Overlap Between ERISA and Internal Revenue Code & Other Laws - - PowerPoint Presentation

1. Overlap Between ERISA and Internal Revenue Code & Other Laws -Employee/Independent Contractor ChallengesApril 21, 2023Fort Worth HREmployment Law Update Conference Henry Talavera, Shareholder, Polsinelli PCMeredith VanderWilt, Shareholder, Polsinelli PC

2. How we define employee can vary depending on the purpose: Employee as defined in your plan documents Misclassification can result in retroactive benefits or plan disqualificationPlan documents often include “Microsoft” language (for example, individuals are who misclassified are still excluded).Different tests used for different purposes: Employment taxes ACAService provider under Section 409AEmployee for Fair Labor Standards Act (FLSA)Employee Retirement Income Security Act (ERISA)Definitions of Employee

3. Affordable Care Act “pay or play” penalties and reporting requirements continue to concern employersThere are two types of pay or play penaltiesA penalty for failing to offer coverage to full-time employees and their dependents.A penalty for offering coverage to full-time employees and their dependents that is not affordable or does not provide minimum value.Each employer within a controlled group is responsible for its employees, but whether the ACA applies at all to an “applicable large employer” is determined by aggregating all related entities.Employer Health Coverage Obligations

4. “Pay or play” penalties have significantly increased risks associated with misclassifying employeesDifferent arrangements present challenges: Independent contractorsStaffing firmsProfessional Employer OrganizationsEmployer Health Coverage Obligations

5. Employers subject to two distinct reporting requirements6056 Reporting:In general. Section 6056 requires an applicable large employer subject to the requirements of Section 4980H to report certain health insurance coverage information to the Internal Revenue Service, and to furnish certain related employee statements to its full-time employees.6055 Reporting:Every person that provides minimum essential coverage to an individual during a calendar year must file an information return and transmittal and furnish statements to responsible individuals on forms prescribed by the Internal Revenue Service. Employer Reporting Requirements

6. Each applicable large employer member is required to file 1094-C and 1095-C and provide a statement to full-time employees. Failure to file with the IRS (or providing incomplete or incorrect information) can result in penalty of $290 per failure up to $3,532,500 for 2023.https://www.irs.gov/irm/part20/irm_20-001-007rSee the 2021 Instructions for the Forms 1094-C and 1095-Chttps://www.irs.gov/pub/irs-prior/i109495c--2021.pdfFailure to furnish timely or correct statement to employees can result in the same penalty.Penalties for Reporting Failures

7. Does your organization utilize staffing firms for temporary employees? YesNoWhat percentage of your workforce will be made up of staffing firm employees in the next 3 years? Less than 5%5%-10%10%-20%More than 20%ACA Employer Poll

8. Common mistake is to treat a partner as an employee Rev. Rul.69–184 (members are not employees for purposes employment tax purposes)Equity-based incentive compensation plans may create partner statusIRS issued final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity. T.D. 9869 (July 2, 2019)Commentators discuss possibility of altering current law to permit employees of a partnership who receive small partnership interests as employee compensatory awards to continue to be treated as employees of the partnership Chief Counsel Advice No. 201436049 (Partners of a management company are not “limited partners” and are subject to self-employment tax on their distributive shares from that company.) https://www.irs.gov/pub/irs-wd/201436049.pdfUnique Issues for Partnerships

9. Impact of becoming a partner: Compensation paid to partners for services rendered must be reported on a Schedule K-1 instead of a Form W-2Partners are not subject to income tax withholding and must instead pay estimated taxes Partners can participate in qualified retirement plans Partners can also participate in a health plan, but, unlike employees, partners may not exclude from their income the value of benefits received under the plan Partners are prohibited from participating in cafeteria plans, including flexible spending accounts, and in certain other tax-favored employee benefit plans (this is a challenge for “PEOs”) Can result in disqualification of plans for all employees Unique Issues for Partnerships

10. Worker misclassification is a high stakes issueHeightened scrutiny has increased risks of misclassifying workers as ICsClassification standards supersede contractual agreementsMisclassification can have steep costsPenalties, litigation expenses, and settlements can escalate quicklyState and federal trend is moving ICs into employee statusEnforcement escalation at odds with social trend toward independent work styleMultiple parties can contest classification for a variety of reasonsBusinesses caught in the middleRecognizing Misclassification Risk: Introduction

11. In Burbach v. Commissioner, T.C. Memo 2019-17, “the IRS imposed failure to file penalties on the taxpayer (Mr. Burbach) and the taxpayer’s business (Burbach Aquatics Inc. or BAI, Inc.). 30 Both Mr. Burbach and BAI argued that their failure to file was due to their reliance on their tax professional and advice given by this professional. However, the court held that both Mr. Burbach’s and BAI’s reliance was unreasonable.” (Among other things, he set up a pension plan for himself as a self-employed director, which the IRS reclassified as wages).https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/ARC19_Volume1_MLI_07_FailureFilePenalty-.pdfhttps://scholar.google.com/scholar_case?case=11738238213643212718&q=burbach+v+commissioner+of+internal+revenue&hl=en&as_sdt=400006Recognizing Misclassification Risk: Introduction

12. Do you have any Independent Contractors engaged at you organization that perform the same job duties as a current employee?YesNoAudience Question #1

13. Most businesses have policies in place for engaging contingent talentBut almost never universally followedManagers often work around engagement policies for many reasons:Headcount freezeExpedite project completionAppeasing talentBusinesses should understand why managers are evading current policiesCurrent Policies Aren’t Followed12345678910

14. Worker sentiment is a significant factor in classification liabilityIC agreement cannot protect employer from misclassificationMisclassification now focuses on lost tax and insurance revenueSatisfied workers are less likely to challenge classificationBest practice: create engagement policies mindful of ICs’ needsIndependent Contractors (ICs) Are Disgruntled12345678910

15. Might be biggest single source of classification audit activityICs sometimes file unemployment applications with the state orForm SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRSIf state reclassifies, employer must pay unemploymentFurther investigation may follow, sometimes leading to widespread reclassificationsICs File for Unemployment Benefits12345678910

16. “Tax Gap” exceeded $345 billion in 2001https://www.irs.gov/pub/irs-news/reducing_the_tax_gap.pdfIncreased to about $496 billion through 2016.https://www.irs.gov/newsroom/the-tax-gapAttributed in part to independent workers and small companiesICs must make quarterly tax estimatesMany do not pay or underpayTax cheats are red flags and risk magnetsBe suspicious of IC relationships where you suspect worker wants IC status to avoid taxesICs May Not Be Reporting Taxes Properly12345678910

17. Treating a worker as both an employee and IC in same tax year is a common “red flag” for audit (although you can have a hybrid “statutory employee” in limited cases)Treating workers with the same responsibilities as both an employee and an IC is another common “red flag” for auditYou Treat as both IC and Employee12345678910

18. Unions sometimes do not like/trust IC engagementsMay see them as way to avoid union organizing and to oppress workersWorkers are Active in Heavily Unionized Fields12345678910

19. ICs do not receive employer benefits (including stock options), which are often given to employeesIf stock increases, ICs may resent being left outMay claim that they were excluded improperlyVizcaino v. Microsoft is most prominent caseMicrosoft ultimately settled the claims for over $96 millionEmployees Receive Lucrative Benefits12345678910

20. Does your company have clauses in its benefits plan documents that clearly exclude ICs? YesNoAudience Question #2

21. Individuals working for IC may be misclassifiedMay claim to be employees of IC or employerEmployer may be liable for wage and hour claimsEmployers must also be alert to ICs’ immigration documentation policiesICs do not have to complete I-9 form and their ability to work in U.S. does not have to verifiedLarge retailer recently hit with penalty related to its janitorial contractors using undocumented workersICs May Use Workers Who Are Improperly Classified12345678910

22. Insurance carrier may dispute employer’s use of IC classificationCarrier may assume potential Workers Comp claim exposure from ICsEven if worker and employer have agreed to IC classificationMay lead to higher premiumsFailure to pay premiums could mean losing coverageInsurance Carrier Audits Employer Account12345678910

23. Be wary if you use ICs and compete for contracts with companies that classify similar workers as employeesCompetitor may see it as unfair advantage for youMay assert tort claims, such as interference with business relationsCompetitors Classify Similar Workers as Employees12345678910

24. Test varies depending upon the particular lawCommon Law Agency Test (NLRA – but wait, ERISA)“Economic Realities” Test (FLSA)“Control” Test (EEOC)“ABC Test” (unemployment insurance)“Right to Control” Test (IRS)How do you know if the worker is IC or employee?

25. When determining who is an employee eligible to join a union, the NLRB has weighed an eleven factors listed below. The weight the NLRB chooses to assign to each factor “will depend upon the factual circumstances of the particular case.” FedEx Home Delivery, 361 NLRB No. 55 (Sep. 30, 2014).Extent of control by the employerWhether or not the individual is engaged in a distinct occupation or businessWhether the work is usually done under the direction of the employer or by a specialist without supervisionSkill required in the occupationWhether the employer or individual supplies instrumentalities, tools, and place of workLength of time for which individual is employedMethod of paymentWhether or not work is part of the regular business of the employerWhether or not the parties believe they are creating an independent contractor relationshipWhether the principal is or is not in the business(New:) Whether the evidence tends to show that the individual is, in fact, rendering services as an independent businesshas a significant entrepreneurial opportunityhas a realistic ability to work for othershas a proprietary or ownership interest in his or her work, andhas control over important business decisions, such as scheduling of performance, hiring and assignment of employees, equipment purchases, and investment of capitalNLRB Test

26. “Under the proposed rule announced September 6, 2022, two or more employers would be considered joint employers if they “share or codetermine those matters governing employees’ essential terms and conditions of employment,” such as wages, benefits and other compensation, work and scheduling, hiring and discharge, discipline, workplace health and safety, supervision, assignment, and work rules. The Board proposes to consider both direct evidence of control and evidence of reserved and indirect control over these essential terms and conditions of employment.”https://www.nlrb.gov/news-outreach/news-story/nlrb-extends-time-for-submitting-comments-on-proposed-rule-concerning-the#:~:text=Under%20the%20proposed%20rule%20announced,and%20scheduling%2C%20hiring%20and%20discharge%2CNLRB Test

27. The IRS does not generally recognize co-employment.Rev. Rul. 66-162 – co-employment can be recognized in limited circumstances, one person employee of two entities, because both had the right to direct and control.Professional Executive Leasing, Inc. v. Commissioner, 89 TC 225, 232 (1987), affd, 862 F.2d 751 (9th Cir. 1988).Chief Counsel Advice (“CCA”) 200415008 (April 9, 2004), joint liability may be possible in PEO context.Sunshine Staff Leasing, Inc. v. Earthmovers, Inc.,199 B.R. 62 (M.D. Fla. 1996); and United States v. Total Employment Company, Inc., 305 B.R. 333 (M.D. Fla. 2004). PEO found liable with client employer.Co-Employment under IRS Rules

28. Generally, the staffing assignments should not extend beyond 13 weeks under ACA rules, to avoid the offer of coverage requirement. With limited exception, the IRS refuses to grant relief to employers who use staffing agencies or similar in cases of reclassification.A link to two IRS memoranda follows, one of which was issued in 2000 and found that a staffing contract designation of employee status was not “dispositive of the issue”: https://www.irs.gov/pub/irs-wd/1347020.pdfhttps://www.irs.gov/pub/irs-wd/0017041.pdfTemporary staffing Employees and challenges

29. Court in California found that an employee was misclassified and entitled to about $65 in damages. Lawson v. Grubhub, Inc., Case no. 15-cv-15128-JSC (N.D. Cal. March 30, 2023).29Grubhub – Misclassification Case

30. “In this class action, the named plaintiffs represent several thousand current and former insurance agents for American Family Insurance Company and its affiliates (collectively, "American Family" or "the company"). The agents claim that American Family misclassified them as independent contractors, while treating them as employees, in order to avoid paying them benefits in compliance with the Employee Retirement Income Security Act of 1974 ("ERISA").The sole issue in this interlocutory appeal concerns the nature of the parties' legal relationship: are the plaintiffs employees or independent contractors for American Family? The company appeals the district court's judgment that the plaintiffs are employees. Because American Family properly classified its agents as independent contractors, we reverse.”Jammal v. American Family Insurance Company, 914 F.3d 449 (6th Cir. 2019), petition denied by the U.S. Supreme Court (December 9, 2019). https://www.supremecourt.gov/Search.aspx?FileName=/docket/docketfiles/html/public%5C19-248.html30American Family – Misclassification Case

31. The misclassification of employees as independent contractors violates Section 8(a) of the National Labor Relations Act, which makes it unlawful for an employer “to interfere with, restrain, or coerce employees in the exercise of” employees’ Section 7 rights to engage in concerted activity regarding the terms and conditions of employment. According to the OGC, because independent contractors are not covered by the Act, an employer who tells employees that they are independent contractors is denying them their rights under the Act. How Misclassification Violates the NLRA

32. Is the work performed an integral part of the employer’s business: if integral, then indicative of an employee.Does the worker’s managerial skill affect the worker’s opportunity for profit or loss: if a worker exercises managerial skill that affects her profit and loss, then indicative of an independent contractor.How does the worker’s relative investment compare to the employer’s investment: if the worker’s investment is relatively minor (e.g., supplies), that suggests that the worker and the employer are not on similar footings and that the worker may be economically dependent on her employer – and thus an employee.Does the work performed require special skill and initiative: a worker’s business skills, judgment, and initiative, not her technical skills, will aid in determining whether the worker is economically independent.Is the relationship permanent or indefinite: permanence or indefiniteness are indicative of an employee as compared to an independent contractor, who typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer.What is the nature and degree of the employer’s control: an independent contractor must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting her own business. FLSA Test

33. Goal of the DOL is to determine if the worker is economically dependent on the employer (and thus an employee) or is really in business for herself (and thus an independent contractor). Misclassified employees may be entitled to:Overtime, if non-exempt and working 40+ hoursBack pay and liquidated damagesSocial Security & FICA 6.2% of wages for failure to withholdHow Misclassification is a violation of the FLSA

34. The employer has the right to control when, where, and how the worker performs the job.The work does not require a high level of skill or expertise.The employer furnishes the tools, materials, and equipment.The work is performed on the employer’s premises.There is a continuing relationship between the worker and the employer.The employer has the right to assign additional projects to the worker.The employer sets the hours of work and the duration of the job.The worker is paid by the hour, week, or month rather than the agreed cost of performing a particular job.The worker does not hire and pay assistants.The work performed by the worker is part of the regular business of the employer.The worker is not engaged in his/her own distinct occupation or business.The employer provides the worker with benefits such as insurance, leave, or workers’ compensation.The worker is considered an employee of the employer for tax purposes (i.e., the employer withholds federal, state, and Social Security taxes).The employer can discharge the worker.The worker and the employer believe that they are creating an employer-employee relationship.EEOC Test

35. Employees are covered by federal anti-discrimination (Title VII, ADA, ADEA, etc.) and other employment laws, but independent contractors are notMisclassified IC’s are entitled to protection from discrimination and harassmentThis same test is used by EEOC to determine whether a joint employer situation exists Staffing agenciesTemporary workersHow Misclassification Violates the EEOC

36. ABC Test used by more than 2/3rds of states (not Texas):The worker is free from control or direction in the performance of the work.The work is done outside the usual course of the company's business and is done off the premises of the business.The worker is customarily engaged in an independent trade, occupation, profession, or business.https://efte.twc.texas.gov/independent_contractor_tests.htmlState Workers’ Compensation Act Tests

37. “Under Section 401.012 of the Texas Workers' Compensation Act, "'employee' means each person in the service of another under a contract of hire, whether express or implied, or oral or written," and "includes: (1) an employee employed in the usual course and scope of the employer's business ... ." That term does not include "an independent contractor or ... a person whose employment is not in the usual course and scope of the employer's business." In section 406.121(2) of that law, an independent contractor is defined as "a person who contracts to perform work or provide a service for the benefit of another and who ordinarily:acts as the employer of any employee of the contractor by paying wages, directing activities, and performing other similar functions characteristic of an employer-employee relationship;is free to determine the manner in which the work or service is performed, including the hours of labor of or method of payment to any employee;is required to furnish or to have employees, if any, furnish necessary tools, supplies, or materials to perform the work or service; andpossesses the skills required for the specific work or service.“’https://efte.twc.texas.gov/independent_contractor_tests.htmlTexas Workers’ Compensation Act Tests

38. 38Questions?

39. 39Questions?Henry TalaveraShareholderhtalavera@polsinelli.com214.661.55382950 N. Harwood Street, Suite 2100Dallas, TX 75201Meredith VanderWiltShareholdershe / hermvanderwilt@polsinelli.com214.661.55582950 N. Harwood Street, Suite 2100Dallas, TX 75201

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