If you’ve been in an HR role for a while or just dealt with employment, then you know that keeping up with benefits is a never-ending challenge. I’ve been asked several times recently if Independent Contractors (IC)/Freelancers/1099 are eligible for benefits. It seems like it’s a cut-and-dry answer, since providing workers with benefits used to be one of the determining factors for worker misclassification. If a company offered the same benefits that W-2 workers received to workers being paid on a 1099 basis, this could put the company at risk for worker misclassification.
As a rule, Independent Contractors have had to pay for their own benefits. Independent contractors are not eligible to receive tax-free benefits from the organization. If the company chooses to offer healthcare benefits to an independent contractor, the contractor must pay income taxes on the value of the benefit.
Some states are making changes to this rule. Proponents would like to see more “gig-workers” who are doing small projects or freelance work, oftentimes facilitated by an internet platform or app, classified as traditional employees under state laws in order to provide them additional protections and benefits.
With the growth of the gig economy, some believe the states will be disrupting how independent contractors are eligible for benefits. Some gig economy workers already have benefits through another employer or a family member. They don’t need or want benefits. More recently, California Assembly Bill – 5 (AB-5) has attempted to define these benefit concepts and bring national attention to the issue. The idea, according to those who support the law, is to minimize the exploitation of workers who are classified as independent contractors but should really be classified as full-time employees, making them eligible for benefits such as paid time off and health insurance. New York is another state that is looking out for workers. NY legislators have considered allowing online platforms to pay into a benefit fund for workers who use their app or website.
Blurring of the Lines
Recent articles and conflicting information have caused a blurring of the lines regarding worker benefits. Companies are usually willing to pay more for independent contractors because they don’t have to pay health benefits, unemployment compensation, Social Security taxes, and Medicare taxes. As with unemployment benefits, an employer is not responsible for workers’ comp benefits if you are an Independent Contractor. But not so fast: Nowadays, some states and cities are offering benefits to Independent Contractors. I’ve recently seen unemployment insurance and workers’ compensation provided to Independent Contractors. For example, New York City allows employers with four or more employees to be covered by the city’s human rights law, and includes freelance workers and independent contractors. Including NYC with Protections Against Discrimination, Harassment, Retaliation, prohibition on pre-offer criminal background checks and salary history inquiries.
Most states permit an independent contractor to be eligible for workers’ comp benefits by paying separately into the state workers’ compensation fund. In most cases, offering group health and welfare plan coverage to independent contractors will not be a realistic option because it would create a multiple employer welfare arrangement (MEWA). This is an arrangement used to provide employee welfare benefits to the employees of two or more employers that are not part of the same controlled group. Employers seeking to offer coverage to independent contractors would first need to receive approval from the insurance carrier. Failure to receive carrier approval could result in the carrier refusing to pay claims for the independent contractors—requiring the employer to self-insure the benefits.2
If your organization needs some help navigating the issues surrounding Independent Contractor Compliance, ClearPath Workforce Management risk mitigation services bridge the gaps to enable compliant engagement of this highly skilled talent and to expand your talent supply chain. ClearIC™ can automate and simplify the Independent Contractor evaluation process while mitigating your risk via our full-service IC vetting process. Contact ClearPath for a complimentary 1:1 review of your current worker status. This blog article is for general information purposes only. It should not be solely relied upon or substituted for legal or professional advice. The use of the information provided is at your own risk.