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Updated August 4, 2014

Employers are scrambling to find ways to avoid the dreaded “employer mandate” of the healthcare reform law, but those who think independent contractors are the answer should be aware of the danger of using independent contractors to avoid Obamacare.

The employer mandate portion of the Affordable Care Act (ACA or Obamacare) will require employers with 50 or more full-time employees to provide healthcare coverage to those employees starting in 2015 (assuming the deadline isn’t extended again)*. Therefore, employers are already cutting employee hours, freezing hiring, and even laying off employees to reduce their full-time headcount.

Others are planning to utilize contractors, but they need to be careful how they go about it.  The temptation is to simply reclassify workers independent contractors (ICs) and pay them on a 1099 rather than a W-2. ICs are not considered employees and therefore would not count toward employers’ number of full-time employees.

But calling a worker an IC doesn’t make it so. The IRS has strict guidelines regarding who can be an IC. Some of the factors the IRS considers are the level of control the company has over the worker, the duration of the relationship, and the payment structure.

The IRS has been cracking down on the misclassification of workers as ICs for the past few years, but it looks like that crackdown will only get more intense in light of the ACA. According to the Wall Street Journal, the IRS has “vowed to be more vigilant” against companies that misclassify workers, and attorneys quoted in the article expect audits to increase. The article states that employers could have to pay back taxes and penalties associated with the ACA if they are found to have misclassified workers.

One of the biggest red flags for the IRS when it comes to worker classification is when a worker who was a W-2 employee is suddenly paid on 1099. Therefore, employers who convert current W-2 employees to ICs will especially be at risk for IRS audits.

Enter the many benefits of using contractors. A better way to achieve the same result is for companies to utilize contractors who are the legal W-2 employees of a recruitment back-office solutions provider.  The workers then count towards the back-office’s headcount, not the company’s. Therefore, the company doesn’t have to worry about ACA compliance or IRS audits.

The use of contract staffing services presents a huge opportunity for recruiters.  By providing contractors to your clients, you can pick up new potential clients and get more business from your existing clients. In addition to helping companies avoid the employer mandate, you can help those that already have more than 50 employees reduce the number of direct hires they have to provide coverage to because they can staff entire departments and projects with contractors.

If you do offer W-2 contractors, be sure that you align yourself with a contract staffing back-office that is familiar with Obamacare and is ACA compliant.

*UPDATE: The deadline HAS effectively been extended for those with between 50 and 99 employees.  They can put off compliance until 2016 IF they can certify that they did not reduce their workforce specifically to qualify for the delay.  They will have to comply in 2016.  Those with 100 or more employees DO have to comply in 2015, but with some temporarily reduced requirements.  Read more here.

This article is for informational purposes only and should not be construed as legal advice.

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