There has been voluminous news coverage of the individual and employer mandates imposed by the Affordable Care Act, but little has been reported about the health insurance mandates imposed on staffing suppliers by their customers.
The ACA’s employer mandate regulations include a sloppy discussion suggesting that assigned employees could be counted as common law employees of the customers. Overinterpreting this language, customers’ legal and benefit advisors warn that such worker reallocation could ruin their ACA compliance programs and advise demanding burdensome amendments to their staffing contracts to solve that misperceived risk. Customers making these demands are usually big organizations and may be prime staffing buyers.
The typical amendment demanded by a customer requires its staffing firm to:
- offer expensive “affordable minimum value” coverage to all employees assigned to that customer (regardless of assignment length or tenure with the staffing firm);
- indemnify the customer for all ACA penalties that result from assigned workers being reallocated as the customers’ common law employees;
- agree, on the customer’s request, that the coverage that it offers to its employees assigned to the customer is offered on behalf of the customer;
- identify assigned employees who enroll in coverage and charge more for them than for those who do not enroll; and
- comply with the ACA and allow the customer to audit that compliance.
However, these mandates are unnecessary, expensive and sometimes legally risky for staffing firms.
The threat of temporary workers being reallocated as customers’ employees for ACA-related purposes is remote. Courts and government agencies have a long history of upholding staffing firms’ common law employer status for assigned employees — under tests of common law status that are virtually identical to the test used by the IRS for the ACA. Reallocation of commercial staffing employees would probably be disallowed if disputed.
The ACA mandate regulations were sloppy because, by referring simply to “staffing firms,” they conflated conventional staffing (temporary help and longer-term contract staffing) with the professional employer organization business, where all parties — the government, providers and customers — agree that the worksite employees are the common law employees of the customer. Most staffing industry commentators believe that the IRS has no intention of reallocating conventional temporary employees, making customer mandates unnecessary.
Two years ago, I explained in a Staffing Stream blog post the many reasons why the IRS, if it were permitted to reallocate assigned employees, would not even want to do so. Those reasons still apply.
However, the practice of “payrolling” as a separate staffing arrangement falls into a grey area between conventional staffing and professional employer organization services and should be carefully reviewed.
Lofty expectations. In order to shield themselves from ACA-related penalties, customers often require that temporary employees be offered too much coverage. The penalties at issue are:
- “A” penalty, for not offering coverage to at least 95% of full-time employees
- “B” penalty, for offering coverage that is either unaffordable or deficient in quality
The “A” penalty can be catastrophic, because it is proportional to the size of the penalized employer’s entire full-time population. For a corporation with tens of thousands of employees, an “A” penalty would be in the eight-figure range.
Affordable minimum value plans, often mandated by misguided customers to avoid the “A” penalty, are unnecessarily expensive. To protect customers from being subject to the “A” penalty (however unlikely that penalty might be), staffing firms need only offer minimum essential coverage (MEC) plans, which are extremely inexpensive and easy for staffing firms to offer and administer to all assigned employees.
The “B” penalty, meanwhile, is likely to be much less costly, because it is levied one person at a time and only for each full-time employee who obtains a government-subsidized healthcare plan. Staffing firms should readily accept indemnity responsibility for any “B” penalties that their assigned employees generate, because staffing firms are responsible for their coverage strategies and costs.
Unnecessary coverage. Requiring coverage offers to all assigned employees is overcompliant. Staffing firms may have ACA-compliant reasons for not offering coverage to some assigned employees (like initial lookback periods or part-time status during later stability periods), and customers would enjoy the same exceptions. Mandated offers of coverage to all assigned employees are unnecessary and may cause troublesome discrimination in the staffing firms’ benefit plans.
Measured indemnity. Indemnifying customers for all penalties is too broad. If reallocation of assigned workers were to produce ACA penalties for a customer, the indemnity should be measured by, or be proportional to, the number of assigned workers and should not be a “pay it all” obligation based solely on the fact of reallocation. It should also take into account the possibility that other staffing suppliers are the actual cause of the customer’s penalty problem.
After reallocation. It is OK to agree that, if reallocation occurs, the staffing firm’s coverage offers would be deemed offers by the customer. However, some customers have gone further and required staffing firms to provide detailed information on the assigned employees so that the customers can claim them as their own employees in their ACA reports. This is a bad idea that tempts fate, because it is bad operational posture for the staffing firm and could be deemed an admission that the assigned employees are the customer’s common law employees.
Differential billing. According to the regulations, if assigned employees are reallocated as staffing customers’ common law employees, the customers can not claim to have offered coverage to the reallocated employees unless the staffing firm charges more for enrolled employees than for nonenrolled employees. However, the amount of the extra charge does not need to be the actual cost of coverage. It can be a very small, nominal amount. There is also no requirement for the enrolled employees to be individually identified to the customer in this differential billing process.
Extra charges. It is actually a better employment law practice to withhold the names of the enrolled employees and to bill the extra charge for the total number of enrolled employees assigned to the customer, so that the customer has no arguable motive for terminating particular employees in a discriminatory way because of their higher benefit costs. Customers can be granted the right to audit the extra charges for enrolled employees, but the auditors should be outsiders or customer personnel who have no roles in assignment termination decisions.
Sunsetting customer mandates. There is no reason for customer coverage mandates other than the ACA, so any contract amendment imposing mandates should be self-annihilating if the ACA is repealed and should be renegotiable if the ACA is modified.
Negotiating changes. Staffing firms should negotiate for changes to proposed customer ACA mandates — getting approval to use MEC coverage to satisfy the mandate instead of affordable minimum value coverage, matching penalty indemnity to the assigned workers, establishing a low differential billing surcharge, and tying the mandate to the continued existence of the ACA employer mandate.
Such negotiations can be difficult, because the customer personnel with whom the staffing firm usually deals are not the source of the demand for the mandate amendment. Some outside legal or risk-avoidance “expert” recommended it, and the customer’s people do not understand why it is necessary or what proposed changes to it should be acceptable. This article could be a useful tool in those negotiations.