Denver Temp Agency – Staffing Firm or Client, Who is the Responsible Employer Under ACA?
Part 2 of 2
Continuing with, “Will Clients Have Employer Obligations for Staffing Firm Employees Under the Affordable Care Act (Part 1), here is Part 2, delving deeper into employer responsibilities.
Part 2 has also been prepared by Ed Lenz, Senior Legal Counsel for the American Staffing Association (ASA) and Alden Bianchi, an expert in employee benefits and executive compensation. Together they have been working directly with the IRS and U.S. Treasury Department on behalf of ASA and the staffing industry. Therefore, we would like provide additional information regarding ACA that affect Denver staffing agencies and its employer/clients.
Ed Lenz is senior counsel for the American Staffing Association (ASA). He led the staffing industry's discussions with the Obama administration on the development of the employer regulations and their application to temporary employees employed by staffing firms. He also is author of "Co-employment—Employer Liability in Third-Party Staffing Arrangements," now in its seventh edition, published by ASA.
Alden Bianchi is a member of the law firm Mintz Levin and heads the firm's Employee Benefits & Executive Compensation Practice. He represents employers, including staffing firms, regarding ACA compliance and recently testified before the IRS on the proposed employer regulations on behalf of the nation's largest employers.
ASA - Legal Analysis - Part 2
Will Clients Have Employer Obligations for Staffing Firm Employees Under the ACA?
(06/24/13) Edward A. Lenz, Esq. and Alden J Bianchi, Esq.
A recent Staffing Today article concluded that staffing firm clients generally should not have "play or pay" obligations for staffing firm employee—unless the client is using the staffing service primarily to avoid its ACA obligations. The second part of this discussion addresses three other issues related to employer status in third-party staffing arrangements:
- whether clients have to include staffing firm employees in their headcount to determine if the client is subject to the ACA;
- how contract language addressing staffing firms' right to control can bolster their common law employer status; and
- how designating the staffing firm as the client's "agent" can protect clients from ACA liability in certain cases where the client is held to be the common law employer.
Staffing firms may want to adopt specific contract language that could be used to address the right to control and agent issues.
Do Clients Have To Include Staffing Firm Employees In Their Headcount?
The play or pay provisions of the ACA apply only to "large employers"—those with 50 or more full-time and full-time equivalent employees.1 "Employer" means the common-law employer. The proposed employer regulations say that common law rules will be used in third-party staffing arrangements to identify the responsible employer, especially if the arrangement is being used primarily to avoid the ACA.
For example, a client that uses staffing primarily to stay under 50 employees, or to reduce its headcount below 50, could be viewed as the common law employer and required to count the staffing firm's employees for purposes of the 50-employee test.
A staffing firm and client could both be considered common law employers under a "concurrent employer" theory2, but court decisions and IRS rulings generally resolve employer status issues in terms of one employer, not two, in benefits cases. And even if the staffing firm and client both were common law employers, the government could still point the finger at the client to address any improper avoidance behavior.3
What About "Leased Employees?"
"Leased employees" warrant a separate mention. The ACA's treatment of leased employees (as defined in section 414(n) of the U.S. Internal Revenue Service Code) supports the conclusion that common law rules will be used to determine ACA compliance issues involving third-party staffing arrangements.
Section 414(n) was enacted in 1982 primarily to address employees working under what are now called PEO (professional employer organization) arrangements. But the definition of leased employee is broad and applies to staffing firm employees and other types of third-party employees who perform services for "recipients" and otherwise meet the definition.
Leased Employee - Definition
A "leased employee" is defined as any person who is not an employee of the recipient and performs services for the recipient under the recipient's primary direction and control on a substantially full-time basis (generally at least 1,500 hours) for a period of at least one year.4 Recipients are not required to offer benefits to leased employees but must count them for purposes of applying the tax code's nondiscrimination testing rules applicable to certain benefit plans maintained by the recipient.
The proposed regulations under the ACA expressly provide that recipients do not have to include leased employees for purposes of the employer responsibility provisions.5 This is consistent with the conclusion that clients do not have to count staffing firm employees for purposes of ACA compliance, including the 50-employee test, unless they are engaged in improper avoidance activities and the government holds them responsible as the common law employer.6
For additional insight as to how the IRS may deal with PEO and other leasing arrangements under the ACA, see the discussion below regarding "agency" relationships between staffing firms and those organizations.
Can Contract Language Help Protect Clients From ACA Liability In Nonabuse Situations?
Yes. Staffing firms and clients should consider adding two provisions to their service agreements to help protect clients from ACA liability in nonabuse situations:
- one to address the staffing firm's right to control its employees at the client's worksite,
- the other to designate the staffing firm as the client's "agent" for purposes of ACA compliance if the client is determined to be the common law employer.
Staffing Firm Right To Control
As discussed in the June 3, 2013, issue of Staffing Today, staffing firms generally should satisfy the common law employer test since:
- they are not only the employers of record for payment of wages and benefits and for withholding and paying employment taxes,
- but also because they recruit, screen, and hire the employees;
- establish employment policies governing their job performance and conduct;
- have the right to terminate or reassign them; and
- retain the right to control how the employees perform their work.
The staffing firm's right to control at the worksite is sometimes questioned. But in a landmark court ruling, the 9th Circuit Court of Appeals had no difficulty finding sufficient control on the part of an employee leasing firm to warrant checking off that factor in support of the firm's common law employer status. As the court stated: Although the client, not Mainstay, supervised the leased employees on a day-to-day basis, the employees were required to comply with Mainstay's employment policies regarding such issues as smoking, telephone use, timekeeping, and breaks. In this sense, the leased employees were subject to the will and control of both Mainstay and the client company.7
Even though the law does not require the right to control to actually be exercised, it makes eminent sense to ensure that the right to do so is explicitly spelled out in the staffing service agreement. Inclusion of explicit "right to control" language, in addition to actually performing the employer functions traditionally assumed by staffing firms, should help secure the staffing firm's status as a common law employer.
Staffing Firm As Client "Agent."
But what if the client is determined to be the common law employer? A recent publication for tax and benefits specialists provides insight on how the IRS might handle such situations.8 Noting that employer status issues involving PEOs and leasing companies "can be murky," the publication discussed the client's potential penalty exposure in cases where the client is determined to be the common law employer but the PEO or leasing firm offers health coverage. For the purpose of this discussion, it should be assumed that the "leasing organization" could include a temporary staffing firm.
According to the publication, the IRS is considering an approach under which the client would not be subject to penalty if an employee accepts an offer of coverage by the PEO or leasing organization that "satisfies the conditions of § 4980(H)." If an employee turns down the coverage, the IRS would conduct an inquiry into whether the leasing organization or PEO is an agent of the client and whether the coverage satisfies §4980(H). If both conditions were met, the client would not be penalized. According to the publication, a formal agency agreement, though not required, would "strengthen the common law employer's position that it is not subject to the assessable payment." The article concluded that the IRS "is looking further into this issue, although it is unlikely to be addressed in the final regulations."
Even if the government does not issue formal guidance on the agency issue, staffing firms and clients should consider adding agency language to their service agreements to protect against the possibility that the client is considered the common law employer.
1 IRS Code Section 4980(H)
2 See e.g., 78 Fed. Reg. 6056 (Jan. 29, 2013) at 6057
3 A client also might be required to count the staffing firm's employees for purpose of the 50-employee as a "joint employer." But no court has considered the issue of joint employment under the ACA and neither the ACA nor the proposed employer regulations make any reference to joint employment.
4 IRS Code § 414(n)(2)
5 The reason is that §4980(H) does not refer to §414(n). Nor did Congress amend §414(n) to refer to §4980(H). 78 Fed. Reg. 218 (Jan. 2, 2013) at 221.
6 Recipients do have to count leased employees to determine their eligibility for the small business tax credit. ACA §1421; IRS Code §45R(e)(1)(B). This is simply to ensure that employers with more than 25 full-time employees cannot claim the credit by shifting employees to leasing organizations; it also ensures that small PEO clients can still claim the credit.
7 Blue Lake Rancheria v. US, 653 F. 3d 1112 (9th Cir. 2011) at 1120.
8 See Applicability of Affordable Care Act to Joint Employers, Tax Management/Compensation Planning Journal, BloombergBNA (May 3, 2013) p. 124.
Source: American Staffing Association (06/03/13) Edward A. Lenz, Esq. and Alden J Bianchi, Esq.
The information in the article above is intended for general education purposes only and should not be relied upon as a substitute for professional, legal, and/or accounting advice.