United States: The Affordable Care Act—Countdown To Compliance For Employers, Week 23: The Impact Of Employment Contract Terms On Variable Hour Employee Status

For applicable large employers (i.e., employers who employed at least 50 full-time and full-time equivalent employees on business days during the preceding calendar year) endeavoring to comply with the Affordable Care Act's employer shared responsibility rules, determining an employee's status as "full-time" is critically important. Final regulations implementing the Act's employer shared responsibility requirements establish two methods—(1) the monthly measurement method and (2) the look-back measurement method—for making that call. The latter, the look-back measurement method, further classifies newly-hired employees as full-time, variable hour, seasonal or part-time. Of these, what constitutes a "new variable hour employee" has proved to be far and away the most confusing.

A recently published set of Questions & Answers made available by the American Bar Association's Section of Taxation, Employee Benefits Committee, provides some helpful insights into the IRS's view of which employees may be properly classified as "variable hour." The Q&As are based on a presentation made by IRS and Treasury officials at the Tax Section's Employee Benefits Committee May 2014 meeting in Washington, D.C. The Q&As reflect the unofficial, individual views of the government participants, which do not necessarily represent formal agency policy. Thus, they may not be relied on as precedent. They are, nevertheless, useful in gaining an understanding of how the regulators think the rules ought to work. One particular Q&A (Q&A 25), entitled "Determining Whether a New Employee is a Variable Hour Employee," deals with the effect of the terms of an employment contract on variable hour status. The IRS response also elucidates other important aspects of the rules governing variable hour employees.

Background

For purposes of the Act's employer shared responsibility rules, an employee is a "full-time employee" if he or she averages at least 30 hours of service per week or 130 hours of service in a calendar month. Under the "monthly measurement method" an employer determines each employee's status as a full-time employee by counting the employee's hours of service for each month. The problem with this method is, of course, that one might not know until after the month is over whether a particular employee is or is not full-time. Recognizing the inherent limitation of the monthly measurement method, the final rules also provide for a "look-back measurement" method. Under the look-back measurement method, an employer determines the status of an employee as a full-time employee during a future period (referred to as the "stability period"), based upon the hours of service of the employee in a prior period (referred to as the "measurement period").

The final regulations prescribe two sets of measurement periods, an "initial measurement period," which generally begins on date-of-hire or the first day of the month following date-of hire, and a "standard measurement period," which is a fixed period of at least three but not more than twelve consecutive months (e.g., the calendar year) selected by the employer. Each measurement period is followed by a corresponding "stability period," which is a period selected by the employer that "immediately follows, and is associated with, a standard measurement period or an initial measurement period." An employer is permitted to interpose an "administrative period" of up to three months between the measurement and stability period.

When applying the look-back measurement method, a newly hired employee must be classified as full-time, variable hour, seasonal, or part-time.

  • Full-time employee

A "full-time employee" is an employee "who is reasonably expected at the employee's start date to be a full-time employee (and is not a seasonal employee)."

  • Variable hour employee

An employee is a "variable hour employee" if, based on the facts and circumstances at the employee's start date, the employer cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee's hours are variable or otherwise uncertain. The final regulations prescribe a series of factors to be applied in making this call. (We explained these factors at length in our April 14, 2014 post.)

  • Seasonal employee

A "seasonal employee" is an employee who is hired into a position for which the customary annual employment is six months or less.

  • Part-time employee

A "part-time employee" means a new employee who the employer reasonably expects to be employed on average less than 30 hours of service per week during the initial measurement period, "based on the facts and circumstances at the employee's start date." As is the case with variable hour employee determinations, the final regulations prescribe a series of factors to be applied.

Once an employee has been employed for a full standard measurement period, he or she sheds his or her status as full-time, variable hour, seasonal, or part-time, and instead becomes (and is tested as) an "ongoing" employee. Special rules apply governing the transition from a newly hired employee to an ongoing employee.

The attractiveness of the look-back measurement method is that the employer is not penalized for failing to offer group health plan coverage to newly hired variable hour, seasonal, or part-time employees during their initial measurement period. But if the variable hour, seasonal, or part-time employee is determined to work on average 30 hours or more per week during the initial measurement period, he or she must be offered coverage during the corresponding stability period, despite that he or she no longer works on average 30 hours or more per week, so long as he or she remains employed. A similar approach applies to ongoing employees.

According to the final regulations, for purposes of determining whether an employee is a variable hour employee, an employer "may not take into account the likelihood that the employee may terminate employment . . . before the end of the initial measurement period." This requirement appears, at least at first blush, to contradict one or more of the factors that must be applied in order to establish variable hour status. For purposes of this post, the factor of greatest interest is—

"[W]hether the job was advertised, or otherwise communicated to the new employee or otherwise documented (for example, through a contract or job description) as requiring hours of service that would average at least 30 hours of service per week, less than 30 hours of service per week, or may vary above and below an average of 30 hours of service per week. (Emphasis added.)

This particular factor invites the question (excerpted from Q&A 25 referred to above):

"If the terms of the employment contract provide for termination before the end of the initial measurement period, can the employer 'take into account that the employee may terminate employment before the end of the initial measurement period?' What if there is some other restriction (such as the expiration of a work visa) that will make it impossible for the employee's employment to continue through the end of the initial measurement period?"

Variable Hour Determinations—Terms of an Employment Contract

The lead up to the proposed response to Q&A 25 picks up on the apparent contradiction noted above. On the one hand, the factors include the terms of an employment contract or job description, which are known in advance; on the other hand, the regulations also state that "the employer may not take into account the likelihood that the employee may terminate employment before the end of the initial measurement period." The proposed response concludes that the "employer can take into account the provisions of an employment agreement—including the term of the employment agreement—in determining whether an employee is a variable hour employee." The IRS disagrees.

Before examining the IRS's response, it's worthwhile to examine the reasoning of the proposed response. It notes that:

"The purpose of the prohibition on taking into account the likelihood of termination of employment is to avoid making assumptions about employees in positions with high turnover, which would penalize employees who are working full-time hours throughout the initial measurement period. This concern is not present when the employment is of a fixed duration, either by agreement or by operation of law."

This is a compelling, though admittedly narrow, reading of the rule. If the purpose of the variable hour rules was so limited, that is, if the sole purpose of the variable hour rules is to avoid making assumptions about employees in positions with high turnover, then the proposed response would be viable. But the regulators do not read the rule this way. Here's how they see it:

"The terms of an employment contract can be relevant in terms of how many hours a week does the employer expect the employee to work while employed, whatever period that is. If the employer does not know if the hours worked are going to be above 130 hours a month or not then the employer can treat them as variable. If an employer hires an employee who is going to work 40 hours a week, but the employer only expects the employee to be employed for six months, so it is going to come out to 20 hours a week for the first year, an employer cannot treat the employee as part time." (Emphasis added.)

Simply put, whether a new employee is a variable hour employee is based on whether he or she is expected to work on average 30 hours of service per week or 130 hours of service per calendar month, not whether he or she is expected as of his or her date of hire to work 1,560 hours in a year. The 1,560 hour test is applied at the end of the initial measurement period to determine whether the employer must extend an offer of coverage during the corresponding stability period, and not at the beginning of the initial measurement period to determine whether the employee is variable hour.

Q&A 25 separately offers the following, welcome clarification relating to seasonal employees.

"An example of a seasonal employee is a life guard or a ski instructor, but it does not have to be someone whose job is affected by the weather directly. It can just be someone who is peak season working in a hotel or something like that or a summer associate at a law firm for that matter."

Where a newly hired employee is properly determined to be a seasonal employee, then the employer may use the initial measurement period for determining if he or she is full-time. But if the employee is simply on a short-term contract, the employer cannot do that. On this last point, the Service representative helpfully adds that an employer "always has until the beginning of the fourth month to get employee into the plan." Thus, if the employee is only going to be employed for, say, two months, then the employer will not have to make an offer of coverage to the employee under its group health plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Alden J. Bianchi
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions