If you employ temporary employees or use a temporary staffing firm or PEO, then the ACA shared responsibility (a/k/a pay-or-play) rules present special issues. The trouble results from the IRS' rather unclear application of its multi-factor direction-and-control test for whether there is a common law employer-employee relationship. I've broken down the contingent workforce problem into 4 categories, which are enumerated below. In every case, though, the first issue is....

Who Is the Common Law Employer?

Thumb temp choicesThe IRS' direction-and-control test has more than 20 factors and is stated in a fair amount of detail in IRS Publication 15-A. You can boil down the 20-plus factors, though, to 3 main questions:

  • Does the business have a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means? The more control a business has over how, when and where work is done, the more likely that the worker is an employee of that business.
  • Does the business have a right to direct or control the financial and business aspects of the worker's job, such as compensation, responsibility to incur business expenses or buy tools of the trade, whether the worker can provide services to other businesses, who bears the risk of profit and loss? The less the worker looks like a vendor or supplier, the more likely that he/she will be a common law employee of the business.
  • How is the relationship reflected in contracts, handbooks and the conduct of the parties as far as expected longevity of the relationship and the extent to which the worker's services a key part of the business? The longer-term the position is expected to be, and the more central the job duties are to what the employer does, the more likely the worker will be a common law employee. 
So how does the direction-and-control test shake out under the pay-or-play penalty scheme?

Strict Liability for Determining Employer-Employee Status

The IRS has clarified that there is no Section 530 relief available under the ACA. Section 530, summarized in this IRS publication, gives employers a little breathing room in making the employee-versus-independent-contractor determination for payroll tax purposes by introducing an element of good faith. In denying Section 530 relief for ACA pay-or-play purposes, the IRS is removing this element of good faith interpretation of the law. That means employers will be held strictly liable for determining whether a worker is an employee of that employer, an employee of another employer or an independent contractor. In other words, close enough is generally not good enough.

So without any further ado, here are the 4 categories of contingent workforce issues, and a few thoughts on how to confront them.

1. Temporary Staffing Firms

First and foremost, it's important to know what I mean by "temporary staffing firms." In the contingent workforce world, there are no standard definitions for terms, and even the IRS wound up using two, substantially similar terms for two completely different things in the preamble to the final pay-or-play regulations. By "temporary staffing firm" I mean companies that specialize in placing people at other companies' work sites for short periods of time--generally one day to a few weeks--and that generally keep those workers on its payroll. I am not including in the term companies that send workers to the same client company, like permatemps used by big-box retailers. Classic examples of temporary staffing firms include temp agencies that will send employees to work at undeniably temporary assignments like working the check-in desk at a 5-day conference, and staffing firms that, sometimes on a daily basis, will send different numbers of employees to work at different factories or warehouses. 

In the preamble to the final pay-or-play regulations, the IRS was quite comfortable with such temporary staffing firms being the common law employer of the workers. Indeed, several examples in the final regulations are devoted to how the temporary staffing firm, as common-law employer of the employee, would address different situations. In the easy cases, where the work assignments are short (less than 13 weeks) and workers are not repeatedly working for the same client company one assignment after another, it's not hard to conclude that the temp agency is the common-law employer. In such a case it is the temp agency that is responsible for providing health insurance, and the client company would not be responsible for providing affordable, minimum-value health coverage to those workers who were deemed full-time.

It's still a good idea to make sure responsibility between the temporary staffing firm and the client employer is clearly allocated, so here are some recommendations:
  • Make sure the temp contract states that the worker is the employee of the temporary staffing firm
  • If you're the client company, get a contract covenant indemnifying your company for any failures of the temp agency to fully comply with the ACA
  • Also, if you're the client company, get a contract covenant expressly stating that the temp agency makes a qualifying offer of coverage to employees deemed full-time under the ACA

2. Co-Employers, PEOs & Permatemps

In contrast to "temporary staffing firms," the IRS dispensed pretty quickly with any notion that a professional employer organization (PEO) or similar co-employer could possibly be the common-law employer. (In the preamble to the final pay-or-play regulations, the IRS uses the term, "staffing firm," which can be quite confusing because it uses the substantially similar "temporary staffing firm" to mean something entirely different.) In the typical PEO/co-employment case, work assignments at a client company are indefinite, and really all the client company is doing is outsourcing its HR department.

Though the IRS does not discuss them, I would also include in this category permatemps--that is, workers who may be on the payroll of a temp agency but who work almost exclusively for one client company for indefinite periods of time. The classic example of permatemps are the warehouse workers of retail distribution facilities. Recent court cases involving Walmart are trending in the direction of finding client companies like Walmart and/or their logistics contractors to be joint employers, or co-employers, with the temp agencies providing workers for those facilities.

In the co-employment and PEO contexts, it is the client company that will be responsible for compliance with the ACA. The client company can still make use of the PEO's or temp agency's health plan, but with an important caveat: the client company must pay an additional fee, even if a nominal one, for employees opting to enroll in the PEO's or temp agency's health plan. Remember, it is the client company that will be responsible for compliance with the ACA; the IRS views the PEO or co-employing temp agency as simply offering health insurance on the client company's behalf. Here are a few recommendations for dealing with PEOs and co-employing temp agencies:
  • If the PEO or temp agency is determining full-time status, make sure it's doing it right, including in its application of the variable-hour and break-in-service rules
  • Make sure the plan offered by the PEO or temp agency and the associated employee contributions for that plan meet the requirements of the ACA
  • The contract between the PEO/temp agency and the client employer should state that there is an extra fee, even if a nominal one, for employees opting to enroll in the PEO/temp agency health plan
  • Get a contract covenant from the PEO/temp agency indemnifying the client company for its conduct as it relates to compliance with the ACA
  • For co-employing temp agencies in particular, monitor ongoing compliance with the full-time employee rules; the consequences of not doing so are just too great

3. A Word about Independent Contractors

Misclassifying workers as independent contractors when they should have been classified as employees will be a much bigger deal than it already is, mark my words. This is already a favorite area for IRS auditors because of the payroll tax and retirement benefits implications. Now there will be big welfare benefits implications in the form of (potentially) substantial pay-or-play penalties. And unlike for payroll taxes, there's no good-faith relief under Section 530. It's a good idea to review all situations involving individuals who are paid as 1099 independent contractors to make sure they really are independent contractors.

4. Beware the "Temporary" Category

Here I'm talking about employees on your payroll whose position is classified as "temporary" because the term of employment is not considered permanent, for whatever reason. The ACA is completely agnostic to the concept of "temporary" or "short-term" employees. (See this part of the preamble to the IRS' final pay-or-play regulations.) There are only 2 categories of employees under the ACA: full-time and not full-time. Period. Full stop.

Employees whose positions are not considered permanent are either full-time or not. If those employees are averaging 30 hours a week or more, then they must be offered health benefits by the first of the fourth month following hire, unless that employee is considered variable-hour or seasonal, in which case the employer can wait up to a year before offering health coverage. But note that there are special rules for determining whether an employee is seasonal or variable-hour; variable-hour is not the same thing as hourly. If the employer has any reason to think that the employee will average 30 hours a week or more in the first 13 weeks, ignoring the possibility of that employee leaving, then the employee is full-time and not variable-hour, and the employer must offer health benefits by the first of the fourth month following hire.

So if you have any employees not being offered health benefits, and the reason benefits are not offered is because the position is "temporary" or otherwise not permanent, it's a good idea to review those positions to make sure the only reason they are not offered health coverage is because the employees are not deemed full-time under the ACA.

Why 13 Weeks Is Important

There are no bright line rules for the IRS' direction-and-control test; it's in the nature of being a multi-factor test. However, because of the way the ACA pay-or-play penalties work, one can make a distinction between contingent worker assignments that are 13 weeks or more and assignments that are less than 13 weeks. In cases where the assignments are less than 13 weeks (and workers stay on the temp agency payroll and are not permatemps working repeated short-term assignments for the same client company), then it will be virtually impossible for the client company to be responsible for pay-or-play penalties. This is because, even if the client company and temp agency were wrong about the temp agency being the common-law employer, no penalties apply to the first 3 months of employment.

In cases where assignments are 13 weeks or more, or where the series of assignments for permatemps tends to be more than 13 weeks, there is greater uncertainty about which company is the common-law employer and there is greater penalty risk. Not only is there potential penalty exposure for workers deemed full-time who get subsidies on the federal or state exchange, but there is also potential penalty exposure for not offering affordable, minimum-value coverage to a high enough percentage of employees (70% in 2015, 95% thereafter). So even if it appears the client company is not the common-law employer, the stakes are far too high, and the client company should evaluate the situation and protect itself as if it was the common-law employer. Specifically, the client company should:
  • Get a contract covenant from the temp agency/staffing firm indemnifying the client company for any failures of the temp agency/staffing firm to fully comply with the ACA
  • Include in the contract a covenant expressly stating that the temp agency/staffing firm will make a qualifying offer of coverage to employees deemed full-time under the ACA
  • Get confirmation of how the temp agency/staffing firm determines who is full-time and who is not
  • Get confirmation of how the temp agency/staffing firm applies the ACA break-in-service rules
  • Evaluate the plan offered by the temp agency/staffing firm for compliance with the ACA minimum-value, affordability and market reform requirements
  • Adjust the payment mechanics of the contract to include an additional fee, even if a nominal one, for employees opting to enroll in the temp agency/staffing firm's health plan