By: HUB’s EB Compliance Team

Employers have undoubtedly noticed recent headlines regarding the Department of Labor’s announcement that a new independent contractor rule will take effect on March 11, 2024. The DOL’s renewed focus on worker classification carries key implications and new considerations for an employer’s employee benefits program. 

Who Cares? Multiple enforcement bodies do

To set the stage, the DOL is not the only federal agency monitoring how employers classify their workers. The Internal Revenue Service, the National Labor Relations Board, and the courts use their own individualized set of criteria to govern how they assess worker classification. In addition, states (for example, California) actively enforce their own classification standards. Problematically, these overlapping “standards” can vary enough s to potentially result in an employer satisfying one agency employment classification standard but not another.

For example, an employer may classify a worker as an “independent contractor” and pay that individual on the same day it does its regular employees, plus it might also provide assistance with supplies and expenses. The NLRB may not find these facts problematic and agree that the individual is an independent contractor. However, the DOL may find these identical facts as evidence suggesting an employer-employee relationship rather than support independent contractor status. Expertly informed planning is crucial for employers relying on independent contractors for regular service.

I offer my Independent Contractors employee benefits – is that a problem?

Oftentimes clients ask their HUB advisors if they can offer employee benefits to independent contractors. We strongly advise against such an arrangement for a number of reasons. 

Employee benefits eligibility is set forth in the employer’s plan document. As a general matter, the plan document eligibility definition (and the underlying policy) strictly reserves benefit eligibility to employees. In other words, eligibility hinges on a true W-2 employer-employee relationship and/or allowed owner-operators arrangements. Expanding the employee benefits program by offering to a non-employee (i.e. independent contractor) likely violates plan terms. 

Moreover, because federal ERISA rules impose fiduciary obligations to operate the plan for the exclusive benefit of eligible participants, extending benefits to a non-employee may represent a breach of that fiduciary obligation. 

Other troubling results could occur as well. For example, if the ineligible benefit user becomes an “expensive” plan participant, the carrier may investigate claims and upon discovering the ineligibility, deny coverage altogether as outside the terms of the policy. Similarly, if the carrier performs an eligibility audit and learns that the participant does not satisfy the eligibility criteria it may retroactively deny claims and return the premium dollars. 

Compounding the issue, since the employer made representations of coverage to the employee, he/she may have a cause of action to sue the company and the plan for the claims costs. This could mean the employer would fully self-fund the cost of claims. Making matters worse, if the coverage is retroactively canceled it is likely the worker will not be able to obtain his/her own health insurance on a retroactive basis.

What other risks do I face if I misclassified my workers?

The risks of offering benefits to an independent contractor do not end with the benefit plan risks. Offering employee benefits to an independent contractor is generally considered a strong indicator that the worker is, in substance, an employee. This can get particularly complex from a regulatory perspective:

  • Affordable Care Act and Family and Medical Leave Act: both of these sets of regulations are premised on employee headcount. Small employers (generally, those with under 50 W-2 employees in the prior year) with a meaningful number of misclassified independent contractors may be out of compliance with both the ACA and FMLA because they operated their programs on the incorrect premise that they were a small employer. If an agency, or a court determines that workers were misclassified as independent contractors the employer may be retroactively required to comply with ACA and the FMLA. 
  • Wage and Hour Rules: If the DOL determines that workers were misclassified and should have been treated as employees, it will likely require the employer to pay back wages, overtime, penalties and fines. If a court determines that workers were misclassified it may also award prevailing plaintiff attorney fees and liquidated (double) damages.
  • The IRS and State Departments of Revenue: When an employer classifies a worker as an independent contractor, it generally does not pay its portion of payroll taxes including Social Security, Medicare, FICA, and state unemployment (among others). As a result, once a worker is deemed misclassified, the inquiring agency may inform the IRS (unless the IRS is the inquiring agency) and state departments of revenue which can each be expected to seek collecting back taxes, plus under-withholding penalties and interest. In addition, a misclassification may require the affected individual to refile their taxes for affected years. 

Isn’t there any way to offer these workers health insurance?

Often employers seek to offer group benefits to independent contractors to be helpful or kind, but the risks to the employer and worker are significant and should not be taken lightly. It’s important to remember that when you are engaging a true independent contractor you are essentially contracting with a business. It’s up to the “business” to price its services appropriately to cover its costs – which generally include items such as supplies, expenses, and insurance programs. If you are currently working with appropriately classified independent contractors and they ask to participate in your employee benefits programs, you can shift the conversation back to the worker and their pricing. 

What should you do if you have independent contractors?

The assessment and determination of worker classification is complex and requires an expert in the field. This article merely discusses the risk of placing an independent contractor on your employee benefit plans. There are many other factors considered by an inquiring mind. It’s important to have your employment counsel perform an audit and assessment of the circumstances of your arrangement with the worker(s). Your outside counsel can provide advice and guidance regarding findings and corrective measures (if necessary). 

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your organization’s particular needs.