If you use a staffing agency or temp workers, there is an added complexity to how you calculate your employees for the sake of the Affordable Care Act “pay or play” rules.
As you know, if you have 50 or more full-time or full-time equivalent employees, you are required to secure health insurance for your employees or face penalties of about $2,000 a head. As the Internal Revenue Service will be scrutinizing employers in this regard, you need to know the rules of the road if you are using staffing companies for your workforce.
The IRS has indicated that it intends to use a fact-based “common law” definition of employee to determine who is a full-time employer under the ACA.
When an employer uses a staffing agency to supply workers, making the determination as to who is a common law employee becomes more complex. However, the final rules allow for some relief for an employer who might otherwise incur the pay-or-play penalties with respect to workers hired through staffing agencies that are reclassified by the IRS as common law employees of the client employer.
Generally, a worker providing services to an employer is a common law employee if the employer has the authority to direct and control the manner in which services will be performed.
The IRS sets out three main categories of facts that it will consider to determine whether a person is a common law employee or an independent contractor:
- Behavioral control;
- Financial control; and
- Facts about the relationship.
Staffing agency conundrum
But the line blurs when contracting with a staffing agency. In many of these contracts, the workers are often characterized as employees of the staffing agency or jointly employed by the staffing agency and the company client.
The IRS has stated in a Q&A section on its website that the terms used by the parties to such a contract are only one of many facts that will be examined to determine who is the common law employer for ACA purposes.
Because employers do not offer health coverage to workers supplied by staffing agencies, if the IRS decides to classify them as common law employees it could trigger liability ACA penalties.
For example, an employer who offers coverage to 96 out of 100 full-time employees would not owe a penalty under the 95% rule. But if just five additional workers provided by a staffing agency are later determined to actually be common law employees of the employer, the employer could owe a penalty of $150,000 ($2,000 multiplied by 75, which is the number of full-time employees, less 30).
What you should do
One bit of good news is that final ACA regulations allow employers to take credit for an offer of coverage made by a staffing agency only if the firm pays the staffing agency more for a worker who accepts the offer of coverage than the employer would pay if the worker did not accept the offer.
If you have not done so, make sure that your staffing agency contract explicitly addresses this issue in a line item.
The typical staffing agency contract prior to the ACA did not include provisions for distinguishing offers of coverage.
You will want to consider how many staffing agency workers typically are part of your workforce to determine whether ACA penalties may be triggered.
Finally, you should review and, if necessary, amend your agreements with staffing agencies to take advantage of the protection offered by the ACA regulations.