And starting soon, Obamacare will be added to the mix.

Under this law, businesses with 50 or more full-time employees must offer health insurance to these workers or pay a substantial penalty. If employers try to “finesse” this requirement by misclassifying employees as independent contractors in order to stay below the magic number, or in order to avoid paying for health insurance in general, the law says they can be subject to a $2,000 to $3,000 fine for each misclassified worker.  If workers are misclassified for several years before the feds figure it out, the fines will multiply.

Now here’s the complicated part: How can you tell whether a worker should be treated as an employee or a contractor for purposes of the Obamacare law? Surprisingly, the law doesn’t say.

Different federal agencies and laws provide different tests for determining if someone’s a contractor or an employee. The IRS has one test, the Fair Labor Standards Act (which governs wages and hours) has a different test, and ERISA – the Employee Retirement Income Security Act, which governs job benefits – provides yet another test.

There are also a multitude of state laws and agencies that have their own requirements. So even if a company is complying with the law under one standard, it might be violating it under a different one.

Obamacare, however, doesn’t specify any standard at all. It simply says that it covers “full-time employees.” (It defines “full-time” as working 30 or more hours per week.)

Some people have pointed out that Obamacare’s treatment of employees is similar to ERISA’s, and they have argued that the standard that the U.S. Supreme Court came up with for ERISA should apply to Obamacare as well. That standard looks at the skill required for the job, who’s providing the tools, whether the worker has discretion over hours, the payment method, whether the work is part of the employer’s regular business, and several other factors.

However, that’s just a guess; it’s not clear if that test or another test will apply.

What is clear is that the stakes have been raised again any time a worker is treated as a contractor rather than an employee. If you have any questions about this area of the law, we’d be happy to help you.