Compliance Corner


FAQ: Why shouldn’t employers offer health coverage to independent contractors?

December 07, 2021

Before addressing the issues of whether coverage should be offered to independent contractors, it is important to understand the difference between an independent contractor and an employee. An employer needs to be very careful in classifying workers. If the worker is correctly classified as an independent contractor, it is not recommended that the employer offer them coverage or consider them “common law employees.”

The determination of who is an employee versus an independent contractor takes a facts and circumstances based analysis of the nature of the individual’s employment. It includes an analysis of factors such as who directs the individual’s work, provides tools, determines work processes, etc. In plain terms, a contractor is given a project or goal to accomplish. The contractor determines how the project gets completed. If the employer dictates exactly how a project must be completed, then the individual is most likely an employee.

Courts have used the following factors to determine whether an individual is an employee or independent contractor:

  • the hiring party's right to control the manner and means by which the product is accomplished
  • the source of the instrumentalities and tools
  • the location of the work
  • the duration of the relationship between the parties
  • whether the hiring party has the right to assign additional projects to the hired party
  • the extent of the hired party's discretion over when and how long to work
  • the method of payment
  • the hired party's role in hiring and paying assistants
  • whether the work is part of the regular business of the hiring party
  • whether the hiring party is in business
  • the provision of employee benefits
  • the tax treatment of the hired party

The DOL has two helpful resources on this issue – a fact sheet and eLaws Advisor. Both resources outline discussion points and questions that should be asked when determining the status of independent contractors. They are available at:

Fact Sheet: Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) | U.S. Department of Labor (

eLaws Advisor: elaws - Fair Labor Standards Act Advisor (

The DOL and many states have made misclassification a focal point of investigation. Penalties can be high for misclassifying an employee as an independent contractor if the federal investigator believes the practice to be motivated by an avoidance of paying taxes on the workers or offering them benefits. See the following information on the DOL Initiative: Misclassification of Employees as Independent Contractors | U.S. Department of Labor (

Generally speaking, an employer would want to limit its offerings to independent contractors- including tools, supplies, equipment, and benefits. If there is too much integration of the employer and the contractor, the DOL and IRS may determine the employee to be a misclassified employee. This would have tax implications for the employer as well as past liability on the group health plan. An employer could owe back employment taxes and have past liability for workers’ compensation.

Health Plan Eligibility

Under ERISA and the Internal Revenue Code, only employees and common law employees can be offered coverage under an ERISA group health plan. That term would not include an independent contractor. An independent contractor is a self-employed individual. They are not a common law employee. If an employer determines and offers them the benefits that should only be provided to common law employees, the DOL could view that as evidence that the workers are misclassified as independent contractors.

As self-employed workers rather than employees, independent contractors would not be eligible for coverage under any ERISA plan- group medical, dental, vision, health FSA, life, disability or HRA. If an independent contractor is offered coverage under a group health plan, there could also be an argument that the plan would be considered a multiple employer welfare arrangement (MEWA). This could subject the plan to MEWA filings and state-imposed MEWA regulations.

Employer Mandate

The employer mandate requires the employer to offer coverage to and report full-time employees (including common-law employees). If the employer offers coverage to an independent contractor or reports them as a full-time employee, they are adding weight to the argument that they have misclassified the worker as an independent contractor and that the contractor should have been classified as an employee.

If the individual is classified as an independent contractor, not offered coverage and the DOL later determines them to be a common law employee, this could result in the employer being subject to employer mandate penalties if the person goes to the exchange and receives a premium tax credit.


Employment practices are beyond our scope. Employers should carefully consider the factors discussed above and whether the workers will be independent contractors or employees, consulting with employment counsel as necessary. If the workers are independent contractors, then offering them coverage may give rise to compliance and legal issues. If they are employees, then the employer would have to look at their terms of eligibility to see if they remain eligible for coverage.