ACA Compliance Responsibilities Could Increase if the Federal Government Adopts the ABC Test for Employee Misclassification
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A tsunami for the gig economy may be coming on the horizon. We have written recently about the ongoing issues that gig economy employers, such as Uber and Lyft, are facing in California and other states that are challenging them on their practice of classifying, or misclassifying, their workers as independent contractors. California and New Jersey both recently adopted the ABC test for determining whether a worker can appropriately be classified as an independent contractor or if they must be classified as an employee, and have established stiff penalties for non-compliance. We discuss in detail the impacts of the ABC test on worker classification here. Essentially, the ABC test makes it impractical, if not impossible, for gig economy companies to continue to classify their workers as independent contractors while continuing to operate in the same manner.
Gig companies are fighting back in California at least, trying to pass a measure called the App-Based Drivers Act this November and even threatening to shut down operations in California if the courts force them to classify their workers as employees.
The fighting between individual states and large gig employers could be muted come November based on a provision tucked into the PRO Act. Passed by the Democrat-controlled House in February, mostly along party lines, the PRO Act would adopt the ABC test on a national level. The PRO Act has not even been taken up by the Republican controlled Senate, but, especially amidst a growing sensitivity during the COVID-19 pandemic to the plight of gig workers who have fewer benefits to fall back on, should control of the Senate and presidency shift in November, there is a good chance that most, if not all, of the provisions in the PRO Act could be taken up again after the new year. Several prominent Democratic senators have voiced their support.
As previously discussed, one of the biggest impacts for employers forced to reclassify their workers as employees is the requirement for offering employee benefits to these new employees, including the requirements of providing healthcare coverage under the ACA.
Under the ACA Employer Mandate, organizations with 50 or more full-time employees and full-time-equivalent employees are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is affordable for the employee, or be subject to Internal Revenue Code (IRC) Section 4980H penalties. The healthcare law defines full-time employees as workers who average 30 hours of work a week or 130 hours a month.
Employers will need to incorporate these newly classified employees into their ACA compliance process. Employers will need to extend offers of health insurance coverage to more employees, and reporting requirements will grow in complexity. The volume of forms to be processed will increase, along with the costs associated with distributing 1095-C Forms to employees and submitting required ACA information to the IRS annually.
Failing to get this right can result in significant penalty assessments from the IRS. The agency is currently issuing ACA non-compliance penalty notices in Letter 226J for the 2017 tax year. Employers should seek out expert ACA compliance consultants to prepare for increased ACA compliance as more independent contractors become full-time employees under the ACA.
To learn more about ACA compliance in 2020, click here.
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