The Affordable Care Act – Independent Contractor vs. Full Time

00877133-1 / EMPLOYEE- 00877133-1 / EMPLOYEE-}



TheAffordableCareAct

IndependentContractor

vs.FullTimeEmployee



PaulH.MalesickII,Esq.

[email protected]



AnimportantstepindeterminingtheextentacompanywillbeaffectedbytheAffordableCareAct(ACA )is

bydeterminingitsnumbe r ofemployees.Unde rtheACA,beginningonJanuary1,2015,employerswith50

ormorefulltimeequivalentsarerequiredtooffertheir employees’healthcarecoverage(the

“playorpay

rule”).Manyissuesaffectthenumberofemployeesworkingforaspecificemployer,suchas:

1. IndependentContractors

It is important to analyzewhether the employer retains the right to control the manner or means of

performing thework ,which is the chieftest under Ohio Law.There are20 factorsused by theIRSto

determinewhetheryouhaveenoughcontroloveraworkertobean

employer(seepage3).Theserules

areintendedonlyasaguide,astheimportanceofeachfactordependsontheindividualcircumstances. 

Employersshouldperformthisanalysisandmakesureagreementsareputinplacetoacknowledgethis

classification.

CommonLawRules

The IRS also relies on common law in making this determination.The IRS guidance provides three

categories of control factors to determine the degree orextent of the employer’s right to control and

theworker’sindependence:

(1)Behavioral,which focuses ontherightto control andhow theworkercompletes

hisorher 

job;

(2) Financial, which focuses on whether or not the business aspects of the worker’s job are

controlled by the employer (three example questions: how is the worker paid, how are the

expensesreimbursed;andwhoprovidesthetoolsandsupplies);

(3)TypeofRelationship,whichanalyzes

thewrittencontractswiththeworkerandthetypesof

additional benefits received by the worker, such as vacation pay, medical insurance, and

retirementaccounts.

IRS guidance recommends looking at the entire relationship, considering all of the relevant foregoing

factors,anddocumentingeachofthefactorsusedincomingup

withthedetermination.

July16,2014

PaulH.MalesickII,Esq

[email protected]



00877133-1 / EMPLOYEE- 2

2. ControlledGroups

UndertheACA,acontrolledgroupofemployersisconsideredoneemployerforthepurposeofthe“play

orpayrule”.Therefore,itisimportanttoanalyzewhetherornotyourcompanyispartofacontrolled

group. Generally,there arethree types of controlled groups: (1) Parent‐Subsidiary Group, (2)

 Brother‐

SisterGroup,and(3)CombinedGroups.

3. TemporaryorLeasedEmployees

ThetreasuryregulationpromulgatedundertheACAsuggestthatanapplicablelargeemployer(onewith

50 or more employees)may be subjectto the ACA penalties for any worker who is a “common law”

employee,asdeterminedundertheInternalRevenueCode.Ifyouhireworkersthroughtemporaryand

leasingagencies,

youmaybeconsideredco‐employerswiththeagenciesand,thusjointlyandseverally

liablewiththeagenciesforACApenalties.Thesetemporaryandleasedemployees’contractshouldbe

examined to ensure the agencies burden the responsibility for ACA compliance and that you are

indemnifiedfromACApenalties.

4. Full‐TimeEquivalents

InordertodeterminewhetheranemployerisalargeemployerforpurposesoftheACA,bothfull ‐time

and part‐time employees are used to determine  the 50 full‐time equivalent (FTE) thresholds. In

summary,youwillcounteachemployeesworkingover30hoursas1FTEandthenadd

thehoursofall

part‐timeemployees and divide by2,080to determinehow many FTEs thepart‐timeemployees make

up.



5RedFlagstoAvoid

Thefollowingsituationsmayraisesuspicionsabouthowyouhaveclassifiedyourworkersandcouldleadto

anIRSaudit.

1. Reclassifyingemployeesasindependentcontractors,especiallyissuingthesameworkerbotha

W‐2anda1099‐MISC;

2. Layingoffemployeesandmakingthemindependentcontractorssothattheycanfinishupwork

thatneedstobedone;

3. Providingmostofthesuppliesthatworkersneedtoperformtheirduties(e.g.,laptops,phones,

officesupplies)andclassifyingthemasindependentcontractors;

4. Beingtheonlyclientorsourceofincomeforanindependentcontractor;

5. Makingregular,indefinitepaymentstoanindependentcontractorovermultipleyears.



After examining each of the preceding issues, you may or may not decide to begin providing health care

coverage for your employees, even if over the 50 FTE requiremen t.Providing coverage may still be

substantiallymorecostlythanpayingthepenalty.Thisisastrategicanalysisthatmustbeperformed

once

youknowwhetheryourcompanymeetsthe“playorpay”requirements.



July16,2014

PaulH.MalesickII,Esq

[email protected]



00877133-1 / EMPLOYEE- 3

TwentyFactorChecklisttoDetermine

IndependentContractorvs.EmployeeStatus

Rev.Rul.87‐41(1987‐1CB296)



Asanaidtodeterminingwhetheranindividualisanemployeeunderthecommonlawrules,twentyfactors

or elements have been identified as indicating whether sufficient control is present to establish an

employer‐employee relationship.The twenty factors have been developed based on an examination of

cases and rulings considering

 whether an individual is  an employee.The degree of importance of each

factorvariesdependingontheoccupationandthefactualcontextinwhichtheservicesareperformed.The

twentyfactorsaredesignedonlyasguidesfordeterminingwhetheranindividualisanemployee.



Answer“YES”toallofthefirstfourquestions

–yourworkerisprobablyanindependentcontractor.



1. Instructions – A worker who is required to comply with other persons' instructions

aboutwhen,where,andhowheorsheistoworkisordinarilyanemployee.Thiscontrolfactorispresentif

the person or persons for whom the services are performed have the right to require compliance with

instructions.See,

forexample,Rev.Rul.68‐598,1968‐2C.B.464,andRev.Rul.66‐381,1966‐2C.B.449.



2. Training – Training a worker  by requiring an experienced employee to work with the

worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other

methods, indicates that the person or persons for whom the services are performed want the services

performedinaparticularmethod

ormanner.SeeRev.Rul.70‐630,1970‐2C.B.229.



3.Integration–Integrationoftheworker'sservicesintothebusinessoperationgenerally

showsthatthe workerissubject todirectionandcontrol.Whenthesuccessor continuationof abusiness

depends to an appreciable degree upon the performance of certain services, the workers who perform

thoseservicesmustnecessarilybesubjectto

acertainamountofcontrolbytheownerofthebusiness.See

UnitedStatesv.Silk,331U.S.704(1947),1947‐2C.B.167.



4. Services Rendered Personally – If the services must be rendered personally

presumablythepersonorpersonsforwhomtheservicesareperformedareinterestedinthemethodsused

toaccomplishtheworkaswellasintheresult.SeeRev.Rul.55‐695,1955‐2C.B.H.410



July16,2014

PaulH.MalesickII,Esq

[email protected]



00877133-1 / EMPLOYEE- 4

Answer“YES”toanyofquestions5‐20

–yourworkerisprobablyanemployee.



5.Hiring,Supervising,andPayingAssistants–Ifthepersonorpersonsforwhomthe

services are performed hi re, supervise, and pay assistants, that factor generally shows control over the

workers on the job.However, if one worker hired supervises and pays the other assistant pursuant to a

contract under which the worker agrees to provide materials

and labor and under which the worker is

responsible only for the attainment of a  result, this factor indicates an independent contractor status.

CompareRev.Rul63‐115,1963‐1C.B.178,withRev.Rul.55‐593,1955‐2C.B.610.



6. Continuing Relationship – A continuing relationship between the worker and the

personor personsfor whomthe services areperformed indicates thatan employer‐employee relationship

exists.A continuing relationship may exist where work is performed at frequently recurring although

irregularintervals.SeeUnitedStatesV.Silk.



7.SetHoursofWork–Theestablishmentofsethoursofworkbythepersonorpersons

forwhomtheservicesareperformedisafactorindicatingcontrol.SeeRev.Rul.73‐591,1973‐2C.B.337.



8.FullTimeRequired–Iftheworkermustdevotesubstantiallyfulltimetothebusiness

of the person or persons for whom the services are performed, such person or persons have control over

theamount oftime the worker spends working andimpliedly restrictthe workerfrom doing other gainful

work.Anindependentcontractor,

ontheotherhand,isfreetoworkwhenandforwhomheorshechooses .

SeeRev.Rul.56‐694,1956‐2C.B.694.



9.DoingWork onEmployer'sPremises–If thework isperformedonthepremises  of

theperson orpersons for whomtheservices areperformed, thatfactor suggestscontrol overtheworker,

especially if the work could be done elsewhere.Rev. Rul. 56‐660, 1956‐2 C.B. 693.Work done off the

premisesoftheperson

orpersonsreceivingtheservices,suchastheofficeworker,indicatessomefreedom

from control.However, this fact by itself does not mean that the worker is not an employee.The

importance of this factor depends on the nature of the service involved and the extent to which an

employer generally

 would require that employees perform such services on the employer's premises.

Control over the place of work is indicated when the person or persons for whom the services are

performedhavetherighttocompeltheworkertotraveladesignatedroutetocanvassaterritorywithina

certaintime,

ortoworkatspecificplacesasrequired.SeeRev.Rul.56‐694.



July16,2014

PaulH.MalesickII,Esq

[email protected]



00877133-1 / EMPLOYEE- 5

10.OrderorSequenceSet–Ifa workermustperformservicesintheorderorsequence

setbythepersonorpersonsforwhomtheservicesareperformed,thatfactorshowsthattheworkerisnot

freetofollowthe worker'sownpatternofworkbutmustfollowtheestablishedroutines andschedulesof

the

personorpersonsforwhomtheservicesareperformed.Often,becauseofthenatureofanoccupation,

thepersonorpersonsforwhomtheservicesarebeingperformeddonotsettheorderoftheservicesorset

theorderinfrequently.Itissufficienttoshowcontrol,however,ifsuchperson

orpersonsretaintherightto

doso.SeeRev.Rul56‐694.



11.OralorWrittenReports–Arequirementthattheworkersubmitregularorwritten

reports to theperson or persons for whom the services are performed indicates a degree ofcontrol.See

Rev.Rul70‐309,1970‐1C.B.199,andRev.Rul.68‐248,1968‐1C.B.431.



12.PaymentbyHour,Week,Month–Paymentbythehour,week,ormonthgenerally

pointstoanemployer‐employeerelationship,providedthatthismethodofpaymentisnotjustaconvenient

way of paying a lump sum agreed upon as the cost of a job.Payment made by the job or on a straight

commissiongenerally

indicatesthattheworkeris anindependentcontractor.SeeRev.Rul.74‐389,1974‐2

C.B.330.



13. Payment of Business and/or Traveling Expenses – If the person or persons for

whom the services are performed ordinarily pay the worker's business and/or traveling expenses, the

workerisordinarilyanemployee.Anemployer,tobeabletocontrol expenses,generallyretainstherightto

regulateanddirecttheworker'sbusinessactivities.SeeRev.Rul.55‐144,

1955‐1C.B.483.



14.FurnishingofToolsandMaterials–The factthatthepersonorpersons forwhom

the services are performed furnish significant tools, materials, and other equipment tends to show the

existenceofanemployer‐employeerelationship.SeeRev.Rul71‐524,1971‐2C.B.346.



15.SignificantInvestment–Iftheworkerinvestsinfacilitiesthatareusedbytheworker

inperformingservicesandarenottypicallymaintainedbyemployees(suchasthemaintenanceofanoffice

rentedatfairvaluefromanunrelatedparty),thatfactortendstoindicatethattheworkerisanindependent

contractor.On

the other hand, lack of investment in  facilities indicates de pendence on the person or

persons for whom the services are performed for such facilities and, accordingly, the existence of an

employer‐employeerelationship.See Rev.Rul.71‐524. Special scrutiny isrequired withrespect to certain

typesoffacilities,suchas

homeoffices.



July16,2014

PaulH.MalesickII,Esq

[email protected]



00877133-1 / EMPLOYEE- 6

16.RealizationofProfitorLoss–Aworkerwhocanrealizeaprofitorsufferalossasa

resultoftheworker'sservices(inadditiontotheprofitorlossordinarilyrealizedbyemployees)isgenerally

anindependentcontractor,buttheworkerwhocannotisanemployee.SeeRev.Rul.70‐309.Forexample,

if

theworkerissubject toarealriskofeconomiclossdue tosignificantinvestmentsorabonafideliability

for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an

independentcontractor.Theriskthataworkerwillnotreceivepaymentforhisor

herservices,however,is

common to both independent contractors and employees and thus does not constitute a sufficient

economicrisktosupporttreatmentasanindependentcontractor.



17.WorkingforMoreThanOneFirmataTime–Ifaworkerperforms morethande

minimisservicesforamultipleofunrelatedpersonsorfirmsatthesametime,thatfactorgenerallyindicates

thatthe workeris aninde pendent contractor.See Rev. Rul. 70‐572, 1970‐2 C.B. 221.However, a worker

who performs services for more than one

 person may be an employee of each of the persons, especially

wheresuchpersonsarepartofthesameservicearrangement.



18.MakingService AvailabletoGeneralPublic–Thefactthataworker  makeshisor

her services available to the general public on a regular and consistent basis indicates  an independent

contractorrelationship.SeeRev.Rul.56‐660.



19. Right to Discharge – The right to discharge a worker is a factor indicating that the

workerisan employeeandthe personpossessingtheright isanemployer.Anemployerexercises control

through the threat of dismissal, which causes the worker to obey the employer's instructions.An

independentcontractor,ontheotherhand,

cannotbefiredsolongastheindependentcontractorproduces

aresultthatmeetsthecontractspecifications.SeeRev.Rul.75‐41,1975‐1C.B.323.



20.Right to Terminate – If the worker has theright to endhis or her relationship with

thepersonforwhomtheservicesareperformedatanytimeheorshewisheswithoutincurringliability,that

factorindicatesanemployer‐employeerelationship.SeeRev.Rul.70‐309.



Thischecklistadaptedfrom:

http://smallbusiness.findlaw.com/business‐forms‐contracts/business‐forms‐contracts‐a‐to‐z/form1‐21%281%29.html

http://www.irs.gov/Businesses/Small‐Businesses‐&‐Self‐Employed/Independent‐Contractor‐Self‐Employed‐or‐

Employee

