The employer shared responsibility provisions under the Affordable Care Act (the ACA) require applicable large employers, which are generally employers with 50 or more full-time equivalent employees, to offer group health plan coverage to substantially all of their full-time employees. In a two-party employment relationship, it is fairly easy to identify both the employer and employee for purposes of complying with the employer shared responsibility rules. However, when the employer retains the services of a third- party staffing agency to provide temporary or contract employees, the determination can be more difficult.
To assist with this determination, the ACA employs the common law test to identify the employer. The common law test focuses on whether "the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished." The common law employer is the entity that has the power to, among other things, assign work, set hours, supervise, hire, fire and discipline employees.
However, when an employer retains a staffing agency, both entities may retain some of the hallmarks of control over the employee, indicating that both may potentially be the common law employer. While the IRS has stated that both entities may be considered co-employers for purposes of the common law test in "unique circumstances," its stated position is that in the typical case, the staffing agency is not the common law employer. This is not to say that a staffing agency is never required to offer coverage to its worksite employees, but rather that employers that utilize staffing agencies will most likely be required to offer coverage to their contract employees.
However, most employers do not offer group health plan coverage to their contract employees. Instead, it is often the staffing agency that provides coverage. The final employer shared responsibility rule states that an employer may only take credit for a staffing agency's offer of coverage to a contract employee if they pay the staffing agency more for an employee who enrolls in coverage than if the employee did not enroll in coverage. Thus, if an employer pays a flat rate for all contract employees, it has not made an offer of coverage to such employees. Therefore, any flat fee or other arrangement that does not specifically provide for an additional charge for coverage can expose large employers to penalties under the ACA.
Under Section 4980H(a) of the Internal Revenue Code, applicable large employers that fail to make a qualifying offer of coverage to at least 95 percent of their full-time employees are subject to a penalty if at least one full-time employee receives a subsidy for coverage purchased on the exchange. The amount of this penalty is $2,160 multiplied by the employer's total number of full-time employees excluding the first 30 employees. If the employer is part of a consolidated group, it may only disregard its proportionate share of the first 30 employees. Thus, the penalty can be quite extensive for employers with a large contract employee population.
For example, if an employer has 80 full-time employees to whom it makes qualifying offers of coverage, and an additional 20 full-time contract employees for whom it is the common law employer and who are offered coverage through a staffing agency, then for ACA purposes the employer has 100 full-time employees. If the employer does not pay an additional fee for the coverage offered to the contract employees, it will be subject to a $ 151,200 penalty ($2,160 x (100 employees – the first 30 employees)) under Section 4980H(a) because it only offered coverage to 80 percent of its full-time employees. If an employer has more than 500 total full-time employees including contract employees the penalty will be more than $1 million.
Accordingly, employers that make use of staffing agencies will want to carefully consider the risk that they will be considered the common law employer of the contract employees. To mitigate this risk, employers should track their contract employees' hours to determine which may be considered full-time and should therefore be offered group health plan coverage. Furthermore, employers should review all their agreements with staffing agencies to ensure that the agreements provide for additional compensation for any contract employee who enrolls in the staffing agency's coverage. There is no set amount required for the additional coverage, but it is clear that the cost of coverage may not simply be spread among all contract employees including those that do not enroll in coverage.
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