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Vol. 72, No. 9, September 1999 |
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A New Approach to Employment Administration
Legislative
and Regulatory Recognition of Coemployment. The Internal Revenue Service
acknowledges that a PEO is the employer responsible for federal employment
and unemployment taxes and also may provide qualified plan benefits.14Many states, including Wisconsin, statutorily recognize
PEOs as the employer or coemployer of worksite employees for purposes of
worker's compensation and unemployment insurance laws.15PEOs
are legally recognized as employers in the EEOC Contingent Worker Guidance,
regulations implementing the Family
and Medical Leave Act, new COBRA regulations, recent cases interpreting
the Fair Labor
Standards Act in coemployment situations, and the OSHA draft "multi-employer
worksite policy."
The IRS 1997 Business Plan specifically targeted additional "employee
leasing" issues for resolution, but guidance was not released in anticipation
of Congressional enactment of the Staffing Firm Worker Benefits Act of 1997
(HR 1891).
The bill would have amended the Internal Revenue Code to make it clear that
a "qualified staffing firm" is the employer of the employees covered
by staffing arrangements, both for purposes of employment tax liability
and employee benefit plan sponsorship.16 The
bill also would have amended the leased employee provisions of IRC section 414
to encourage retirement and fringe benefit coverage of employees of qualified
staffing firms.17
Notwithstanding the failure to pass the Staffing Firm Worker Benefits
Act, state and federal legislators and regulatory agencies continue to show
interest in, and support for, PEO arrangements. A new bill limited to clarifying
PEO arrangements will be introduced soon in Congress with apparently strong
bipartisan support.18
Selecting a PEO
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James J. Gettel (left), Illinois 1984, is executive vice
president and general counsel of the Waterstone Group Employment Administration
Services LLC, a professional employer organization with offices in Mequon,
Plymouth, and Green Bay. Prior to starting the Waterstone Group in 1994,
Gettel was a partner in the Milwaukee office of Michael, Best & Friedrich.
Bruce A. Mcilnay (right), U.W. 1984, is a shareholder in
Maier, Mcilnay & Kerkman Ltd., Milwaukee and Grafton. He practices in
business planning and dispute resolution. His firm has used Peo Services
since 1996. |
A good place to start a search for a PEO is with the National Association
of Professional Employer Organizations (NAPEO), which has a Web
site.
As with selecting any major vendor, firms should perform a credit check
on PEOs under consideration. Firms also should search public records for
incidents involving noncompliance with tax requirements and ask for customer
referrals. When speaking to the customer, talk to staff employees who have
experience in asking the PEO for benefit information or assistance with
claim processing. How responsive was the PEO to requests for information?
Given the relative infancy of the industry, many participants are adding
to existing, more limited, services to create PEOs. For example, more traditional
payroll service or staffing firms are creating PEOs. The firm's history
can offer some clues as to its strengths and weaknesses in offering a full-service
PEO.
The quality, cost, and variety of benefits offered are important factors
to consider. A strong PEO should have sufficient knowledge of, and bargaining
power in, the benefits market to offer attractive benefits at costs less
than a firm's smaller group could obtain on its own.
In the final analysis, the PEO should in all respects be an outstanding
business partner to the law firm.
Conclusion
PEO arrangements can be an effective strategy to combat the spiraling
costs of having a professional and clerical support staff perform employment
administration. PEOs can offer financial and administrative benefits to
legal practices, and employees can receive better benefits, which in turn
can increase staff loyalty and reduce turnover.
As lawyers decide whether to enter a PEO arrangement, they should especially
review their health insurance and retirement plan costs, and the time and
costs associated with employee administration and government compliance.
Many lawyers will discover that they spend a lot of time on employment administration
(usually in relatively small, disruptive increments) and that PEO services
will give them more time to address the quality of services they provide
clients.
Chosen wisely, and properly structured, a relationship with a PEO can
be an ethical, economic, and efficient means of unburdening attorneys from
the "business of law," and free more time to devote to the "practice
of law."
Endnotes
1"An important reengineering principle
is that companies should focus on their core competencies and outsource
everything else. ... Our core competencies at Microsoft are creating high-volume
software products, working with other software companies, and providing
customer service and support. We outsource a number of functions that don't
fall into those categories, from help-desk technical support for our employees
to the physical production of our software packages." Gates, W. H.,
Business @ The Speed of Thought, pp. 133-34, Warner Books (1999).
2The PEO industry is among the fastest growing
industries in the United States. The National Association of Professional
Employer Organizations conservatively estimates that more than 3 million
employees are in PEO arrangements and that the industry growth rate is 20-30
percent per year. In 1983 only about 4,000 employees were covered by PEO
arrangements. The average client customer of a PEO is a small business with
16 employees, though businesses of up to 300 employees find value in PEO
arrangements. PEO customers include all types of businesses and professions,
including accountants, doctors, and lawyers.
3In some cases, the PEO relationship places
greater responsibilities on the law firm as an employer. Generally, the
determination of whether an employer is subject to a particular statute
is based on the number of workers employed during the year. Workers employed
by a PEO are protected by more laws because they are included in the larger
workforce of the PEO. Examples of statutes that apply because of the PEO
arrangement are COBRA, the Family
and Medical Leave Act, Title
VII of the 1964 Civil Rights Act, the Age
Discrimination in Employment Act, and the Americans
with Disabilities Act.
4The PEO business is a comprehensive form
of outsourcing. A recent American
Management Association survey revealed that 94 percent of the responding
companies had outsourced at least one activity. The primary reason for outsourcing
was to reduce costs, followed by saving time and improving quality. Good
PEO services offer all of these benefits.
5Retaining employees is especially critical.
A recent U.S. Department of Labor study
put the direct cost of hiring a new employee at 33 percent of the employee's
first year salary. Direct costs include the time involved in recruiting,
selecting, and training new personnel. Indirect costs include the decreased
productivity of coworkers and the negative impact on customer relationships
that turnover creates. For professional positions, turnover costs are even
higher because it can take up to three years for a new employee to reach
his or her productive capacity.
6Smaller law firms' cost disadvantages are
most evident in purchasing power for benefits such as health, life, and
disability insurance, and retirement plans. In addition, a study by Thomas
Hopkins of Diversified Research found that smaller businesses pay about
$5,400 per employee to manage regulatory compliance compared to $3,000 for
larger firms a cost difference of 80 percent. Staffing Industry
Reports, January 1999.
7According to a 1996 Bankers Trust Co. study,
small business owners generally save 3 to 5 percent of their payroll expenses
by outsourcing to PEOs.
8Use of leasing as a means to avoid pensions
created some animosity in Congress toward the employee leasing industry,
and this use of leasing as a "tax shelter" was short lived. See
Professional & Exec. Leasing Inc. v. Comm'r, 862 F. 2d 751 (9th
Cir. 1988). Under current regulations, businesses that lease their employees
either must include the leased employees in their retirement plan or show
that the leasing company provides the employees with a plan that is comparable
or better.
9Courts consider many factors in determining
the existence of the employer-employee relationship. Among those factors
are: 1) the right to control the details of the work; 2) the furnishing
of tools and the work place; 3) withholding of taxes, worker's compensation
and unemployment insurance funds; 4) right to discharge; and 5) permanency
of the relationship. See United States v. Silk, 331 U.S. 704, 714-16
(1947), and the IRS 20-factor test in Revenue Ruling 87-41, 1987-1 C.B.
296. See also, Siev, Jordan W. and Kirsten M. Eriksson, Are Your Independent Contractors
Truly Independent?, 72 Wis. Law. 10 (July 1999); Beightol, Scott
C., In Wisconsin, Most
Workers Are "Employees," 72 Wis. Law. 13 (July 1999).
10American Law Institute, 1958-1992.
11The Restatement defines "joint employment"
as: "Two persons may agree to employ a servant together or to share
the services of a servant. If there is one agreement with both of them,
the actor is the servant of both at such times as the servant is subject
to joint control. Restatement (Second) of Agency, § 226, comment b.
See also, Larson, The Law of Workman's Compensation, §
48.41 (Matthew Bender 1991).
12Restatement (Second) of Agency, § 226, "Servant
Acting for Two Masters."
13Restatement (Second) of Agency, §
227, "Servant Lent to Another Master."
14PEOs are contractually (and in some states,
statutorily) obligated to pay worksite employees without regard to the receipt
or sufficiency of payment by customers. Internal Revenue Code section 3402(a)
requires every employer making payment of wages to deduct and withhold from
such wages federal income taxes in accordance with the tables or procedures
prescribed by the Secretary of the Treasury. For the purposes of both sections
3401 and 3402 the term "employer" means the person having control
of the payment of wages to an individual (employee) who performs or performed
services. Statutes, case law, revenue rulings, and private letter rulings
substantiate the responsibility of the PEO for payroll taxes and other withholding
liabilities. See, e.g., Revenue Ruling 75-41, 1975-1 C.B. 323; Packard
v. Comm'r, 63 T.C. 621 (1975); Private Letter Ruling 7748037, Aug. 31,
1977; Private Letter Ruling 8250042, Sept. 13, 1982 (citing Otte v. U.S.,
419 U.S. 43, 51 (1974); In re Armadillo Corp., 561 F. 2d 1382 (10th
Cir., 1977); In re Southwest Restaurant Sys. Inc., 607 F. 2d 1237,
1240 (9th Cir. 1979). Internal Revenue Code section 414(n) permits a PEO
or the recipient of the PEO's services, or both, to provide qualified plan
benefits to employees. The legislative history of section 414 makes clear
that the provision does not override traditional common law employee rules
and that an employee does not cease to be a common law employee of the recipient
by virtue of section 414. See General Explanation of the Revenue
Provisions of the Deficit Reduction Act of 1984 (DEFRA Blue Book), 827-28.
Section 414(n) also applies to cafeteria plans, group term life insurance
plans, dependent care assistance programs, group legal service plans, qualified
tuition reduction programs, and employer sponsored health plans. See
I.R.C.
§ 414(n)(3)(C).
15For unemployment insurance, Wis. Stat.
section 108.02(12m) defines an "employee service company" to include
a "leasing company" that performs specified services for its customer,
including paying, hiring, and terminating employees. For worker's compensation,
Wis. Stat. section 102.01(f) defines a "temporary help agency"
to include "an employer who places its employee with or leases its
employees to another employer who controls the employee's work activities
and compensates the first employer for the employee's services, regardless
of the duration of the services," and section 102.04(2m) makes "a
temporary help agency the employer of an employee whom the temporary help
agency has placed with or leased to another employer that compensates the
temporary help agency for the employee's services." Seventeen other
states provide some form of licensing, registration, or regulation of PEOs.
16In mid-1997, Congress nearly passed a tax
law with the same effect as The Staffing Firm Worker Benefits Act. Early
provisions in the Taxpayer Relief Act of 1997 (HR 2014) recognizing coemployer
status (and eliminating the 20-factor common law test applied by the IRS
to determine employer status in Revenue Ruling 87-41) passed the House and
survived the House-Senate Budget conference committee in July 1997, but
were dropped at the last minute to avoid vulnerability to a parliamentary
point of order.
17The Staffing Firm Worker Benefits Act did
not pass in 1998 for two reasons. First, the Act was attached to HR 3788,
legislation focused on comprehensive pension reform which will require further
study. Second, the Act defined temporary staffing firms and PEOs as employers,
making the bill controversial because it would remove clients of temporary
employment agencies from worker classification disputes such as Vizcaino
v. Microsoft Corp. (CA-9, 96-2 USTC ¶50,533; 96 FTG ¶3933A
and ¶8356). In Microsoft, the federal court found that Microsoft
had an obligation under the terms of certain employee benefit plans to cover
temporary workers as well as direct employees.
18Information regarding the status of these
legislative initiatives can be obtained from the National
Association of Professional Employer Organizations (NAPEO), 901 N. Pitt
St., Alexandria, VA 22314.
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