Search:

Articles

< Back to Articles

Understanding Benefits Liability for Long Term Contract Employees

By Elizabeth M. Rice, SPHR

Due in large part to a successful, costly litigation involving Microsoft® in the 1990s, companies with contingent employees placed through staffing or payrolled companies began adopting specific - and often unnecessary - policies to avoid benefits liability. The Internal Revenue Service had ordered Microsoft to reclassify its independent contractors who performed essentially the same work as its direct employees, as employees. Although Microsoft hired many of the contractors directly or through staffing firms, the workers later sued, claiming common-law employee status, and thus entitlement to company benefits. We interviewed Edward A. Lenz, Senior Vice President of Public Affairs and General Counsel at the American Staffing Association (ASA) to gain deeper insight into the rules and regulations governing employee benefits, and how staffing firms can help protect their customers from benefits liability.

In the Microsoft case, Lenz explains, the court decided after years of litigation that the employees were in fact common-law employees and entitled to the company's stock purchase benefits - retroactively. As Lenz discusses in his ASA article "Assignment Limits and Customer Concerns About Benefits Liability: Issues and Answers", staffing firm customers increasingly began to adopt policies that would limit the length of assignments for staffing firm and payrolled employees in order to avoid similar retro-benefits claims. However, many of these policies were likely misguided by the erroneous belief that employees are automatically entitled to company benefits, or to being hired by the customer, after working a certain length of time.

Companies using staffing firms and payrolling services should revisit their own staffing policies to ensure that the imposed limits are truly necessary and not based on a common legal misperception. Lenz' article examines basic principles of law that apply to employee benefit plans, and discusses ways that customers can effectively avoid retro-benefits exposure.

Technically speaking...
The principal law regulating employee benefits is the federal Employee Retirement Income Security Act (ERISA). This law sets rules governing the structure and administration of employer retirement and other benefit plans. However, it does not require employers to offer benefits, nor does it dictate the level of benefits that are offered.

While ERISA generally regulates but does not require benefit plans, federal tax law encourages employers to offer benefits by allowing certain benefit costs under a tax-qualified plan. Under such a plan, the employer deducts the benefit costs and excludes those costs from the employee's income, so that the value of the benefits is non-taxable. To take advantage of a tax-qualified plan, companies need not necessarily cover all employees. For example, a company generally can exclude up to 30% of its rank-and-file employees from coverage under a pension, profit sharing, or 401(k) plan without risking the plan's tax-advantaged status. Lenz refers to this provision as "slack."

IRS Code section 414(n) is the federal tax code provision that deals with leased employees. Leased employees are not common-law employees of a customer, but have nonetheless worked under the customer's direction on a substantially full-time basis for at least one year.

Simply Speaking...
Misconceptions about ERISA and tax code rules are not uncommon. For example, some customers have terminated long term contract employees before they have completed 1,000 hours within one year, believing that this threshold entitles the employees to company retirement benefits. In fact, ERISA regulations do not apply to non-employees. Similarly, the federal tax code rules do not require customers to provide benefits to leased employees.

Lenz recommends that leased employees be specifically excluded from the customer's benefit plans. Without a clearly defined exclusion from customer benefit plans for contracted employees, assignment limits could actually carry some risk. With ill-defined exclusions, assignment limits could be construed as an effort to deny benefits, and that inference could lead to charges of violating ERISA, which protects employees from such employer action.

Moving forward...
Lenz proposes that customers using staffing firms and payrolling companies amend their benefit plans to expressly exclude the employees from these organizations. Staffing firms and payroll companies can track the number of leased employees to ensure that the customer's slack is not exceeded. As an added precaution, customers should consider executing employee waivers of company benefits. Although court decisions generally support such waivers, the plan must be carefully written to be consistent with, and expressly sanctioned by, the customer's benefit plan.

Rather than terminating productive contract employees based on arbitrary assignment limits, companies should take decisive steps to ensure that benefit plans expressly exclude staffing firm and payrolled employees, and - as added protection - to adopt employee waivers. Most importantly, Lenz advises staffing firms and their customers to always consult with expert legal counsel regarding the implementation of these strategies.