Service Contract Act (SCA) Prevailing Wage Increase

Effective July 22, 2014 the new Health and Welfare Fringe Benefit Rates increased to $4.02 per hour.  Please click here to read the All Agency Memorandum.

The new rate of $4.02 per hour (up from last year’s $3.81 per hour) is required in all government contract bids or other service contracts awarded on or after July 22, 2014. A special rate of $1.66 per hour is set for Hawaii (up from last year’s $1.55 per hour).

Solicitations/Contracts Affected

  • All invitations for bids opened or other service contracts awarded on or after July 22, 2014, must include the new fringe benefit via an updated Wage Determination (WD).
  • For contracts beginning on or after July 22, 2014, contracting agencies are directed to make pen-and-ink changes to the current WD received for the contract for which the updated fringe benefit rate was not included.
  • For all other contracts (not those awarded or starting after July 22, 2014), revised WDs reflecting the new fringe benefit rate will be available at the Wage Determination OnLine website (www.wdol.gov). The new rate will go into effect on the anniversary date (annually, or every two years for non-appropriated funds contracts) or option renewal/modification date of these contracts — whichever date for a particular contract triggers incorporation of a new WD by the contracting agency.
  • The obligation to pay employees prevailing wages and benefits in compliance with the SCA requirements falls to contractors and subcontractors, who are jointly and severally liable for any violations. However, it is the contracting agency’s legal obligation to provide correct and updated WDs to the prime contractor, and the prime’s responsibility to flow-down updated WDs to their subcontractors.
  • Government contractors should check routinely to determine if new WDs have been provided to them by contracting agencies (or, in the case of subcontractors, by their prime contractor) by incorporation into their contracts. If the agency has not provided an updated WD as required, contractors should request that the agency do so and be sure to document their compliance efforts.

At Cleary, we know how important a comprehensive benefits package can be to your continued success. Give us a call today at 617-723-0700 and we will work with you to create a plan that meets your fringe-benefit obligations and provides your employees with valuable benefits.

The Employee vs. The Independent Contractor

Business owners may not understand when to classify an individual as an employee versus an independent contractor. Proper classification of a worker as an independent contractor may save a company money and benefits, such as group health insurance. However misclassification can result in significant liability.

Employers are often tempted to classify workers as Independent Contractors because they don’t have to pay the employer share of taxes or provide benefits to those workers. The Affordable Care Act’s (ACA) upcoming employer mandate makes this type of arrangement even more tempting. Under the employer mandate, which will go into effect in 2015, employers with 50 or more full-time or full-time equivalent employees will have to provide healthcare insurance to at least 95% of their full-time workforce or face fines. Even if they provide coverage, they could be fined if that coverage does not meet the ACA’s standards.

Who is counted as an “employee”

Under the common-law standard, an individual is an employee if a legal employer and employee relationship exists. Generally, that relationship exists when the company “has the right to control and direct the individual” regarding “the details and means by which” the individual’s work is performed for the company. There are several factors that are considered under the common-law standard, including the right to discharge, the furnishing of workspace or tools, the source of the individual’s employment wages, etc. The determination depends on the particular facts and circumstances of the relationship.

Ultimately, the determination of whether an individual is an employee or independent contractor is based on a holistic analysis of the relationship between the business professional and the company. It should be noted that just because a company classifies and pays a business professional as an independent contractor, it does not always mean that the business professional is truly an independent contractor under the law. Courts typically focus on the substance of the relationship over its form.

The rules tell us little more than that an employer’s ACA obligations extend to every person who is its “common law employee.” For health care reform, “employee” is defined using the common-law standard found in 26 CFR § 31-3401(C)-1(b). The IRS uses a 20-factor “right to control” test to determine whether a common law employment relationship exists. No one factor determines the result, but if an employer can tell a worker what to do, when to do it and how to do it, then, generally speaking, the worker is that employer’s common law employee.

What is an independent contractor?

An independent contractor, also known as a 1099 contractor, refers to a worker who contracts their services out to a business or businesses. An independent contractor is considered to be self-employed, not an employee of the business or businesses with which they work. “1099” refers to the IRS form that an independent contractor must receive to state their income from any given business in a given tax year.

Why Does It Matter?

Misclassification of an individual as an independent contractor may have a number of costly legal consequences.

If your independent contractor is discovered to meet the legal definition of an employee, you may be required to:

  • Reimburse them for wages you should’ve paid them under the Fair Labor Standards Act, including overtime and minimum wage
  • Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment.
  • Pay any misclassified injured employees workers’ compensation benefits
  • Provide employee benefits, including health insurance, retirement, etc.
  • Pay ACA penalties if the misclassification results in increasing the number of employees to 50 or more.

Penalty and Claim Examples

The California Legislature enacted Senate Bill 459, which imposes hefty fines for each “willful misclassification” of a worker. The penalties are not less than $5,000, nor more than $15,000 for each violation of the statute. Employers may also face penalties ranging from $10,000 to $25,000 for each violation if the employer engaged in a “pattern or practice” of such misclassification.

In May 2014, Lowe’s agreed to pay $6.5 million to settle a class action lawsuit that accused the company of misclassifying over 4,000 installers, and hundreds of businesses, as independent contractors.

Defining Employee for Health Care Reform

If an IRS audit reveals that an employer misclassified workers and reclassifying those workers as W-2 employees puts the employer over the 50-employee threshold, they could be subject to the fine for failing to offer healthcare coverage. That fine is $2,000 per full-time employee if even one employee obtains insurance through The Marketplace with government subsidies. If they do offer coverage, but that coverage doesn’t meet the ACA’s standards for minimum coverage and affordability, the employer could pay $3,000 for each employee who goes to The Marketplace for coverage and obtains a government subsidy.

The info graphic, embedded below, created by payroll software company ZenPayroll, provides a flowchart to walk you through determining whether you need to be classifying a worker as an employee or a contractor.

Assumptions to Avoid in Classifying Workers

A hiring firm should not assume it is safe to classify a worker as an independent contractor simply because:

  • The worker wanted, or asked, to be treated as an independent contractor
  • The worker signed a contract
  • The worker does assignments sporadically, inconsistently, or is on call.
  • The worker is paid commission only
  • The worker does assignments for more than one company.

IRS Form SS-8 can be used to request a determination of the status of a particular individual. The IRS will use the information provided on the form, as well as any other information that can be obtained from the parties involved to determine whether an individual is covered under the payroll tax laws. The IRS determination does not necessarily indicate worker classification under other employment-related laws.

Conclusion

It is important for businesses to understand difference between and employee vs. independent contractor, especially in today’s ACA climate. Correctly classifying workers before they perform services can save a business confusion, difficulties, and possible fines down the road.

At Cleary, we know how important a comprehensive benefits package can be to your continued success. Give us a call today at 617-723-0700 and we will work with you to create a plan that meets your business objectives, takes into account state and federal laws, and capitalizes on incentives and innovative solutions now being offered.

PCORI Fees: IRS Form 720 Update

The Affordable Care Act imposes fees on issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans to help fund the Patient-Centered Outcomes Research Institute (PCORI). PCORI is responsible for conducting research to evaluate and compare the health outcomes and clinical effectiveness, risks, and benefits of medical treatments, services, procedures, and drugs.

Plan sponsors must pay the PCORI fee by July 31 of the calendar year immediately following the last day of that plan year. All plan sponsors of self-insured group health plans will pay the fee in 2014, but the amount of the fee varies depending on the plan year.

  • Calendar year plan beginning January 1, 2013 will pay $2 per covered life.
  • Plan years beginning from October 2, 2012 – December 31, 2012 will pay $2 per covered life.
  • Plan years beginning January 2,2012 – October 1, 2012 will pay $1 per covered life.

PCORI fees are reported annually on the 2nd quarter Form 720 and paid by its due date, July 31st. The fees are based on the average number of lives covered under the policy or plan. They apply to policy or plan years ending on or after October 1, 2012, and before October 1, 2019. The PCORI fee will not be assessed for plan years ending after September 30, 2019, which means that for a calendar year plan, the last year for assessment is the 2018 calendar year.

The types of plans that must pay the PCORI Fees by July 31, 2014 include the following:

  • Health/accident plans
  • HRAs with a plan year that began 1/1/2013 that are not an excepted benefit (Employer contribution is greater than $500)
  • Health FSAs with a plan year that began 1/1/2013 that are not aIRn excepted benefit (Plan has employer contributions with the maximum reimbursement greater than two times an employee’s salary reduction election or employer contribution is greater than $500)
  • Retiree plans

Please click on the links below to access Form 720 and Form 720 instructions.

Form 720
Form 720 instructions

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