“Be your own boss, and set your own hours.” This slogan is one of Uber’s recruiting pitches to attract new drivers to join its network. Many readers are surely familiar with the ongoing debate (and litigation) over whether Uber drivers are properly classified as independent contractors or employees, and Uber is not alone in trying to design the workforce of the future. Many employers use similar flexible work-schedule arrangements to attract and retain talent. These workers go by different names, depending on the industry and company, including gig workers, per diem, on-call, project-based, temporary, flex-time, part-time, variable hour, seasonal, and other types of workers that may work on-demand or in an otherwise nontraditional manner. Additionally, in some cases, an employer may hire these workers through third-party payroll providers, like staffing agencies and professional employer organizations, or through independent contractor arrangements. In other cases, employees may be hired on-payroll, but not offered full benefits. While these arrangements may be the wave of the future, employers should consider whether their employee benefit plans are impacted, including whether they are in compliance with all employee benefits laws, and whether plan documents need to be amended. In short, the workforce of the future can lead to new employee benefits risks, unless an employer identifies and avoids the traps that exist in this area.
As a general matter, before hiring nontraditional workers, employers must determine how these workers are treated by the employer’s existing employee benefits plans’ terms and consider whether any amendments are appropriate. For example, if a new category of employee is created by an employer, the employer’s plans may need to be amended to either cover or exclude the new employment classification. Without a careful review of the plan documents from time to time, an employer may be creating benefit plan risk that will be expensive to fix in the future. In this regard, all employee benefit plan documents should accurately describe who is covered and which employment classifications are excluded. Qualified retirement plans may be subject to other concerns, including that coverage testing could be impacted if too many employees are put into an excludible class, making the covered group discriminatory. Moreover, in what may be the most significant exposure to an employer, Affordable Care Act (ACA) taxes can be triggered if employees are determined to be full-time under the law and appropriate coverage is not offered.
Qualified retirement plans are also subject to special requirements that dictate how long an employee can be excluded from the plan, where the exclusion is service related. These concerns generally exist for employees classified as part-time or in a similar service-based classification. In that case, the workers may need to be offered participation in the plan once the employee completes one year of service. Applicable law generally defines one year of service as either (i) completing 1,000 hours of service within a 12-month period (hours of service method); or (ii) being employed by the employer for a 12-month period (elapsed time method). Each of these methods has pros and cons when dealing with nontraditional workers so an employer needs to understand which method its plan has adopted and whether a change may be a good idea.
From a medical plan perspective, the ACA requires employers with more than 50 full-time equivalent employees to provide affordable health care coverage or pay a tax. An employer with nontraditional workers who are not counted properly can lead to ACA noncompliance and outsized ACA “pay or play” penalties. These penalties can quickly skyrocket when workers who are really employees under the law are misclassified as independent contractors. This is particularly the case beginning in 2016, when the ACA requires employers to offer coverage to 95% of their full-time employees. The applicable regulations generally define a full-time employee as someone who works 130 hours in a month. In order to correctly classify employees as full-time, a game plan must be formulated to determine how hours will be tracked properly. This data may be crucial for certain “look-back” testing that needs to be conducted. Additional issues include how to handle rehired employees and forming an appropriate waiting period. The issues are particularly exacerbated in the case of nontraditional employees, whose hours may fluctuate from week to week, or project to project, and for whom collecting hours worked can sometimes be challenging.
In summary, the economy of the future is here, and it includes a growing number of employers that are embracing a nontraditional workforce. At the same time, employee benefits laws need to be adhered to, and, in many cases, those laws don’t fit perfectly with this new normal, perhaps because some of those requirements were designed for an earlier time. At the very least, employers need to be mindful of the impact these new types of employees will have on their employee benefits plans. Additionally, from a societal perspective, the workforce of the future may result in more employees working for cash only, with no access to benefits. This may create a workforce that may be even less prepared for retirement than the workers of today. As employers continue to innovate in this area, policymakers would be well advised to consider the effect that nontraditional workers may have on the current employee benefits system. For now, from a practical perspective, employers are well advised to keep their benefits counsel in the loop as they make changes to the character of their workforce, and employers should review their plan documents with counsel to determine the best way to proceed.
The author wishes to thank William Szanzer, an associate at Davis & Gilbert, who assisted with the preparation of this article.
Alan Hahn is a partner in and co-chairs the Benefits & Compensation Practice Group of Davis & Gilbert LLP.
Alan can be reached at firstname.lastname@example.org