Costly FLSA landmine lurks in new Obamacare rules

As we move toward 2014, many CFOs see relying more heavily on independent contractors as an attractive Obamacare strategy. But there’s a costly danger in this move that many firms may not be aware of.

The healthcare reform law’s “shared-responsibility” rule requires large employers (50 or more FTE employees) to provide workers with a minimum level of affordable healthcare coverage or pay a penalty.

Because of this, many firms have been searching for ways to avoid reaching that 50-employee plateau.

And classifying workers as independent contractors (ICs) seems very appealing on the surface.

After all, theoretically it would eliminate the burden of having to either provide healthcare coverage or pay the reform law’s penalty for not doing so.

Of course, it also leaves employers wide open to much more costly penalties if they make any mistakes in the process.

And the feds have really beefed up their enforcement in this area.

$2,000 per employee to start …

Obamacare’s effect on employee misclassification is something that has flown under the radar. But it’s something all employers should be aware of.

Here’s an example of just how much more costly the reform law makes employee misclassification.

Let’s say a company has 45 full-time employees. The company doesn’t offer healthcare coverage because it falls under the reform law’s 50-employee threshold and assumes it’s exempt from the law’s shared-responsibility penalty.

However, the company also uses 35 independent contractors.

And a government audit reveals that the ICs are technically full-time employees. That automatically bumps up the firm’s number of FTEs to 80 (45 FTEs + 35 misclassified ICs) and subjects it to the reform law’s shared-responsibility penalty for not offering “minimum essential coverage.”

Under Obamacare, the feds automatically subtract the first 30 employees from the penalty.

So that leaves this company with 50 employees that should’ve been offered healthcare coverage.

The shared-responsibility penalty imposes a $2,000 penalty for each of these 50 employees – for a grand total of $100,000 per year.

And the penalty can be broken into one-month increments until the guilty company becomes compliant. That breaks down to $8,333 per month.

Of course, this figure doesn’t even account for the additional fines, back pay and tax penalties the IRS and DOL could impose for this firm’s initial misclassification errors.

And, as Resourceful Finance Pro reported previously, a new IRS ruling just made classifying employees even more tricky.