There has been a great deal of discussion here about legal issues that can arise under ERISA and other areas of the law when employers try to reclassify employees as independent contractors to avoid various costs that can arise, such as benefits costs. Such actions can give rise to employee lawsuits and claims under section 510 of ERISA. (See related posts on the topic: ERISA Temporary Worker Lawsuit Settles and Outsourcing: Traps for the Unwary.)
One state–the state of Hawaii– is apparently “cracking down” on employers who misclassify workers as “independent contractors.” According to an article from Pacific Business News (Honolulu)–“State looks hard at ‘independent contractors’“–the state is seeking to reduce the number of individuals who are without health insurance. (Source for the article: Jottings by an Employer’s Lawyer in an April 4, 2005 post.) According to the article, a study by the Hawaii Institute for Public Affairs found that 1 out of 4 of the uninsured are actually eligible for insurance if they were not misclassified by their employers.
As indicated in this article here, the history behind the development is as follows:
Under the state’s Prepaid Health Care Act, companies are required to provide health insurance for employers working at least 20 hours a week for four consecutive weeks. Union and government workers are exempt; the government arranges to insure its own workers, while unions negotiate coverage in labor contracts.Hawaii is the only state that has such a law. The Prepaid Health Care Act came into being in 1974, shortly before the federal Employee Retirement Income Security Act, or ERISA, which set uniform standards for employee benefits. ERISA does not require healthcare insurance for employees. Hawaii asked Congress for, and secured, an exemption to ERISA.
The penalty for not complying with the Prepaid Health Care Act is a maximum of $1 per employee per day of violation, plus medical costs incurred by workers who should have been covered, said Nelson Befitel, director of the state Department of Labor and Industrial Relations.
According to the Pacific News article, starting this month, the state will check businesses at random to see if they are providing benefits to workers who qualify. The article states that the “names of businesses are to be randomly generated by a computer” and the “department is looking especially hard at companies that are state contractors.”
The Pacific News article reports that a ruling in February by the Department of Labor and Industrial Relations ordered one company, a disability services provider, to classify its workers as “employees”, not “independent contractors”, and ordered the company to provide benefits such as workers’ compensation, health-care and temporary disability insurance for the employees. The action apparently “shook the approximately 50 companies that provide services for the elderly and disabled in Hawaii, many of whom have relied on temporary or on-call workers who can work flexible schedules.”
More on the development in an article from the Honolulu Advertiser.com: “Health insurance audits begin on local businesses.”
What would be the effect of such action on an employer’s retirement plans, such as 401(k) plans? Workers who are reclassified by the agency as “employees” might end up being inadvertently covered by the employer’s qualified retirement plans. However, see also this article from Milliman: “IRS Permits Plan Exclusion upon Employee Reclassification.”