ACA Learning Center – Hours of Service

How do Employers “count” Hours of Service

Hours of Service is part of both the calculation for being an Applicable Large Employer and the calculation for determining if someone is a Full-Time Employee who must be offered affordable minimum essential coverage.

The most basic definition of “hours of service” is that it includes:

  • Actual working time
  • Paid Sick Leave
  • Paid Time Off
  • Jury Duty
  • Military Service
  • Any other paid leave

One thing which is not necessarily obvious from the IRS Regulations (and won’t be found in the “tools” or “guides” put together by most PPACA experts) is that the hours of service for any time off is capped at a total of 501 hours for any single leave of absence.  This is because the IRS regulations incorporate the definition of Hours of Service from Labor Department Regulations under ERISA.

 

Hourly Employees – Actual Working Time

For hourly employees, getting the number of actual working hours should be the easiest part of this entire process.  If the employer has a reliable time-keeping system for tracking hourly employees working time, this system will generate the definitive figure for working-time hours of service for hourly employees.  If the employer does not have a reliable time-keeping system, they obviously have a great deal of risk of wage claims from workers who are being improperly paid.

Also check out our “special situations” section to make sure all your bases are covered when totaling hours for hourly employees.

 

Non-Hourly Employees

For non-hourly employees, the IRS gives us a few options to “credit” their hours of service:

  • Actual working time
  • Days-worked equivalency,
  • Weeks-worked equivalency.

We will cover the days-worked equivalency and weeks-worked equivalency first since these are the simplest to calculate.

Under the days-worked equivalency option, the non-hourly employee is credited with 8 hours of service for any day they earned at least 1 hour of service.  Under the weeks-worked equivalency option, the non-hourly employee is credited with 40 hours of service for any week in which they earned at least 1 hour of service.

These options are easier to administer, but for employers who are “on the edge” of ALE status, or for employees who are “on the edge” of full-time status, these options will be more likely to push the hours of service artificially higher than they would be under the “actual working time” method.

The cost of trying to implement the actual working time method for non-hourly employees is not entirely straightforward, but centers around the difficulty of tracking the actual working time of these employees.  For salaried employees, working fixed hours at a fixed place, “clocking in and out” might be feasible (and we encourage that transition, since it not only addresses ACA Compliance but also the recent dramatic increase in the overtime exemption pay level).  For commissioned salespeople, work-from-home, adjunct faculty, and people working in the transportation sector, much of their time is spent off-site and solo, making tracking time difficult.  For these employees, the IRS has offered little guidance but has said that employers “may use any reasonable method for tracking actual hours worked.”

So for employers of non-hourly employees, if using the “easy” days-worked or weeks-worked equivalencies does not sound like an attractive option, it is important to develop our own “method” for tracking hours.  This is something that it is imperative to document and should be included in the employer’s plan document provisions discussing eligibility.  Like with hourly employees, the reader should also review our section on “special situations” to make sure all bases are covered when totaling hours for non-hourly employees.

 

Special Situations in Counting Hours

The IRS identified (4) special situations in counting hours of service, and we’ve run across a fourth in our own work:

  1. On-call hours
  2. Layover hours
  3. Adjunct Faculty
  4. Leaves of Absence and re-hires*, and
  5. Piece-rate employees**

*NOTE: For information about Leaves of Absence and Re-Hires, see our Employer Compliance Breakdown section discussing the “look-back method.” The Leaves of Absence calculations are also ignored for purposes of determining if an employer is an ALE.

**NOTE: Piece-rate employees is a concept that wasn’t addressed by the IRS, but we have encountered it in our work and believe it is a significant issue worth addressing here

 

On-call Hours

Many businesses, particularly retailers and service-based businesses, assign employees to be “on-call” for duty.  Having employees on-call increases the business’ ability to meet customer needs while allowing for unforeseen difficulty in individual employees’ attendance and unforeseen changes in customer demand.

For businesses with on-call employees, the IRS allows us to use “any reasonable method” for crediting employees for hours of service for those times the employee is on call.  The IRS goes on to say that it is unreasonable to not credit any hours of service to an on-call employee, particularly if the employee is paid (at all) for being on-call.  The IRS also says that it is unreasonable to credit an employee with zero hours of service for being on-call if the employee must remain at the employer’s premises while on call, or if the employer’s policy “substantially” restricts the employee’s freedom while on-call.

Again, this is a circumstance where a business must come up with its own reasonable policy for crediting employees with hours of service for days on which they are on-call.  It is also critical to document this policy in the eligibility provisions of the employer’s plan documents.

Layover Hours

The IRS discussed layover hours within the context of the Airline Industry, however we believe that the phenomenon is similar enough to the broader transportation field that IRS guidance should be applicable to the entire industry.  Layover hours occur when an employee spends time away from home due to the needs of their employer, but the employee is not actually working.  Within the airline industry this occurs when flight crews, at the end of a work day (or between work days) are put up in a hotel for the night after a day of flying, so that the flight crew can then work the following day from the same location.

The IRS, again, stated that employers should use any reasonable method for crediting hours of service for time spent on layovers, but cautioned that crediting zero hours of service was most likely unreasonable.

Again, while the IRS discussed layover hours within the context of the airline industry, the phenomenon of employees remaining away from home while on their employers’ business during time periods where the employee is not actively working, extends to trucking, busing, rail, and the entire transportation industry, and it would be reasonable to extend the IRS guidance to those areas as well.

Like the other areas where the IRS leaves it to employers to use any reasonable method for crediting hours of service, it is critical for an employer to develop that policy and document the policy within the eligibility provisions of the employer’s plan document.

 

Adjunct Faculty

The IRS discussed how to credit Adjunct Faculty with hours of service, given that many Universities are employing “part-time” adjunct faculty in greater and greater numbers to reduce costs.  The difficulty in crediting hours of service for these employees is that, traditionally, faculty have been instructed that they are expected to spend 3 hours (or more) attending to their educational duties for every hour they spend in the classroom.  Under these circumstances, any faculty member teaching more than three 3-credit courses (or two 4-credit courses) would surpass the 30-hour per week ACA threshold.  This would dramatically inflate the University’s roster of “full-time employees” for whom the University would be required to provide affordable health coverage .

The IRS stated that Universities may use a reasonable method for crediting hours of service for adjunct faculty, and went on to give us something close to a “safe harbor” (it appears in the preamble to IRS regulations, but not the actual regulations).  An employer satisfies this safe harbor where an adjunct faculty member is credited with 2.25 hours of service for every hour of classroom instruction time.  The IRS offered no guidance on the applicability of this safe harbor to online or correspondence courses, however we believe it is reasonable to extend this safe harbor to these circumstances by multiplying the credit hours for the course by the 2.25 modifier to reach the hours of service for each week.

 

Piece-Rate Employees

Within the ACA context, we use the term Piece-Rate Employees to include anyone who is paid either on the basis of a quantifiable result from the employee’s work (how many widgets are built, how many deliveries are made, how many maintenance or customer service calls they complete), and also employees who are compensated a flat rate for accomplishing specific tasks, regardless of how quickly or slowly the task takes.

While rising minimum wages may make these sorts of compensation arrangements less-practical, they still exist in many industries.

While the IRS offers no guidance on these sorts of arrangements, we believe they fall under the “other” category buried within the preamble to IRS regulations: “employers of employees whose hours of service are particularly challenging to identify or track…are required to use a reasonable method of crediting hours of service that is consistent with [IRC §] 4980H.”

So the employer must look at these arrangements and develop their own policy for crediting hours of service.  Some examples of methodologies we’ve recommended are:

  • Determine the overall average weekly pay for each Piece-Rate employee, and then divide that sum by a reasonable hourly wage for similarly skilled employees to determine the number of hours to credit the employee,
  • For arrangements based on flat sums paid for a single shift, credit the maximum hours that the shift could last for each day the employee works,
  • Determine the overall average weekly pay for each Piece-Rate employee, and then divide by either the state or local minimum wage (whichever is higher).

In any event, the employer absolutely must develop their policy and document this policy within the eligibility provisions of its plan documents.

 

Important Considerations Regarding “Difficult to Track” Employees

As mentioned in the previous section on Piece-Rate compensation arrangements, the IRS has left us a narrow escape route in terms of calculating the actual hours of service for employees where it may be difficult to track their actual hours on duty.  This last section covers some questions that need to be answered before we can use this escape route and come up with our own methodology for calculating hours.

First, we need to actually determine that the employee’s hours are “difficult to track.”  While the IRS offers very little in the way of criteria for what constitutes “difficult to track” hours, we have formed some opinions about the criteria based on what the IRS actually has told us.  Here are a number of factors we believe an employer should consider before placing an employee or group of employees into the “difficult to track” category:

  1. The employee works independently, solo, or away from a fixed location,
  2. The employee’s compensation is tied to something other than actual time worked, and
  3. The nature of the employee’s work makes it impractical to implement time-keeping measures.

We recommend that an employer only treat an employee (or group of employees) as “difficult to track” if they meet all three criteria.  If someone’s compensation is tied to their actual time worked, then the employer cannot make a case that it is difficult to track their working hours.  Likewise, if the employee works at the employer’s premises or if they work with equipment or systems that can be easily monitored, then the employer will have a hard time persuading the IRS that it would be difficult to keep track of their working hours.

To go back to our page on the Applicable Large Employer determination, click here.

To go back to our page on the Look Back Method and ACA Penalties, click here.