Proposed regulations that attempt to resolve issues and practical problems related to employer penalties under the “play or pay” provisions of the Affordable Care Act were revealed late Friday by the U.S. Department of the Treasury and the Internal Revenue Service and placed in line for publication on Jan. 2. The proposed regulations run 144 pages long.

Here are comments by George Reardon, special counsel for employment law firm Littler Mendelson on the proposed regulations:

“These proposals are subject to further comments, at least one public hearing and revisions before becoming final. Although some provisions may change on the way to becoming final, the agencies promise that taxpayers may rely on the interim proposals as if they were binding rules for specified periods of time.

“The subjects of these regulations are extremely important to the staffing industry, because the government’s interpretation of the Affordable Care Act will determine how severe the penalties will be if staffing firms do not offer qualifying coverage to all full-time employees or offer coverage that is not affordable to eligible employees. Staffing firms also have a stake in how the rules apply to staffing customers, since the Affordable Care Act creates opportunities for staffing firms to help their customers minimize their penalties.

“The best news is that the much-anticipated ‘look-back’ system of measuring full-time status has been carried into the proposed regulations. That system allows employers to measure the full-time status of employees over retrospective averaging periods as long as 12 months — instead of making that determination over monthly averaging periods, as the original statute suggests. In staffing, as in some other businesses, employee turnover is naturally very high, so longer measuring periods drastically reduce the number of employees who will qualify as full-time and thereby present penalty-generating potential.

“Some staffing firms believe that, because the percentage of temporary employees who will qualify as full-time over 12-month measuring periods will be low, they may be able to obtain and offer coverage to both their internal staff employees and their few full-time temporary employees, thus avoiding the heavy penalties for firms that do not offer coverage to all full-timers. One troublesome problem is that, when an employer that offers coverage to all full-timers expects a newly-hired person to be full-time, that person must be covered within the first 90 days. If the employer guesses wrong about the new hire’s full-time future or waits for the verdict of the 12-month measuring period, it may have failed to give coverage to an eligible full-time person within the 90 day maximum waiting period. Although the regulations provide some ‘slack’ in the requirement for coverage of all full-timers, this could be a risk.

“The look-back system is useful primarily with respect to ‘variable-hour’ employees, which are treated specially under the rules. It is very hard for staffing firms to predict the density or duration of the service of temporary employees. Hoping that coverage for all temporary employees could be delayed for at least 12 months, staffing industry representatives lobbied for a blanket presumption that all temporary employees are variable hour employees, but the agencies expressly refused to grant that presumption or to allow staffing firms to rely on an expectation that particular full-time temporary employees will not be employed for the entire 12-month period (which would make their full-time status ultimately irrelevant to coverage issues.) This refusal will make it riskier for staffing firms to choose the strategy of offering coverage to all full-timers.

“The most troublesome feature of the proposed regulations may be their emphasis on the common law test of the employment relationship. Although the regulations openly acknowledge the existence and function of the staffing industry, they also cite to existing regulations that, by focusing almost exclusively on the right to supervise the employees’ work, could be used to classify many staffing employees as common law employees of the customers rather than of the staffing firms. This approach could be extremely disruptive to staffing firms and their customers, and it will be worthwhile for staffing firms and their customers to give increased attention to the substance and the appearance of the co-employment relationships they maintain.

“The regulations also create a special exception for the process of determining which employers will be ‘large employers’ vulnerable to penalties during 2014. The statute provides that employers will be ‘large’ during a calendar year if, during the previous calendar year, they averaged at least 50 full-time employees and full-time equivalents per month. Because these regulations are being published so late, employers will be allowed to measure large employer status for 2014 over any six consecutive calendar months during 2013 instead of over the entire year. This will be very helpful to staffing customers that plan to use staffing services to bring their full-time totals below 50 for 2013.

“Further analysis will be published as the proposed regulations are carefully reviewed.”

To view the proposed rules, click here.

George Reardon is special counsel and member of the Contingent Workforce Practice Group at Littler Mendelson, P.C., the largest employment and labor law firm exclusively representing management in the United States. He was formerly general counsel of Kelly Services Inc. and Adecco Group North America.