Employers have always been concerned about the potential for worker reclassification, but health care reform and a recent NLRB decision take this issue to an entirely new level. “Large” employers who offer coverage will be required to offer coverage to “all” of their “full-time workers,” defined as at least 95% of employees working 30 hours per week. An employer that offers coverage to only 94% of its full-time employees, and has one employee who enrolled on an exchange with a premium credit, will be subject to annualized penalties of $2,000 per full-time employee, less the first 30 employees. This draconian penalty applies to all employees, not just the percentage excluded from the offer.
Consider that the NLRB just shocked the college sector with its ruling that Northwestern University students with football scholarships are employeesfor purposes of the National Labor Relations Act. The immediate result is that if the players with scholarships organize themselves with a labor organization, they can collectively bargain for themselves against Northwestern University. (Of course, we presume there will be further legal challenges.) But think about what this means in the context of taxes and health care reform. Will the IRS deem the students to be employees, liable for taxes, and full-time employees of Northwestern University for purposes of the health care reform employer mandate?
Northwestern University’s website reports that the University has 3,820 full-time faculty and 6,000 full-time staff. Let’s consider a hypothetical: on January 1, 2016, the IRS reclassifies enough students and independent contractors as “full-time employees” so as to cause the University to miss the 95% mark, and at least one employee used a premium credit to purchase coverage on an exchange. It appears that after paying all the health care plan costs, the University could also be liable for a penalty in the neighborhood of $20 million, per year.
The shared responsibility final regulations define “employee” using the common law standard. The regulations list some individuals that are not considered employees. For example, a “leased employee” as defined in Code Section 414(n)(2) is not an “employee” of the service recipient. So good, so far. Then, in the preamble, the Treasury Department and IRS acknowledge employers’ concerns about potential reclassification of employees. Commentators had suggested that Section 530 of the Revenue Act of 1978 should be applied in the context of Code Section 4980H penalties. Essentially, Section 530 protected employers, on a retroactive basis, unless the employer “had no reasonable basis for not treating such individual as an employee.”
But the Treasury and IRS rejected the request, arguing that “the relief requested would serve to increase the potential for worker misclassification by significantly increasing the benefit of having an employee treated as an independent contractor.” In fact, the IRS and DOL are already engaged in a Misclassification Initiative, targeting independent contractor arrangements. Now eliminate the “reasonable basis” standard, and add in the possibility that the IRS can collect penalties in the range of $20 million from a single employer.
We have talked to employees who were eagerly awaiting health care reform so they could leave their employers and start their own businesses. But in another one of those odd twists on the road of health care reform, self-employment dreams, like athletic scholarship dreams, could be imploded by a health care reform land mine. Given the high stakes involved with a failure to satisfy the 95% test, employers need to consider their margin for error, and give serious consideration to the circumstances involving anyone who is performing services but is not being treated as an employee. Keeping in mind that the reasonable basis standard does not apply in the context of health care reform, are you confident that you can establish that the facts and circumstances support your presumption that these people are not your employees, have you calculated the cost of being wrong, and are these relationships worth the risk?