1. Employee Benefit Considerations for Contingent Workers1

2. Types of Contingent Workers
Employee or Independent Contractor
Employee or Leased Employee
Who is the common law employer, especially in three-party arrangements?
On-call Employees
Temporary Employees
Freelancers
Contract Employees
Workers of Staffing Firms
Workers of Professional Employer Organization (PEOs) 2

3. Scope
Employment of contingent workers is governed under a series of federal laws, but the high profile cases have principally involved two laws:
Internal Revenue Code
Employee Retirement Income Security Act
IRC and ERISA Common Law Test
Other laws may have broader tests
For example, FLSA uses a very broad definition (is the worker economically dependent on the employer?)
Employers have historically been required to distinguish between workers who are their common law employees and who are not – affects payroll considerations and design of employer sponsored plans (qualified). The complexities of the affordable care act again add a reason for the distinction. 3

4. Employee or Independent Contractor
Mostly focus on abuses involving misclassification of workers as independent contractors
Common law agency test focuses on who has control over the services performed by the worker.
Mostly subjective
The relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.
Avoidance of tax obligations:
FICA
FUTA
Federal Income Tax withholding
in which an insurance
agent alleged that he was an employee of
the insurance company rather than an independent
contractor, and therefore his benefits under
a deferred compensation arrangement were
subject to ERISA’s vesting rules 4

5. IRS 20 factor test
Revenue Ruling used to determine FUTA, FICA, and income tax withholding: Factors include:
Complying with instructions of others
Extent of training
Integration of services
Hiring, supervising
Continuing relationship
Submission of reports
Payment by hour, week, or month
Right to discharge or terminate
Reduced to three broad standards:
Behavioral control (how the work is performed)
Financial control (economic aspects of relationship
Legal control (relationship of parties)
Factors 5

6. Agreements Important
Important to have a good agreement in place that at the very least describes:
obligations to pay taxes,
responsibilities,
equipment and office space,
fixed fees, and
distance from employee status 6

7. Employee Benefit Issues
Plan might not cover workers who are not employees
Plan may exclude from participation workers who are employees and who do not fit within the eligible class of employees 7

8. ERISA Obligations
ERISA is the law designed to protect rights of employees, former employees, and their designated beneficiaries with respect to certain employee benefit plans.
Under ERISA, benefits are generally provided only to persons designated as employees and not independent contractors.
Courts use the common law agency test
Having the IRS go back and reclassify workers as employees rather than independent contractors can be very expensive if benefits must be provided to those individuals and/or if they should have been counted in running certain discrimination tests that apply to tax-qualified plans. Tax-qualified plans may risk disqualification if non-employees are permitted to participate. 8

9. Tax-Qualified Plan Overview
Provide Benefits to Indep. Cont.
Did Not Provide Benefits to Employees
Violates the exclusive benefit rule
Operational issues (unless have specific language)
Potential loss of tax deduction
Right to bring suit for benefits owed under ERISA
Potential fiduciary violations
 Nondiscrimination Issues (including safe harbor plans) 9

10. Tax-Qualified Plans Cont.
IRC Section 401(a)(2) requires qualified plans to be maintained “exclusively for the benefit of …… employees”
Plans covering non-employees violates the qualification requirements
Use of EPCRS for reclassified workers 10

11. Tax-Qualified Plans Cont.
To receive benefits under the plan, a worker needs to show:
He is an employee of the employer (common-law definition of an employee)
Member of the class of employees who are eligible to participate in the Plan
He elects to participate (in some cases) 11

12. What if the Plan is not Tax-Qualified?
Retroactive reclassification of workers (exposure to risk)
Consequences for including Independent Contractors or excluding Employees:
Operational failures, only corrected through EPCRS
Nondiscrimination testing issues
Financial consequences for plan sponsor, plan participants, trust 12

13. Welfare and Fringe Benefits
Include group health plans, life, travel, accident, AD&D, long-term disability, short-term disability, severance, long-term care plans, etc.
Think about the terms of insurance policies
Health plans are subject to the Affordable Care Act 13

14. Affordable Care Act
Certain employers must offer group health plan coverage to their full-time employees or pay an assessment
Applies only to applicable large employers (50 or more FTEs starting in 2016) (100 or more FTEs in 2015)
Full-time common-law employees are those that work at least 30 hours per week 14

15. 4980H Rules
When applying the rules, employee classification is critically important:
For determining whether employer has at least 50 FTEs, and
Determining penalty based on each full-time employee
Must offer coverage to at least 70% in 2015 or 95% in 2016 and beyond
(a) Penalty of $2000/year for each FTE excluding the first 80 in 2015 or first 30 in 2016 and beyond if at least one employee receives a premium tax credit
(b) Penalty of $3,000 per each FTE who receives a premium tax credit
Improperly classified workers may skew the calculations
Assessment in the nature of a nondeductible excise tax 15

16. Health and Accident Plans
Tax benefits for employee, not independent contractors:
Section 105 governs the tax treatment of “amounts received by an employee”
Section 106 provides that employer-paid coverage under an accident and health plan is not taxable to the employee
Under a typical plan, 106 insures that premiums paid by an employer on employee’s behalf are excluded from income and 105(b) exempts any benefits paid on the employee’s behalf under the plans.
Employee contributions would be taxable in absence of section 125 16

17. Health and Accident Plan Cont. Issues
Nondiscrimination issues for self-insured plans, causing taxable reimbursement to highly compensated employees (IRC Sec. 105)
Taxation of excess benefits provided in case of failure of eligibility test or taxation of benefits not provided to all participants in case of failure of contribution test
Nondiscrimination issues under cafeteria plans (IRC Sec. 125) 17

18. Group-Term Life Insurance
Employers are permitted to provide employees with group-term life coverage on a tax-advantaged basis ($50,000)
Employees include current common law employees, full-time employees, leased employees
Plans that improperly include independent contractors or exclude workers who are common law employees risk violating the nondiscriminatory eligibility requirements, in which case the entire cost must be included in wages of key employees
Key employee – officer with annual compensation in excess of $170,000 18

19. Education Assistance Programs
Section 127
Provides that gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance, up to a dollar limit and the excess of the dollar limit may be deductible as a working condition fringe benefit
Employee is a common law employee, leased employee, former employee who retired or terminated as result of disability, present employee on leave, self employed individual
Must be for an exclusive benefit of employees 19

20. Educational Assistance Program Cont.
Violates the requirements that programs be for the exclusive benefit of employees and result in the loss of tax benefits for all participants
If employees are excluded, concern with failure of the applicable nondiscrimination tests 20

21. Dependent Care Assistance Program
Section 129
Exclusion from gross income of employee for amounts paid or incurred by the employer for dependent care assistance provided to the employee, up to a certain dollar limit
Employee means current common law employee, 414(n) leased employee
For misclassified workers, income is taxable and subject to employment taxes and income withholding 21

22. Fringe Benefits
Form of non-cash compensation for performance of services that would normally be treated as taxable
Tax benefits are unavailable to non-common law employees
Misclassifying workers may result in reporting errors, employment tax issues, loss of tax deduction 22

23. Qualified Transportation Benefits
Tax advantages for two categories of transportation expenses
Only permits inclusion of current common law employees and leased employees 23

24. Counting 414(n) Leased Employees as “Employees” for Nondiscrimination
Generally employees of staffing firm
Prevention of “fire” and “lease-back”
Qualified retirement plan
IRC Sec. 401(a)(3), (4), (7), (16), (17), (26)
Group life-insurance – IRC Sec. 79
Accident and health plan – IRC Sec. 106, 125
Cafeteria plan – IRC Sec. 125
Educational assistance program – IRC Sec. 127
Dependent care assistance program – IRC Sec. 129
COBRA – IRC Sec. 4980B
Also crediting service 24

25. 414(n) Leased Employees Counting for nondiscrimination testing
any person who is not an employee of the recipient and who provides services to the recipient if—
(A)such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the “leasing organization”),
(B)such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year, and
(C)such services are performed under primary direction or control by the recipient. 25

26. 414(n) Leased Employees Cont.
Never required recipient employer to cover leased employees under those plans, but instead, count the leased employees when conducting nondiscrimination testing for various benefits
A worker who otherwise would be treated as a leased employee may not be so treated if the worker participates in a safe-harbor plan maintained by the leasing company.
Primary direction and control prong of the test is applied only after it is determined that the worker is an employee of the leasing organization. 26

27. 414(n) Leased Employees Cont.
Factors to determine primary control:
Service is performed by a particular person
Subject to supervision of service recipient
Perform services in sequence set by service recipient
Leased employee status only occurs where leasing company involvement is substantial 27

28. Statutory Leased Employees Cont. Example
Staffing company duties (IRS Rev. Rul ):
Entered into contracts with employers (determining services and fees);
Has right to replace the worker;
Employer has no right to affect contract between staffing company and worker.
Hires the worker, pays wages, provides liability and unemployment insurance
Contractual right to evaluate workers
Hours and nature of duties are set by staffing company based on employer’s request
Need to have control of employees at the worksite 28

29. Co-Employment (PEOs) Who is the common law employer?
Two business exert some control over an employee’s work or working conditions
Three-party arrangements
Assume responsibilities for all or most of a client’s existing workforce
Client still has control over day-to-day activities of its workforce
Under the Code:
The business employer is considered the common law employer for benefit and tax purposes.
Accommodations and special rules in the ACA 4980H regulations 29

30. Professional Employer Organizations
Smaller employers outsourcing their tax and benefits compliances to specialists with expertise in the area (payroll, benefits, hr)
Allow employers to use group purchasing power to purchase employee benefit programs collectively 30

31. Joint-Employment

32. Professional Employer Organizations Cont.
The IRS has done little to discourage PEOs, but has not come up with a set of clear principles
For wages, the IRS has issued guidance starting with 2016 that a certified PEO is treated as the only employer but only with respect to remuneration remitted by the PEO to the employee (ABLE Act)
The ABLE Act solves a number of payroll-tax related issues, but not employee benefit issues 32

33. Professional Employer Organizations Cont. Qualified Plans
If the workers employed through the PEO are common law employees of the recipient only, and if workers are covered by a tax-qualified plan by the PEO, then:
The plan may be disqualified because it is not being offered exclusively to employees;
The plan has to be treated as a multiple employer plan 33

34. The Affordable Care Act and Staffing
Staffing Models:
Staffing firm is the common law employer
Client of the staffing firm is the common law employer
No distinction between staffing firm and PEO
Ultimate penalty rests on the common law employer
Actual facts and circumstances will govern the status, not the contract
Anti-abuse provisions which address arrangements to evade application of the employer mandate
Historically it has been presumed that for qualified plan purposes the PEO is not the common law employer, but that the staffing firm is. 34

35. The Affordable Care Act and Staffing Cont.
Recognize that the PEO and not the employer, in some instances, will make the offer of coverage
Regulations permit an offer of coverage by an unrelated employer in cases where the employee to whom coverage is offered by the staffing firm is the common law employee of the client
Can be used intentionally or contractually 35

36. The Affordable Care Act and Staffing Cont.
If PEO offers coverage for common law employees of the employer, the employer is treated as having offered coverage, but only if the fee paid for the employee enrolled in the health plan is higher than the fee paid for employees not enrolled in the plan.
Do not address issues such as:
MEWA status of the staffing firm’s group health plan;
Loss of tax deduction under Code Sec. 105, 106, and 125 (additional fee may preserve these exclusions)
Determination that the employees being placed with an employer are employees of the employer may have consequences on other benefit programs (such as 401(k))

37. Post-Employment Consultant
If a worker that is now referred to as a consultant is still a common law employee, then he/she is misclassified
Looking for a fundamental change in the relationship
Employees should not be immediately rehired as an independent contractors
The employer should enter into a contract with the worker, which describes limited services provided
Payment for services should be on a project basis
The agreement should not set a time or place
Issues when W-2 and 1099 received in same year 37

38. Self Audit
Employers should self-audit their worker classifications and to review benefit issues as part of the analysis:
Review status as common law employer
Eligibility terms and distinctions
Nondiscrimination tests
Proper crediting of service and inclusion of leased employees 38

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