Paying Your Seasonal Workforce: Know the Law to Avoid Pitfalls
This article was updated on July 4, 2018.
During specific times of the year, some organizations need to staff up to meet demands. Hiring seasonal workers not only provides extra sets of hands, it also benefits organizations by providing new talent and fresh perspectives. Of course, there are financial as well as legal considerations for CFOs to keep in mind when hiring and paying your seasonal workforce.
Affordable Care Act
CFOs may think that hiring seasonal workers will increase benefit costs; however, the Affordable Care Act (ACA) has an exception for those workers.
The ACA specifies that an organization that employs an average of 50 or more full-time employees (employed on average at least 30 hours per week), including full-time equivalent employees, is considered an "applicable large employer" (ALE) subject to the Employer Shared Responsibility Provisions, according to the IRS. That means you must provide health insurance to employees or pay a penalty. Whether an employer is an ALE is determined each calendar year, depending on the average size of its workforce during the prior year (2018 number of employees and hours of service determine whether an employer is an ALE for 2019).
According to the IRS, the exception is that an employer is not considered to have more than 50 full-time employees if both of the following apply:
1. The workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year.
2. Employees in excess of 50 employees during such 120-day period are seasonal workers.
ALEs are permitted to treat seasonal employees differently from full-time nonseasonal employees because the ALE does not have to offer seasonal employees medical benefits. What can be confusing is that the terms "seasonal worker" and "seasonal employee" are both used in the Employer Shared Responsibility provisions. The term "seasonal worker" is used to determine whether an employer is an ALE. A "seasonal employee" is defined as an employee hired into a position for which the customary duration of the job is expected to be six months or fewer.
The same employment tax rules that apply to employees generally apply to temporary workers, including withholding federal and state income taxes and social security and Medicare taxes (plus employer matching amounts). Employment tax returns must be filed, but there are special filing rules for seasonal employees. According to IRS Publication 15, seasonal employers do not need to file for quarters when they regularly have no tax liability because they have paid no wages, but they must "check the 'seasonal employer' box on every Form 941 you file. Otherwise, the IRS will expect a return to be filed for each quarter."
It is important to classify seasonal employees correctly under state and federal laws. Workers cannot be treated as independent contractors for tax purposes, with no payroll taxes withheld, if they are used and treated like full-time employees. Generally, an employer must withhold income taxes, withhold and pay social security and Medicare taxes and pay unemployment taxes on employee wages, but does not have to withhold or pay taxes on independent contractor payments. The business relationship, including degree of control and independence, helps determine the classification.
Finance leaders can help organizations maintain compliance by becoming more familiar with the definitions, ensuring seasonal employees are classified correctly based on their job descriptions when they are hired and monitoring the way they work during their employment so that their classification does not inadvertently change over time.
When hiring seasonal workers as employees, certain benefits are required by law (which may vary by state). These include workers' compensation and unemployment benefits (with certain exceptions depending on the period the employee works). Employers should check with state labor departments and workers' compensation agencies to learn about specific requirements. CFOs and their teams should take pains to verify that that their payroll withholdings are appropriate for seasonal employees.
Seasonal employees are subject to the Fair Labor Standards Act, which regulates minimum wage and overtime requirements. Seasonal employees are covered by state and local laws in areas of employee protection like discrimination, workplace safety and harassment. Failure to consider these requirements can result in financial harm to the organization if seasonal employees claim that they have not been treated appropriately. While human resource and legal departments are typically primarily responsible for oversight in this area, finance leaders should back them up and do what they can to help HR leadership make sure that employees are aware of the laws and treated fairly and consistently.
Seasonal employees can add significant value to your organization. With some planning around paying your seasonal workforce, you can maximize the use of this resource while protecting your organization and minimizing the risks.