MISCLASSIFICATION OF WORKERS

AND THE

AFFORDABLE CARE ACT

POTENTIALLY MISCLASSIFIED WORKERS

Dancers DJ’s House Mom’s Bathroom AttendantsValetsShot GirlsMassage Girls

Affordable Care Act (“ACA,” or “OBAMACARE”)

Applies if business averages over 50 “full time equivalent employees” during the preceding year.

Starts January 1, 2014

THIS is the preceding year (i.e., 2013)

AHCA

Waiting period limited to 90 days

Eliminates annual dollar limitEmployers with 200+ employees must implement

automatic enrollmentEmployers must certify to U.S. Dept. of H.S.S.

whether group plan provides “minimum essential coverage”

Eliminates pre-existing conditions

2014

Companies with over 50 full time equivalent employees in their control group must offer minimal essential coverage to all full time employees who average 30 hours or more per week.

If you don’t:

First year penalty of:

$2,000.00 per year x number of full time employees, minus 30 (to be paid per month)

Penalties increase each year by the growth in insurance premiums

IF YOU DON’T AND EMPLOYEE IS INJURED OR GETS ILL:

UNLIMITED medical care liability

No Penalty IF:

1) Employer offers coverage to its workers2) The insurance pays for at least 60% of covered

health care expenses for a typical population3) No employee has to pay more than 9.5% of

single income for single employer providing coverage

Must notify employees of health insurance exchanges

by March 1, 2013

Full time employment:30 hours per week

29 hours is the key cutoff

Variable hour employees

At start date the worker is not reasonably expected to work an average of at least 30 hours per week

Seasonable employees

Different measurements of qualifying employees

Collective Bargaining vs. Non-Collective Bargaining employees

Salaried vs. Hourly employeesEmployees of different entities (irrespective of

“control group”)

Employees located in different states

FULL TIME EQUIVALENT EMPLOYEES

One FTE Employee = one person working 8 hours, five days a week

It is not the number of full time employees 2 people working 4 hours a day, 5 days a week =

1 FTE employee

SAFE HARBOR FOR FTE DETERMINATION

Standard measurement period (current employees) 3-12 months

Initial measurement period (new employees) 3-12 months

Administration period Not to exceed 90 days

Stability period Full time

Pay benefits for at least 6 consecutive months after measurement period

Not full time Not required to offer benefits during the stability period

Antecedent question of employment

“Section 530”

Common Law Test

WINNING ON AN IRS WORKER MISCLASSIFICATION CLAIM

THE I.R.S. THREE PART CONTROL TEST

The I.R.S. utilizes a “three aspects of control” test to determine whether a worker is an employee or an independent contractor.

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1.Behavioral control -- the right to direct or control how the worker performs the work for which he or she is hired. All of the following are types of instruction that demonstrate control:

When and where to do the work.

What tools or equipment to use.

What workers to hire or to assist with the work.

Where to purchase supplies and services.

What work must be performed by a specified individual

What order of sequence to follow.

2.Financial Control -- financial control is shown by a right to direct or control the financial aspect of the worker’s activities. The facts relevant for financial control include:

The extent the worker has un-reimbursed business expenses.

The extent of the worker’s investment. The extent to which the worker makes his/her services

available to others.

How the worker is paid by the business.

The extent to which the worker can realize a profit.

3.Relationship of the parties -- generally shown by the agreements and actions between the two parties and how they perceive their relationship and represent it to others. Facts that the I.R.S. looks at include.

Written contracts.

Employee - type benefits provided.

Permanency of the relationship.The degree that the services provided are key to the

regular business.

THE PREVIOUS I.R.S. TWENTY PART TEST TO DISTINGUISH EMPLOYEES FROM INDEPENDENT

CONTRACTORS 

Prior to consolidating the three aspects of control, the IRS used a list of 20 factors to determine worker status. The IRS still considers these factors to the extent that they are relevant to illustrating the three controls of behavior, finances and relationship. These twenty points are:

1. Employee compliance with instructions required – a person who is required to comply with instructions of when, where and how to perform task is usually and employee.

2. Training – training is an indication that the company expects the work to be done in a particular manner.

3. Integration of worker’s services into the business – helps illustrate that the person is subject to direction and control.

4. Services are rendered personally – an indication that the employer is interested in the method and the results.

Continued on next slide 19

5. Ability to hire, supervise and pay assistants – employer having control over the hiring, supervising and paying of workers indicates an employer-employee relationship. An independent contractor would be responsible for hiring, paying and supervising all assistants.6. A continuing relationship – an ongoing continued and exclusive relationship indicates an employer-employee relationship.7. Set hours of work are established – setting hours of work by business is an indication of control.8. Full time is required – if a person is required to work full time, it is implicit that the worker is restricted from seeking work elsewhere. An independent contractor has the right to choose whom and when to work.9. Work performed on business’s premises – only relevant in showing the amount, if any, control the business has.10. Services performed in a set order of sequence – services required to be performed in a certain order may indicate control.11. Oral or written reports required – an indication of control by employer.12. Payment by hour, week or month – an independent contractor is typically paid by the job. An employee is typically paid by the hour, week or other period of time. The guarantee of a minimum payment or salary tends to indicate employer-employee relationship.

Continued on next slide

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13. Payment of business and/or travel expenses – payment of expenses is a factor indication control.

14. Tools and materials furnished by business – indicative of control.

15. Worker investment in facilities – a worker who invests in the facilities in order to perform their work is an indication of independent status, while having a business furnishing all necessary facilities tends to indicate employee status.

16. Worker can realize a profit or loss – those who are in a position to realize a profit or loss because of their activity are generally considered independent contractors. Risk of loss and ability to make a profit in paramount.

17. Worker performs services for more than one business at a time – working for more than one business is usually and indication of independence.

18. Worker makes services available to the general public - workers who make their services available to the general public are generally considered independent contractors.

19. Business has the right to discharge worker – a person having the right to discharge a worker without penalty is typically an indication of employment.

20. Worker has the right to terminate the relationship – an employee has the right to end an employment relationship at any time. Independent contractors have agreed to complete a specific task and are legally obligated to do so.

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SCHEDULING

MUSIC

LIGHTING

COSTUMES

PROPS

PRESENTATION (hair, makeup, etc.)

ABILITY TO PERFORM AT OTHER CLUBS

TRAINING

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CONTROLFactors Which Courts Look To:

RANDOM DRUG TESTS

MANDATORY TIP OUTS

“FINING”

“FREE” DANCES

SELECTION OF CUSTOMERS

REQUIRED DANCING (stage rotation, bachelor parties, etc.)

REQUIRED PARTICPATION IN CLUB ADVERTISING AND PROMOTIONS

Employer-Employee Relationship:

Employee versus Independent Contractor: Text of Section 530In Act. Sec. 530 (a non-Code provision) of the Revenue Act of 1978,

Congress provided as follows:

530(a) Act. Sec. 530 – TERMINATION OF CERTAIN EMPLOYMENT TAX LIABILITY

530(a)(1) IN GENERAL. -- If –

530(a)(1)(A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and

530(a)(1)(B) in the case of periods after December 31, 1978, all Federal tax

returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee.

Then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.

Continued on next slide23

530(a)(2) STATUTORY STANDARDS PROVIDING ONE METHOD OF SATISFYING THE REQUIREMENTS OF PARAGRAPH (1). – For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was in reasonable reliance on any of the following:

530(a)(2)(A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer.

530(a)(2)(B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or

530(a)(1)(C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged.

Continued on next slide

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530(a)(3) CONSISTENCY REQUIRED IN THE CASE OF PRIOR TAX TREATMENT. -- Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 1978, if the taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977.

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ALLEGED EMPLOYER: Did not treat the workers as employees for any period; and

Filed all required federal tax returns (including 1099’s) with respect to such individuals; and

Had a reasonable basis for treating the individuals as non-employees. Established by:

Judicial precedent, published rulings, technical advice, or letter ruling; or

Past IRS “no change” audit that looked at employment taxes; or

Long-standing recognized practice of a significant segment of the industry.

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Section 530 Elements

Is Section 530 applicable to ACA?

Excise Tax or Income Tax???

Policy Considerations???