Staffing agencies and their clients must work out who pays for health benefits

Businesses using staffing agencies will need to tread carefully when Patient Protection and Affordable Care Act changes take effect in 2014, but clearly written contracts and careful communication can mitigate problems.

“The tricky part is figuring out who the employer is,” said Bret Clark, an attorney with Hawley Troxell in Boise, who focuses on employee benefits and executive compensation. “It really comes down to who has the right to control the employee.”

Mike Markley, managing director of Aquent Studios, a staffing agency in Boise, said Aquent’s contracts with its clients spell out who is responsible for employees.

“It’s, ‘These folks are our employees,’ and that’s pretty clear to everybody,” he said.

But should an employee seek coverage on the health care exchange, the Internal Revenue Service may determine a staffing agency’s client is the employer, even if the contract states otherwise, according to Bret Busacker, also an attorney at Hawley Troxell in Boise, who also focuses on employee benefits and executive compensation. If the employee does not have health insurance, the agency’s client could be assessed a penalty.

“I think an employer has some risk in dealing with a staffing company that doesn’t provide medical benefits,” Busacker said. “These staffing firms are going to have to figure out how to make their clients comfortable that these employees are not employees of the client. … It creates this really hard management issue in terms of dealing with your client relationships.”

When dealing with staffing agencies and independent contractors, the IRS uses a 20-factor checklist to help determine who is the employer. Busacker said a business may ask a staffing agency to include an indemnity clause in the contract stating that if the business is penalized under PPACA, the staffing agency will pay the business for that expense.

“The only way you can avoid the penalty is you have to have coverage,” Busacker said.

Staffing agencies in Boise are trying to figure out their best options for how to proceed under the new regulations.

“It’s going to be a non-issue for us,” Markley said. Aquent, many of whose employees work in the high-tech field, already provides benefits for employees who average 20 or more hours of work per week, so as long as those insurance plans meet PPACA requirements for value and affordability, Aquent workers should not need to buy insurance on the exchange.

“We really needed to be competitive on that front just to get good people within our pool,” Markley said. “You have to sell yourself on both ends, so benefits are a pretty big deal.”

Dustin Cureton, manager of Gem State Staffing in Boise, said his company is still trying to figure out what options will be cost-effective.

“We’re all kind of in the same position: We don’t really know what the impact is going to be until we get some concrete direction,” Cureton said. “We’re being as proactive as possible, but the answers don’t seem to be out there yet.”

One missing piece of the puzzle is the fact that Idaho’s insurance exchange is not yet active. The exchange is supposed to be active by Oct. 1, but until then, employers who have never provided health benefits – such as Gem State Staffing – must make their best guesses about what health insurance coverage will cost compared with paying PPACA penalties for noncoverage.

“We’re kind of in limbo waiting to find out what the cost is going to be,” Cureton said. “If there’s a penalty involved with not offering the benefits, we’ll have to find a way to pass that cost on. … Ultimately, the companies we work with will have to pay that cost.”

Another issue, Cureton said, is figuring out how many full-time equivalent employees the agency has and which employees are full-time workers.

“The language that we’ve read, it’s very vague in regards to the definition of a full-time employee in the staffing community,” he said. “The first thing that we have to determine is the definition of a full-time employee.”

“It’s going to be a documentation nightmare,” Busacker said. Because a staffing agency doesn’t necessarily know whether a new employee will work full time, it can wait to provide benefits until after the employee has worked for a “measurement period” of three to six months, during which time the employer must document how many hours the employee worked. At the end of that period, the agency must average the total number of hours worked to determine whether the employee worked full time or part time on a weekly basis, which will indicate whether the agency must pay benefits.

Such a strategy poses a risk to the agency’s clients, however, because of the individual mandate, Busacker said. People without health insurance will be penalized under PPACA, so workers may turn to the exchange for coverage during the measurement period. If the worker lists the staffing agency’s client as his employer, rather than the staffing agency, the IRS would likely audit the client, which could be penalized for not providing benefits.

“Presumably some of these people will go to the exchange so they don’t get a penalty,” Busacker said. “It’s anybody’s guess who’s going to receive that paperwork.”

Determining whether a staffing agency is subject to PPACA requirements is more straightforward.

“A staffing firm is not any different than any other employer,” Busacker said. “They don’t escape the obligation of covering (employees) with health insurance. … I think staffing agencies are, at a minimum, going to have to go out and get some kind of coverage.”

“I think the labor community’s going to suffer,” Cureton said. “It’ll be a shock, initially, I think. I think we’ll get used to it, though.”