Uber and Lyft sued by California for Misclassifying Gig Workers. How Misclassification can Impact ACA Compliance
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Gig Economy giants Uber and Lyft are being sued by the state of California for allegedly failing to meet the requirements of California Assembly Bill 5 (AB 5).
The Complaint, filed by attorneys from the Office of the California Attorney General and the city attorney offices of Los Angeles, San Diego and San Francisco “accuses Uber and Lyft of depriving workers of benefits, such as a minimum wage, health care, overtime pay, reimbursement for business-related expenses, access to disability insurance and paid sick leave.” according to a post by Forbes.
The lawsuit seeks restitution in unpaid wages for drivers as well as action from the companies to treat their drivers as employees moving forward. According to a post by the LA Times, “The law enables plaintiffs to seek up to $2,500 in civil penalties per violation for drivers going back four years.”
AB 5 went into effect January 2020, and requires employers to treat contract workers like employees, unless they meet certain requirements.
The bill effectively expands the definition of the word employee: “…a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.”
Earlier this year, Instacart faced an injunction from the city of San Diego to stop it from classifying thousands of its grocery packaging and delivery workers as independent contractors. While the injunction only covers San Diego, the writing appears to be on the wall for Gig Economy, as the state of California lawsuit against Uber and Lyft now shows.
The trucking industry is also facing challenges in complying with AB 5, as there has been confusion on how the law applies to trucking companies that carry out business with owner-operator truck drivers.
One of the biggest impacts all employers in the state of California must face in the wake of AB 5 is the requirement for offering employee benefits to these new employees, including the requirements of providing healthcare coverage under the ACA.
While the IRS uses a different test than California for determining independent contractor status. It is unclear how the IRS will be able to differentiate between the state and federal standards with respect to ACA reporting. For workers that are reclassified as employees under AB 5, prudent employers should account for tracking hours of services, wages, and other employee level details for ACA compliance and reporting purposes, as required by the Employer Shared Responsibility Provisions, also known as the Employer Mandate.
As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), 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 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 2021, click here.
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