Protect App-Based Drivers Act Would Create Further Employee Classification and ACA Reporting Issues
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As part of their campaign against the requirements of California Assembly Bill 5 (AB5), which went into effect January 2020 and requires employers to treat contract workers as employees unless they meet certain requirements, GIG giants Uber and Lyft have promoted a ballot measure, the App-Based Driver Protection Act (Driver Act), which would reclassify those same workers as independent contractors with quasi-employee benefits. One of the more prominent benefits provided to these new quasi employees under the act would be a “healthcare subsidy consistent with the average contributions required under the Affordable Care Act (ACA).”
Since the implementation of AB5 in January, the GIG economy has faced a barrage of legal action. A 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.”
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.
We previously discussed that one of the biggest impacts all employers in the state of California must face in the wake of AB5 is the requirement of offering employee benefits to these new employees, including the requirements of providing healthcare coverage under the ACA, and that 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 for all workers regardless of how they appear to be classified under state law to protect themselves from running afoul of the Employer Mandate.
If California passes the Driver Act, it will raise even further issues with regarding potential worker misclassification. As theIRS uses a different test than California for determining independent contractor status, it was never entirely clear how the IRS would treat GIG workers that were newly classified as employee’s under AB5. The new quasi-employee classification under the Drivers Act will likely create even more confusion for ACA reporting under the Employer Mandate in California.
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.
In addition to the overall classification issues, the previously identified healthcare subsidy will likely make it even more difficult for Covered California to accurately allocate premium tax credits and implement reporting and penalties for their recently implemented statewide individual mandate.
Employers already need to incorporate newly classified employees under AB5 into their ACA compliance process. Should California pass the Drivers Act, they will likely need to incorporate all workers that fall under this new proposed quasi-employee classification as well. 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 and or state agency 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.
We’re committed to helping companies reduce risk, avoid penalties, and achieve 100% ACA compliance. For questions about the ACA contact us here.
