The roles of independent contractors and full-time employees were often ambiguous in the past, as arguably employers’ means of classification relied in how the job was done versus who was doing the job (and for how long). However, the Affordable Care Act’s crackdown on employees receiving adequate health insurance has led to all sorts of issues arising from misclassification of employees.
We’ve learned how Dave & Busters came under fire for purposefully cutting hours to fall below the “full-time equivalent” requirement. We’ve also learned how companies like Uber and video gaming corporation Valve faced lawsuits for misclassified contractors who were clocking in full-time hours to seemingly no promise of employees’ rights to health care.
If a worker is part of an Applicable Large Employer(50 or more full-time or full-time equivalent employees) and averages a full-time workweek, they are entitled to an offer of health care. It is there that they are seemingly misclassified, and lawsuits aside, penalties can pile up at the end of the tax year.
For 2016, it was mandated that ALEs must offer health care to 95% of their full-time equivalent employees or pay a fine of $2,160 per employee, often known as the “sledgehammer penalty.” These are rigid fines that can amount to millions of dollars if enough employees are not properly offered benefits.
While employers were just getting adjusted to the idea of providing health care for employees previously ineligible, it’s evident that something had to change; and it has, albeit gradually.
Last year, the Department of Labor implemented what is called the economic realities test as a means of classifying a worker as either an employee or an independent contractor. The test includes six components that include scope of work, managerial skill, investment, special skillset, terms, and control.
For scope of work, the general inquiry is how vital is said worker’s job to the function of the company? Should the worker be an important part of the process, they may not be merely an independent contractor.
Managerial skill involves the extent of independent operations on behalf of the worker. If the worker is still at the mercy of the business when it comes to operations, then they may need to be classified as an employee.
Investment is most easily described using tools of the trade. Is a worker responsible for their own tools to complete a job? Or is that funded by the business? Independent contractors often make their own investments with their own tools to complete the job.
Special skillset is another indicator of how a worker’s skillset used on the job may factor in finding that worker an employee or an independent contractor. If one worker provides one special skillset for one company, that can be seen as an employee. However, if a worker has one special skillset they use for multiple companies, they are more than likely an independent contractor.
A worker’s term regarding time is another factor for determining classification. If a worker has completed tasks for one company for years using the company’s tools then that permanency suggests such worker is an employee. As previously stated, if the skill is used for multiple places with inconsistent time frames, that suggests that the worker is an independent contractor.
Finally, control is the last factor, focusing on the level of input the worker has in choosing the work. If a worker has an option to complete a task, he/she is probably an independent contractor as the duties are within his/her control. Should that worker lack that control, he/she is more than likely to be an employee.
While the economic realities test is currently the go-to analysis for determining proper classification, certain states have not fully picked up on the trend. However, it’s something states and employers must be wary of as they continue their classification procedures, as workers may be eligible for health care. Many find the economic realities test as a roadblock when it comes to classifying workers as independent contractors, but perhaps that’s a good thing.
