For “applicable large employers” (i.e., generally, those employers who employed an average of at least 50 full-time employees on business days during the preceding calendar year), determining which employees are “full-time” employees is central to their efforts to comply with the employer shared responsibility provisions of the Affordable Care Act.

The Act defines the term “full-time employee” to mean “an employee who is employed on average at least 30 hours of service per week,” and recently issued final regulations under employer shared responsibility rules provide that, for purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week (provided that the employer applies this equivalency rule on a reasonable and consistent basis). IRS Notice 2011-36 (2011-21 I.R.B. 792) highlights the problem with both definitions:

“A determination of full-time employee status on a monthly basis for purposes of calculating an employer’s potential § 4980H liability may cause practical difficulties for employers, employees, and the State Exchanges. These difficulties include uncertainty and inability to predictably identify which employees are considered full-time and, consequently, inability to forecast or avoid potential § 4980H liability. This issue is particularly acute in circumstances in which employees have varying hours or employment schedules (e.g., employees whose hours vary from month to month or who are employed for a limited period). If employer-sponsored coverage were limited to employees who satisfied the definition of full-time employee during a month, employees might move in and out of employer coverage as frequently as monthly, which would be undesirable from both the employee’s and the employer’s perspective, and could also create administrative challenges for the State Exchanges.” (Emphasis added).

To address this problem, Notice 2011-36 described and requested comments on a possible “look-back/stability period safe harbor.” An expanded version of this safe harbor was included in proposed regulations, under which an employer would not incur a penalty for failing to make an offer of group health plan coverage—or, more accurately, an offer of “minimum essential coverage under an eligible employer-sponsored plan”—to “new variable hour employees,” among others, during a “measurement period” of up to 12 months. The final regulations retained the safe harbor, which is now referred to as the “look-back measurement method.”

One of the categories of employees to whom the look-back measurement method may be applied is “new variable hour” employees. The final regulations define the term “variable hour employee” to mean:

“[A]n employee if, based on the facts and circumstances at the employee’s start date, the applicable large employer member cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee’s hours are variable or otherwise uncertain.”

In an effort to assist employers to determine variable hour status, the final regulations require employers to apply a set of factors, which include, but are not limited to—

• Whether the employee is replacing an employee who was a full-time employee or a variable hour employee;

• The extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods; and

• Whether the job was advertised, or otherwise communicated to the new employee or otherwise documented (for example, through a contract or job description) as requiring hours of service that would average at least 30 hours of service per week, less than 30 hours of service per week, or may vary above and below an average of 30 hours of service per week.

According to the final regulations, “these factors are only relevant for a particular new employee if the employer has no reason to anticipate that the facts and circumstances related to that new employee will be different.” No single factor is determinative, and an employer may not take into account the likelihood that the employee may terminate employment before the end of the initial measurement period.

Where an employee is hired by a staffing firm for temporary placement at an unrelated entity the final regulations prescribe the following additional factors:

• Whether employees, as part of their continuing employment with the temporary staffing firm, retain the right to reject assignments;

• Whether other employees in the same position of employment with the temporary staffing firm typically have periods during which no offer of temporary placement is made;

• Whether other employees in the same position of employment with the temporary staffing firm typically are offered temporary placements for differing periods of time; and

• Whether other employees in the same position of employment with the temporary staffing firm typically are offered temporary placements that do not extend beyond 13 weeks.

While the method established by the final regulations for determining which employees are variable hour employees looks eminently reasonable on its face, it also raises a number of questions. Here are some:

(1) What is the difference between the “same or comparable positions” and “the same position”?

There is a curious difference between the two sets of factors: the first, general set of factors refers to “the same or comparable positions,” while the second, limited set of factors refers and applies to “the same position of employment.” It is not clear what this difference is intended to accomplish (or even if it was intentional). For example, if a staffing firm has a number of verticals (e.g., general staffing/light industrial, IT, finance and health care) must it apply the staffing firm factors vertical-by-vertical, or could it apply the factors on some other basis (e.g., by client)?

(2) How many factors must be present?

Examples included in the final regulations include a clear majority, i.e., three out of four in the staffing context. Will two out of four do? And is one out of four too aggressive?

(3) What are the “other” factors that the final regulations refer to?

The final regulations refer to other factors that may apply, but neither the preamble nor the rule itself gives any indication of what they might be.

(4) Is one factor more important than others?

In the temporary staffing context, could regulators give greater weight to the “13-week” factor? Possibly, but wouldn’t that effectively conflict with the rule that says no one factor will be viewed as determinative?

(5) What weight should we accord the term “typically” in the second set of factors?

On the one hand, the final regulations tell us that an employer may not take into account the likelihood that the employee may terminate employment before the end of the initial measurement period. On the other hand, the rule clearly allows new employees to be classified as variable hour based on the historical tenure of employees in the same position. Is this a contradiction, or simply a recognition that employers should be able to reasonably determine the variable hour status of a particular employee based on what the employer knows about the position to which that employee will be assigned?