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June 12, 2017
It is common for employers to rely on more than one source when seeking workers to address needs for changing business demands and needs for different types of expertise. Professional Employer Organizations (PEOs) are an increasingly common resource for employers. This Issue Brief highlights several important issues businesses should consider when retaining the services of a PEO. While the paper touches on some general employee issues and wage and hour questions, its primary focus is on PEOs as they relate to and intersect with employee benefits.
PEOs have been around for a number of years. Their business model continues to evolve, and in many cases, it moves much faster than the laws and regulations that impact employers. There’s no clear legal definition for what constitutes a PEO, and they come in many shapes and sizes—some PEOs look a lot like traditional staffing companies, while others look more like an outsourced human resources department.
The National Association of Professional Employer Organizations (NAPEO), the leading trade organization for PEOs, describes PEOs as providing comprehensive HR solutions for small businesses. These services can include payroll, benefits, human resources functions, tax administration and regulatory compliance assistance. As the NAPEO website says, the roles of the PEO and the client (and the identity of the employer) depend on the circumstances of each relationship and the parties might share certain responsibilities. They may also be joint employers in some instances and neither party is the employer for all purposes.
As is the case for PEOs, there is no legal definition for “staffing firm,” though the term is used in some of the Affordable Care Act regulations. Many think of staffing firms as entities that employ workers who are “supplied” to customers of the staffing firm. Assignments might be short-term or they could last for several years.
The lack of concrete definitions, the variation in PEO models and the overlap with a more traditional staffing firm model are why NAPEO urges business to review the terms of their “client service agreement” closely to identify each party’s responsibilities.1
A complicated piece of the PEO puzzle is identifying the party that is the actual employer. Because the employer is typically the entity responsible for compliance with various rules this is an important piece of information. Identifying the employer is complicated for a few reasons. First, the definition of “employer” is subject to different interpretations. Furthermore, the term “employer” is defined differently by different laws. Here are a few examples:
As mentioned above, the ACA relies on the common-law standard and therefore doesn’t include a “joint employer” definition. Only one entity can be the employer.
The common-law standard is quite complex and is fundamentally a facts-and-circumstances analysis. In a very general sense, the standard focuses primarily on the extent to which an employer has the right to control a worker’s activities—specifically with respect to what is to be accomplished and how that work should be accomplished. The IRS has developed both a 20-factor list and a broader set of categories to help guide this analysis. However, it’s important to keep in mind that no one factor will be decisive and not all factors are equally weighted. All aspects of the relationship must be considered and ultimately the determinative factor will be the unique nature of the relationship in question.
Luckily, the ACA contains some specific rules for sharing risk if the parties get the common-law employer analysis wrong. For instance, under the ACA, the common-law employer (again, there can be only one) is responsible for making a qualifying offer of minimum essential coverage to employees. And the common-law employer is responsible for paying the penalty if they fail to make that offer.
In light of the ACA’s focus on a single employer (versus a joint employer) scenario, a properly structured PEO agreement will work even when the identity of the common-law employer is unclear. The following scenarios illustrate this possibility in more detail:
Below are several things for employers to consider when looking to PEOs for help with staffing needs.
The PEO puzzle can be tricky. The lack of standard definitions, the various shapes, and forms PEOs take and the multitude of contractual arrangements between employers and PEOs make it impossible to develop a standard recommendation for determining where responsibility lies. Instead, employers should pay close attention to the various federal laws that apply in different situations to determine how the law views the employer/employee relationship. With respect to employee benefit plans, as well as to employer obligations under the ACA, employers should familiarize themselves with the common-law standard. In addition, employers should ensure that any PEO agreement contains provisions that will help to minimize the employer’s exposure in the event that the common-law employer is misidentified. Taking the appropriate steps up front will provide the employer with some protection from potential violations and penalties that could arise in this complex area.
The views and opinions expressed within are those of the author(s) and do not necessarily reflect the official policy or position of Parker, Smith & Feek. While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it.