Home > Employee Benefits > How many employees do you have? The answer may not be so simple

How many employees do you have? The answer may not be so simple

employeesSimple question? Maybe. For many organizations, it is anything but simple. Companies hire staff to complete required tasks. Many of these individuals are easily identified as ‘employees’ and the employer generates a W-2 reporting their compensation to the government. Alternatively, some organizations onboard certain workers as “Independent Contractors” to accomplish tasks. This category of worker is in a different class.

It gets confusing when “contractors” and regular employees are sitting at desks right beside each other doing identical or similar jobs and being overseen by the same individuals. In this scenario, the lines are blurred considerably. The IRS provides employers with some information on how to determine if someone has crossed the line from an ‘Independent Contractor’ to ‘employee’. The IRS tells us that the determination is based on whether the person for whom the services are being performed has the right to control how the worker performs that service. It is not an employer’s choice of how they want to pay the individual or even how the individual would like to be paid, rather, this decision is broken down into three broad factors:

  • Behavioral control
  • Financial control
  • Relationship of the parties

In Publication 1779 the IRS attempts to help employers work through this test on their own. They will also make the determination for you if you submit a Form SS-8.

So why does any of this matter?

The government and the tax code look at these individuals as if they are vendors hired by the firm. They generally are not benefits-eligible and are excluded from a variety of regulations including minimum wage, unemployment insurance, and overtime rules. The employer is also not on the hook for paying things like Social Security and Medicare tax payments on behalf of these individuals. This can appear to be an attractive solution to some employers who are looking to contain the rising costs in their benefits expenditures.

Employers who have not looked at their workforce with a critical eye toward correcting employee classifications might want to take this opportunity to do so. Why now? Because President Obama’s 2014 budget plan includes $14 million for the Department of Labor to specifically combat the misclassification of employees as independent contractors. One can assume that this new initiative is at least partially tied to PPACA and how employers are penalized if they fail to offer affordable coverage to employees, but would not be penalized if that same individual was an independent contractor. It can also provide employers a loophole if keeping those individuals as independent contractors keeps the employee count under 50 in order to avoid penalties under PPACA completely.

So if asked again, how many employees do you have? Has your answer changed?

(WGA’s Health Reform Advisory Team recently presented an educational web event on  “Questions on Variable Hour Employees” if you are interested in learning more, click here for the recording.) 

About the Author

Kathleen McSherry is a Senior Vice President at William Gallagher Associates in the Employee Benefit Group with a core focus on compliance and communications. Her responsibilities include educating clients on applicable local, state and federal regulations affecting their insurance programs and employees. She also acts as a liaison between WGA’s ERISA attorney and WGA’s Benefits Department.

617.646.0359 | kmcsherry@wgains.com | Connect with Kathleen on LinkedIn

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