This presentation addresses employee benefit plan exposure arising from employer use of a contingent workforce. Included is a discussion of employer liability arising from use of independent contractors to avoid or minimize ACA's "play or pay" coverage requirements.

1. CONTINGENT WORKERS AND
EMPLOYEE BENEFITS: HOT TOPICS
Daniel N. Janich & Thomas H. Mug
Guest Speaker:
James Kosciolek
February 13, 2014

2. INTRODUCTION
“To compete in the future, organizations will need
to push talent management beyond the confines
of the enterprise wall to include the new extended
workforce: a global network of outside
contractors, outsourcing partners, vendors,
strategic partners and other nontraditional
workers. . . Even top-level managers and
executive teams are being replaced by temporary
CEOs, CFOs, CEOs and other highly skilled
troubleshooters.” Accenture 2013 Report: “The
Rise of the Extended Workforce”
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3. CONTINGENT WORKERS ARE HERE TO STAY
TREAD CAREFULLY!!!
 Increase in use of contingent workers today comes
from:
Competition in the fast moving global market
which demands that businesses adopt a “just - in
– time” staffing model
60% of mid-size and large enterprises plan to
increase hiring of contingent workers in 2014 (The
Future of Work Report by Tower Lane Consulting)
Impact of the Affordable Care Act (ACA)
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4. WHAT IS A “CONTINGENT WORKER”?
 History and roots of the contingent worker in the
United States
 Extent of contingent workers in the U.S. workforce
 Benefits of the contingent worker
 Flexibility
 Cost savings
 Recruiting
 Disadvantages
 Loss of employee loyalty and morale
 Confidentiality
 Training
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5. NON-EMPLOYEE = CONTINGENT WORKER
 Contingent worker is any individual working in a
capacity other than as a common law employee:
 Independent contractors: self-employed workers or
freelancers paid directly by service recipient
 Leased employees: hired and paid by staffing company that
contracts with service recipient to provide workers for a fee;
considered common law employees of the leasing
organization
 Seasonal, temporary and part-time employees: hired for a
limited duration as common law employees, independent
contractors, or leased employees
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6. IMPORTANCE OF
EMPLOYEE CLASSIFICATION
 Income Taxes, FICA and Withholding
 Applicability of Certain Employment Federal
Laws
 Tax-Qualified Retirement Plans
 Welfare Benefit Plans
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7. IMPORTANCE OF EMPLOYEE CLASSIFICATION TO
RETIREMENT PLANS
 Retirement Plans
 Improper inclusion of independent contractors or
exclusion of employees is considered a failure to
comply with the "exclusive benefit" rule of IRS Code
§401(a)(2).
 Plans may be disqualified for improperly including
independent contractors or excluding employees.
 Exclusion of employees creates liability for additional
benefits.
 Errors may be corrected, albeit at a cost through IRS
correction programs.
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8. IMPORTANCE OF EMPLOYEE CLASSIFICATION TO
WELFARE PLANS
 Welfare Plans
 Welfare plans may allow non-employees to participate.
However, unlike employees, non-employees will be
subject to income tax on value of benefit.
 Under ACA not covering misclassified workers could
lead to imposition of disastrous penalties.
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9. COMMON LAW EMPLOYEE: “RIGHT TO CONTROL”
COURT TEST
 ERISA’s (§3(6)) ambiguous statutory “definition” of
“employee” is unavailing - “any individual employed
by an employer”– we need to look to:
 The common law test used by the Courts to determine
“employee” status for ERISA
 National Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992)
 Supreme Court adopted the common law agency test relying
in part on the Restatement (Second) of Agency and the IRS
20-factor test.
 A subjective multi-factor test was applied, focusing on the
(the hiring party’s right to control and the manner and means
by which the work is performed)
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10. COMMON LAW EMPLOYEE: IRS FOCUS
 For tax and retirement plan purposes the IRS
considers the following when examining the
business:
 Behavioral control: The company has the right to direct and
control how and where the worker does the task for which
the worker is hired.
 Financial control: The company has the right to control the
business and economic aspects of the worker's job.
 Type of relationship: How the company and the worker view
their mutual relationship (the intent regarding control over
the work).
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11. COMMON LAW EMPLOYEE: “RIGHT TO
CONTROL”: IRS 20 FACTOR TEST
 Level of instruction.
 Amount of training.
 Degree of business
integration.
 Extent of personal services.
 Control of assistants.
 Continuity of relationship.
 Flexibility of schedule.
 Demands for full-time work.
 Need for on-site services.
 Sequence of work.
 Requirements for reports.
 Method of payment.
 Payment of business or
travel expenses.
 Provision of tools and
materials.
 Investment in facilities.
 Realization of profit or loss.
 Work for multiple
companies.
 Availability to public.
 Control over discharge.
 Right of termination.
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Revenue Ruling 87-41, 1987-1 C.B. 296:

12. MISCLASSIFICATION ISSUES ARE ADDRESSED IN:
 Litigation: Individual or class action suits for benefits
by contingent workers
 IRS/DOL Audits: Misclassification issue in the cross-
hairs. (IRS anticipates hiring thousands of new
agents to investigate ACA compliance)
Domino Effect: Audits may trigger collateral
investigations by federal or state authorities for
non-compliance with other federal and state
statutes, such as immigration, labor,
unemployment, workers’ compensation.
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13. LITIGATION INVOLVING
WORKER CLASSIFICATION ISSUES
 Theories of liability under ERISA
 Independent contractor cases
 Vizcaino v. Microsoft Corp., 120 F3d 1006 (9th Cir. 1997) – Claim
for benefits by “freelancers” following IRS audit determining
employee status.
 Issues include the ability exclude a class of employees from
receiving benefits and the validity of waivers of benefits.
 Leased employee issues
 Seasonal and temporary employee issues
 Exclusion of part-time employees
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14. WHAT CAN EMPLOYERS DO TO MINIMIZE
LIABILITY FOR RETIREMENT BENEFITS
 In written agreements with independent contractors,
use clear, plain language identifying worker status
and ineligibility for plan benefits.
 Include knowing waivers of benefits with written
acknowledgements.
 Leased employee arrangements should satisfy
§414(n)(2):
 Such workers will not be reclassified as common law
employees.
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15. WHAT CAN EMPLOYERS DO TO MINIMIZE
LIABILITY FOR RETIREMENT BENEFITS
 Ensure that benefit plan language clearly excludes
independent contractors and leased employees from
plan eligibility.
 Include provision that reclassification of independent
contractors or leased employees will not result in
retroactive eligibility.
 Ensure that treatment of contingent workers is
distinct from that of regular common law employees.
 Review company operations and assigned job duties of regular
employees and contingent workers.
 Implement program that documents type of work performed by
contingent workers, how it is performed, what support is provided,
and how they are supervised.
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16. ACA BASIC CONCEPTS
 “Shared responsibility (pay-or-play employer
mandate):” : a “large employer” must provide a
minimum level of health insurance coverage to its
employees and their dependents.
 “Large employer:” a business and all of its controlled
group have an average of at least 50 full-time
equivalent employees (FTEs) during the preceding
calendar year.
 FTE: 1 FTE = 120 hours worked/month (total hours
worked by all personnel: full; part-time and other
employees).
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17. ACA BASIC CONCEPTS:
“PAY-OR-PLAY” PENALTIES
 Penalties (“pay-or-play”): Starting in 2015 a “large
employer” that fails to provide affordable and
adequate health insurance coverage faces penalties
based on the number of its actual full time employees
– ACA defines “employee” by reference to ERISA.
 During 2014 employers must ascertain who their
full time employees are. Analysis must include re-
evaluation of independent contractors
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18. ACA BASIC CONCEPTS:
PAY-OR-PLAY PENALTIES (CONT.)
 “No coverage” - §4980H(a) Penalty:
If an employer does not offer minimum essential
coverage to all full-time employees (and their
dependents), the employer must pay an annual tax of
$2,000 for each full-time employee (less the first 30), if at
least one full-time employee obtains federally- subsidized
coverage through an "Exchange.”
•
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19. ACA BASIC CONCEPTS:
PAY-OR-PLAY PENALTIES (CONT.)
“Unaffordable Coverage”-- §4980H(b) Penalty:
Employers offering "minimum essential
coverage" to all full-time employees and
dependents but at least one full-time employee
obtains federally-subsidized coverage through an
Exchange, the employer must pay an annual tax
of the lesser of: (1) $3,000 per subsidized full-time
employee; or (2) $2,000 for each full-time
employee (less the first 30 full-time employees)
Both penalties are determined on a month-by-
month basis. The tax is not deductible.
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20. ACA FINAL IRS REGULATIONS (ISSUED
FEBRUARY 10, 2014) – TRANSITION PROVISIONS
 In 2015, rules apply to employers with 100+ full-time
employees. (Employers in the 50-100 range need to
certify eligibility for transition and need to meet
requirements, including not reducing the current
workforce and maintain previously offered coverage).
 In 2016 the rules apply to all employers with 50+ full
time employees.
 In 2015, to avoid penalties, employers with 100+ full
time employees must offer coverage to 70% of their
full-time employees and their dependents.
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21. ACA FINAL IRS REGULATIONS (ISSUED
FEBRUARY 10, 2014) – TRANSITION PROVISIONS
 In 2016, to avoid penalties, employers with 100+
employees must offer coverage to 95% of their full-
time employees and their dependents.
 Employers with non-calendar year plans are to start
implementation of the mandate at the start of their
2015 plan year, rather than on January 1, 2015.
 Ability to use shorter time frame in 2014 (at least six
months) to ascertain whether the employer is subject
to the mandate in preparation for 2015.
 Requirement to provide coverage to dependent
children delayed until 2016.
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22. ACA AND CONTINGENT WORKERS
 Both “small” and “large” employers may be
motivated to reduce the number of full time
employees through the use of contingent workers:
 Small employers may want to keep the number of
full time employees under 50, so that they would
not have to provide health insurance
 Large employers that do not want to provide health
insurance, may want to reduce the number of full
time employees to minimize penalties
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23. ACA INCREASES MISCLASSIFICATION RISKS –
PROCEED WITH CAUTION!!!
Unintended consequences of misclassification:
 Substantially increased risk of DOL and IRS scrutiny
 Potential “Domino” effect of scrutiny from other
governmental agencies
 Potentially very high penalties if independent contractors
are reclassified by the IRS as employees
 Potential for need to modify business practices
NOTE: The Final Regulations do not provide section
530 safe harbor relief because employers need to
ascertain who their employees are based on the
common law standard
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24. ACA and PART-TIME EMPLOYEES
Trend: 15% of “Large” and 20% of small employers
plan to adjust hours so that fewer employees will
qualify for health care coverage:
Reclassifying full-time employees as part-
time: Sodexo, Ball State.
Capping the number of hours worked by part-
timers: Seaworld capped part-time hours to
28 from 32.
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25. ACA AND PART-TIME EMPLOYEES (CONT.)
Cutting health care benefits for part-timers:
Target, Home Depot, Trader Joe’s, Forever 21
are cutting health care benefits for part-
timers.
Trader Joe’s and Target offer low paid part-
time employees $500 towards purchase of
insurance.
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26. ACA AND PART-TIME EMPLOYEES(CONT.)
 Sodexo: reclassified full time employees (30
hr/week for 6 weeks) as part-time in a workforce
“realignment.” DOL “preliminary review”
concluded: “Given the facts as we understand them,
this change in scheduled work hours and
subsequent pay reduction does not appear to
violate either the law or a contract.”
• Reclassified workers are considering unionizing
 Ball State: is re-examining its workforce with an
eye towards cutting hours.
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27. STAFFING AGENCIES AND ACA
 IRS presumes temporary staffing agencies are the
common law employers of their leased workers.
 IRS – True common law employer is ultimately
responsible for pay-or-play compliance.
 Risks – Possibility that user of staffing agency be
deemed “true” common law employer obligated to
offer coverage to employees of staffing agency.
 Recommendation: Include indemnification for
“pay-or-play” penalties in contract with staffing
agency.
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28. STAFFING AGENCIES AND ACA (CONT.)
 Final IRS Regulations: New Rule applicable when
the staffing agency is not the common law
employer: For an offer of coverage to an employee
performing services for the agency and the agency makes
an offer of coverage to the employee on behalf of the
client under the agency plan, the offer is treated as made
by the client for pay-or-play purposes only if the fee the
client would pay to the agency for an employee enrolled
in health coverage is higher than the fee the client would
otherwise pay the agency for the same employee if that
employee did not enroll in health coverage.
•
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29. WHAT EMPLOYERS NEED TO DO TO MINIMIZE ACA
LIABILITY
 Exercise prudence when reclassifying regular
employees as non-employees.
 Preserve attorney-client privilege during the planning and
implementation process of review and reclassification –
consultants and other professionals should be hired by
counsel.
 Identify legitimate business considerations for
reclassification.
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30. WHAT EMPLOYERS NEED TO DO TO MINIMIZE ACA
LIABILITY (CONT.)
 Review current contingent worker status to
ascertain whether they are in fact common law
employees for ACA purposes.
Convert Section 530 workers to independent
contractor status under a written contract
 Review and amend health plan language to insure
definitional consistency.
 Review state laws regulating insurance coverage to
ascertain what full-time status means for coverage
purposes.
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31. ADDITIONAL RESOURCES
 Daniel N. Janich: “Contingent Workers and Employee
Benefits” – Chapter 37 of ERISA Litigation (BNA Books,
4th ed. and Cumulative Supplement 2012)
 Daniel N. Janich: “Without Proper Planning, Contingent
Workers Pose Serious Legal Risks to Employer Benefit
Plans” in Employee Benefit Plan Review, July 2011
 “Employers Beware: How Do You Protect Against The
Significant Legal Risks Posed by The Use Of Contingent
Workers?” (Firm newsletter Employee Benefits &
Executive Compensation Update - Winter 2009)
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32. DISCLAIMERS
 These materials, and the oral presentation accompanying
them, are for educational purposes only and do not
constitute legal advice or create an attorney-client
relationship.
 Any information in this presentation is not intended and
cannot be used for the purpose of avoiding any penalties
that may be imposed on any person under the Internal
Revenue Code.
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