Small Companies Response to Obamacare May Violate California and Federal Employment Law

Small Companies Response to Obamacare May Violate California and Federal Employment Law

By Gary Wartik
November 20, 2013

Word is already out that a number of small companies with an employee count in the range of fifty or so are looking for ways to exempt themselves from having to meet requirements under the Health Care Reform Act of 2010 (aka “Obamacare”).  The law requires health insurance be provided to all employees where company coverage has not been provided.

A tempting approach may involve reducing the hours of some employees to part-time status and reclassifying some others as “independent contractors” in order to bring the employee count to fewer than fifty.  Misclassifying an “employee” likely violates federal law in particular and may result in significant penalties being imposed by the Internal Revenue Service

A full-time worker may be happy to be considered an independent contractor until he/she learns that company benefits, such as paid vacation and holidays, workers’ compensation, unemployment insurance coverage, expense reimbursement and disability insurance are negatively affected.  If an employer reclassifies an employee as an “independent contractor,” and does not offer benefits, or severely restricts them, and does not withhold income taxes, trouble may arise.

Among the tests involved in determining whether a worker is an independent contractor or an employee may include the following: 1) Number of hours worked; 2) Company control of the work place; 3) Whether company specifies a specific work schedule; 4) Worker is reclassified from employee to contractor status without notable change in duties, pay, hours, etc., and finally, 5) Does company otherwise treat the contractor as if he/she is an employee.  All of these areas are signs that a worker may be an employee.  In such cases, California and federal authorities may impose fines and past-due tax obligations for Social Security, Medicare, income tax withholding and unemployment and disability insurance that the employer failed to pay.

This is an area of difficulty which is easy to avoid.  Management would be best advised to remember this writer’s adapted saying, “If it walks like an employee, talks like an employee, acts like an employee and you treat him/her as an employee, then he/she is not an independent contractor.”

Employers are encouraged to have employment law specialists review any changes they may be contemplating to avoid the requirements of Obamacare.  Vision Economics is available to provide referrals to employment law specialists.  Both employers and workers may also ask the IRS (800-829-3676 or to make a determination on whether specific individuals are independent contractors or employees.

To skirt or ignore the law, and then be charged by state or federal authorities for violating various employment and tax laws may be a mistake far more costly than having complied with the law in the first place.

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