Since the IRS released its regulations regarding the ACA’s employer mandate, some staffing clients have been concerned that the agency might deem contingent workers assigned to them to be their common law employees. Reallocation by the IRS would require such clients to count the assigned employees in the clients’ ACA compliance efforts. In a worst-case scenario, it could drive clients’ “offering” rates to full-time employees below the 95% that will be required from 2016 onward in order to avoid the heavy “A” penalty, and it could also complicate other ACA requirements.
Does this issue really present a serious risk? Think about it from the IRS point of view.
PEOs were the real subject, not commercial staffing. When the IRS published the problematic language, it was thinking about PEOs, not commercial staffing.
Virtually all parties involved in PEOs (clients, PEOs, employees, and government) agree that assigned employees are the common law employees of the clients. In contrast, there has been almost universal agreement that commercial contract staffing firms are the common law employers of their assigned employees, and the ACA regulations should have acknowledged that difference, instead of lumping all forms of staffing together.
There is no reason to assume the IRS wants to treat commercial temporaries as client employees.
IRS policy and practice in three other areas (worded almost exactly like the ACA regulations) recognize staffing firms as the common law employer of assigned employees. It would be horribly inefficient and disruptive for IRS to change all of those practices to match a new and different ACA common law rule or to apply inconsistent practices among the four areas (FICA tax, FUTA tax, income tax withholding, and ACA.)
Purposes of the ACA. Most staffing firms are large enough to be covered by the ACA employer mandate. But many of their clients are too small to be covered by that mandate. Reallocation of assigned employees from large staffing firms to small clients would remove many employees from the presumed benefits of the ACA employer mandate. This effect would be contrary to the goals of the ACA law and would be a counterproductive strategy for IRS.
IRS audit overload. It is vastly easier for IRS to audit staffing customers and suppliers separately than to trace assigned employee relationships, through each of their assignments, to staffing clients that may not themselves be involved in an audit. IRS is also unlikely to have the resources to push “common law reallocation” situations. It claimed to need 16,500 new agents to enforce ACA, but Congress, instead of indulging this plea, cut its budget.
Consistency for credibility. It has been suggested that IRS might use reallocation as a tool for threatening, deterring, or punishing employers that use legal workforce strategies to minimize the costs of the mandate. However, an inconsistent position on this issue – reallocating some assigned employees while not reallocating others – would discredit the IRS generally and especially impeach its position on this issue. IRS will be much better off to consistently avoid reallocation than it would be to pursue it.
Service counting. Employees who are not full-time are not counted for ACA penalty or coverage purposes. If IRS reallocates assigned employees to clients, their ACA service would have be counted according to their client assignments. The service of assigned employees would start from zero every time they change assignments to work for a different client, removing many from the full-time status that they would otherwise achieve as the staffing firm’s common law employees. Again, this is not a result that IRS would want to generate.
IRS is not the ultimate law. IRS positions are not always the ultimate law; they get reversed a lot by the courts. On this issue, previous court cases have rejected assertions by non-IRS parties that employees assigned by staffing firms are the common law employees of the customers. See, for example, Blue Lake Rancheria v. United States, 653 F. 3d 1112 (9th Cir., 2011); Burrey v. Pacific Gas & Electric Co., 1999 U.S. Dist. LEXIS 22619 (N.D. Cal. May 12, 1999). IRS may not want to risk reversal on this issue.
Short assignments make reallocation irrelevant. Staffing clients can easily immunize themselves from “common law reallocation” by limiting the assignment length of assigned employees to less than 1560 hours in each year. Assignment length limits have been used by staffing clients for other reasons, without challenge, since 1999.
An even more conservative precaution would be for clients to only use staffing suppliers who prevent all of their assigned employees from ever becoming full-time. That way, it does not matter who is deemed to be the common law employer.
Staffing Firm coverage promises. If IRS reallocates assigned employees as the clients’ common law employees, the clients may take ACA credit for coverage that the staffing firm offers them, as long as the staffing firm charges more for enrolled employees than it does for non-enrolled employees. Some clients have required their staffing firms to offer expensive minimum value coverage to all assigned employees. This is a very expensive way for clients and their suppliers to avoid the very remote possibility of reallocation, but it may prevent IRS from developing an aggressive reallocation program.
Joint employment under labor law. The National Labor Relations Board recently changed its test for joint employment for labor law purposes, making it easier for the government to find that assigned employees are jointly employed by staffing firms and their clients. Although the new NLRB test uses some of the factors used by the ACA common law test, it does not affect ACA directly, since the ACA contemplates a single common law employer and, unlike traditional labor law, creates no role for joint employment. IRS has no reason to conform its ACA policies to NLRB rules, which are also unreliable long-term because they change with the party of the incumbent president.
Payrolling. In the staffing industry, “payrolling” occurs when clients recruit employees for work in their businesses but send those recruits to staffing firms, there to be employed and assigned back to the client. It may be done on an occasional, exceptional, and temporary basis or as a long-term client workforce strategy.
In some payrolling situations, it will not be clear who the common law employer is, and IRS reallocation may be a real risk. Staffing firms doing long-term workforce payrolling may want to consider recognizing this activity as PEO business and complying with the special legal requirements for PEOs. Staffing firms doing sporadic payrolling may want to blend payrollers with the other assigned employees and eliminate all practices that segregate, identify, and highlight the differences of payrollers, such as lower markups, benefit plan differences, and exceptions to liability and indemnity clauses. Clients can be given credit for their recruiting efforts in the overall negotiation over rates that apply equally to all assigned employees, whether payrolled or sourced by the staffing firm.