Data Destruction Regulations

On June 1, 2005 the Federal Trade Commission adopted a new regulation concerning the disposal of consumer report information and records. The new regulation will be found at 16 CFR part 682. The FTC was required to adopt this regulation as a result of recent federal legislation addressing the problem of identity theft.

The key requirement is actually pretty simple: Anyone who has possession of a consumer report for a business purpose, must take reasonable measures against unauthorized accesss or disclosure when disposing of the information. This new regulation is specific to disposal of consumer information, and for example does not address how such information may be used, shared or stored.

The new regulation covers any information that is a consumer report or investigative consumer report within the meaning of the Fair Credit Reporting Act, as well as information "derived" from such reports. The new regulations do not apply, however, to records or data which contain no personally identifying information.

This new regulation will plainly apply to PEOs as employers if, for example, you have possession of any background check reports on the worksite employees. In most caes, a background check report used for employment purposes would be a "investigative consumer report" under the Fair Credit Reporting Act, and would thus be covered by this new regulation.

The regulation pretty clearly indicate that the FTC expects employers to "implement and monitor compliance with policies and procedures." The FTC comments are even more straightforward, "reasonable measures are also likely to require elements such as the establishment of policies and procedures governing disposal, as well as appropriate employee training."

The FTC's comments recognize that complete destruction of records is difficult. Instead, the regulations only require "reasonable measures" to ensure that the information "cannot practicably be read or reconstructed."

Computer data is notoriously difficult to competely destroy. The FTC 's comments to the final regulations suggest that covered entities may want to consider measures such as smashing computer hard disk drives with a hammer before disposal, or wiping or overwriting the data on a disk via software programs. However, the FTC noted that "whether wiping as opposed to destruction of electronic media is reasonable" will depend on the circumstances. In otherwords, if you choose to wipe disks electronically, you'd better make sure you do it right.

PEOs should review their existing business practices in light of this new regulation, and take this opportunity to ensure that you have a compliant data destruction process.

Possible action steps:
1. Do you have any reports or records falling within the new regulation? In particular, consider whether you have background check reports.

2. If so, you should evaluate your current policies and procedures for disposal of these records.

3. If necessary, update policies and commit them to writing.

4. Make very certain that unwanted or obsolete computers and electronic media are being checked for data and that data is destroyed or effectively wiped before disposal. Keep in mind that simply "deleting" files or formatting a disk under any version of Windows does not actually destroy the files. Consult with computer professionals as needed.

5. Establish a training process and internal quality control checks to ensure compliance with your policies.

6. Consider what guidance to give to client companies regarding their use and disposal of any consumer reports, such as employee background check reports.

Revision to UI report back statute passes Senate

On May 19, the Sentate Commitee on Business & Commerce considered HB1939. The Sentate Committee declined to adopt the version of the Bill sent over by the House, and instead reported out a committee substitute.

The Committee substitute does not seem to me to significantly change the House version, as the Committee substitute continues the House language requiring written notice to the worksite employees given at the time of termination of employment.

(1)  at the time the employee's assignment to a client
company concluded, the staff leasing services company, or the
client company acting on the staff leasing services company's
behalf, gave written notice and written instructions to the
assigned employee to contact the staff leasing services company for
a new assignment [on termination of assignment at a client
company]; 

The Committe substitute is here.

HB1939 on UI report back rule - moves forward

HB1939 on the employee report back rule has passed the House, and been sent on to the Senate. The version that passed the House has the following key components:

• The PEO must give written notice to the employee about the report back requirement.
  
• The notice must be in a separate document.
  
• The notice must be given at the time of termination of employment.
  
• The notice must be in the specific language stated in the statute.
  

While not explicit in the statute, I think it is a fair reading that the only consequence of not giving the required notice would be that you could not invoke the report back rule to challenge an employee's UI claim.

HB2995 substantially watered down

HB2995 recently had a hearing before the House Committee on Business and Industry. The Committee substitute bill significantly changes the nature and scope of the lien, quite possibly rendering it useless.

Under the original version of the bill, PEOs would be treated as a subcontractor under the existing mechanic's lien statute. PEOs that were not paid by their client, could file a lien against a construction project, provided that the client company was a contractor or subcontractor on that construction project. Because of the lien against the project, the project owner would then have an incentive to make certain the PEO got paid.

The Committe substitute fundamentally changes the bill, rendering it substantially less valuable.

Under the committee substitute, two crucial changes were made: First - the lien attaches only to the client company's prooperty, and second - the lien expires after one year.

Also, the substitute bill removes the language from the existing mechanic's lien statute, and makes it a stand alone lien. This is significant, since it means that any uncertainty in the langauge of the bill will have to be litigated to be cleared up. Also with no other lien to cross reference, it is doubtful in my mind that you can read this bill as providing a basis to attach a lien against the property of anyone other than the client company.

Here is what the Committee substitute says:

Sec. 64.003.  PROPERTY SUBJECT TO LIEN.  The lien attaches to
all products, papers, machinery, tools, fixtures, appurtenances,
goods, wares, merchandise, contracts, chattels, or other things of
value that are created wholly or partly with the staff leasing
services provided or that are necessarily connected with the
performance of the staff leasing services provided and that are
owned by or in possession of the client company or the agent of the
client company that entered into the contract with the staff
leasing services company.

This section unfortunately is not clear, given the number of "or's" in the sentence. There are two ways to parse this sentences.

Possible reading #1:
The lien attaches to: (A) all products, papers, machinery, tools, fixtures, appurtenances, goods, wares, merchandise, contracts, chattels, or other things of value that are created wholly or partly with the staff leasing services provided or that are necessarily connected with the performance of the staff leasing services provided; and (B) that are owned by or in possession of the client company or the agent of the client company that entered into the contract with the staff leasing services company.

If this is the correct reading, this means that the lien applies ONLY to property owned by the Client Company.

Possible Reading #2
The lien attaches to: (A) all products, papers, machinery, tools, fixtures, appurtenances, goods, wares, merchandise, contracts, chattels, or other things of value that are created wholly or partly with the staff leasing services provided or (B) that are necessarily connected with the performance of the staff leasing services provided and that are owned by or in possession of the client company or the agent of the client company that entered into the contract with the staff leasing services company.

If #2 is the correct way to read the Committee Substitute, then the lien could attach to any property "created wholly or partly" with the labor of the worksite employees, even if not owned by the client company.


I have to say, I think #1 is the more likely way to read the bill. Especially since there is no mention in the bill of the rights of third parties whose property would be subect to this lien. I think the courts would be very troubled by the idea of a lien attaching to the property of third parties, when there is not a clear basis in the langauge of this (stand alone) lien statute addressing the rights and obligations of third parties.

Also, the Committee substitute also provides that the lien is valid for only one year. This restriction did not exist in the original version of the bill, and is not part of the general mechanics lien statute. What happens at the end of the year? Possibly, the lien automatically "evaporates." Does the PEO have to explicitly release the lien if not paid? Suppose the PEO has not been paid, but has not yet filed suit?

On the whole, I no longer like HB2995 very much.

Texas PEO law and Unemployment Claims

For some time, Texas law has addressed unemployment claims by worksite employees. Section 207.045(i) of the Texas Labor Code requires worksite employees to report back to the PEO and request reassignment, as a condition of receiving unemployment benefits. The PEO rule is essentially identical to the longstanding rule for temporary staffing firms at 207.045(h).

Here is what the existing law actually says:

(i) An assigned employee of a staff leasing services company is considered to have left the assigned employee's last work without good cause if the staff leasing services company
demonstrates that:
(1) the staff leasing services company gave written notice to the assigned employee to contact the staff leasing services company on termination of assignment at a client company;
and
(2) the assigned employee did not contact the staff leasing services company regarding reassignment or continued employment; provided that the assigned employee may show that good cause existed for the assigned employee's failure to contact the staff leasing services company.

In short, the statute lays down three rules:
(A) When a worksite employee is fired, the employee must report back to the PEO for reassignment, or face denial of unemployment benefits.
(B) However, benefits will only be denied if the PEO proves that it gave the employee written notice to the employee of the requirement to report back to the PEO on terimination of employment.
(C) If the worksite employee fails to report back benefits will be denied, unless the employee can show "good cause" for failure to report back.

HB1939 would change the rules on this issue. Specifically, the bill would make the following changes:

• The written notice currently required under 207.045(i) would have to be provided by the PEO to the worksite employees in a separate written document.
• The employee must receive a copy of the notice.
  
• The employee must sign the notice.
  
• The notice must be printed in bold face, capital letters or other conspicuous print.
  
• The notice must substantially conform to the language specified in the bill. In otherwords, the bill would provide the wording for the standard notice.
• The notice must be given to the employee at the conclusion of employment.
  

The effect of the bill would be to require PEOs to obtain a separate signed statement from the employee at the time of termination of employment.

More thoughts on PEOs and Mechanics Liens

I reported yesterday on HB2995 that would explicitly authorize Texas PEOs to file mechanics' liens to secure themselves against client non-payment. After some additional thought, I am inclined to think this is a reasonable idea, but one that does have limits. The reason why this change is needed at all is that current Texas law is unclear on the question of whether a PEO can properly file a mechanics lien.

The key case is AMS Staff Leasing v. Warm Springs Rehabilitation, 94 S.W.3d 152 (Tex. App.--Corpus Christi 2004). AMS entered into a PEO arrangement with a construction contractor which was a subcontractor on a construction project. When AMS was not paid by its client, AMS filed a mechanics lien. When it did not get paid, AMS sued to enforce its lien rights. In defense, the owner asserted that AMS had no right to file a lien since AMS had not "furnished labor" to the project, only provided administrative services to the subcontractor who was the one who actually provided the labor and did the work. The Court of Appeals agreed that this was a fair question, but one that could not be decided on appeal, and so sent the case back to the trial court for additional factual determinations. The AMS case thus raises more questions than it answers, other than making clear that there is an issue as to whether a PEO has standing to assert a lien.

In a later case, the same Court of Appeals looked at similar arguments in the context of a lien claim filed by a temporary staffing firm. Advanced Temporaries v. Reliance Surety Company, 2004 WL 1632737 (Tex.App.--Corpus Christi 2004).

Here the Court pointed out that only those who furnish "labor" within the meaning of the lien statute have a right to file a lien. The statute defines labor as "labor used in the direct prosecution of the work." Tex. Prop. Code 53.021(3). Helpfully, the court rejected the idea that the statute requires every lien claimant to "engage in the business of construction" as being "contrary to the legislature's intent to construe the lien statute liberally for the purpose of protecting laborers and materialmen." The Court of Appeals held that "the property code affords protection to those who 'furnish labor' as well as those who actually labor on a construction project in Texas."

But, here is the rub. Simply providing HR or staffing services does not necessarily mean that you have standing to assert a lien. The Court cautioned: "However, we conclude that not every arrangement will establish that a temporary employment agency "furnishes labor" as defined by chapter 53. For instance, a temporary employment agency may contract with a construction company to provide only administrative services for the contractors employees and not labor engaged in direct prosecution of the work."

Despite these concerns, the Court of Appeals did find that the temporary staffing firm had "furnished labor" and thus had a right to file a lien. However, the Court of Appeals relied on the following facts in reaching this conclusion:

• The temp service actually recruited & hired the employees that were provided to its contractor client.
• The temp service "qualified" the workers by verifying legal documentation, driver's licenses, social security cards, and federal employment forms.
• There was no evidence that the client company had done any employee screening, qualifying or hiring of the temporary workers.
• The temp service recruited and hired the workers as its own employees, and provided the workers' compensation, unemployment insurance, and general liability insurance.
• The workers received their paychecks from the temp service, not the contractor, and the temp service made the payroll deductions.
  

On these facts, the Court of Appeals reversed the trial court's holding that the temporary staffing firm had not "furnished labor" and instead held that it had and therefore had standing to assert a lien claim under Chapter 53 of the Texas Property Code.

Keep in mind the limits of a lien claim. Mechanics liens exist only to the extent provided by Chapter 53 of the Texas Property Code - i.e. for "labor furnished" in connection with construction of improvements to real property. No lien is available under the mechanics lien statue where the work is something other than construction of improvements to real property.

This means that the mechanics liens are not available to PEOs whose clients are engaged inanythong other than construction work. For example, no mechanics lien is available under Property Code chapter 53 if the client company is an auto repair shop, a barbershop, a childcare facility, an optometrists office, or a manufacturer. Liens are available only where the labor is furnished in connection with construction projects related to real property.

New Bill - PEOs and Mechanics Liens

A new bill just introduced would expressly authorize PEOs to assert mechanics & materialmans liens. The bill, HB2995, was filed last week.

The bill would add express authority for PEOs to file liens under Chapter 53 of the Property Code and under Chapter 2253 of the Government Code by enlarging the definition of a subcontractor to include a PEO.

Pending Texas PEO legislation - updates

SB976, which would authorize PEOs to sponsor self funded group health plans, has been referred to the Business & Commerce Committee. SB976 was NOT sponsored or authored by NAPEO and is being opposed by NAPEO. Expect state agencies, such as the Texas Department of Insurance, Attorney General, and others to register strong opposition to this bill.

HB1939, related to disclosures to be made to terminated worksite employees, has been referred to the Economic Development Committee. It is not clear who is behind this bill, or the real reason for it. I am concerned that this bill will complicate (rather than improve) the problem of giving notices to terminated employees under the rule that provides PEOs with a defense to some unemployment insurance claims.

Pending Texas PEO legislation

Two bills related to PEOs have been introduced into the Texas legisalture.

SB 976 - Would change existing law to permit PEOs to sponsor self-funded group health plans. Under the current Tewas PEO licensing law self funded health plans are not permitted, unless permitted under ERISA. The current language is fairly murky, but is generally interpreted as effectively forbidding self funded plans. The U.S. Department of Labor has consistently held that PEO group health plans are MEWAs subject to state regulation. Texas has consistently interpreted this language as barring all self funded PEO plans.

SB 976 is thus a significant alteration in existing law.

HB 1939 - Would modify the rules related to giving notice to worksite employees regarding the requirement for reporting back to the PEO to seek reassignment. HB 1939 would define specific requirements for the disclosure to be made to the worksite employees.

What is not in HB 1939 is any indication that this statute would give PEOs any assurance that the TWC would actually apply the statute. Most PEOs have seen only inconsistent enforcement of the existing law by the TWC.

Texas Hazardous Employer Program preempted by OSHA?

A recent decision from the Austin Court of Appeals holds that the Texas Hazzardous Employer program is preempted by the Occupational Safety & Health Act. Skilled Craftsmen of Texas, Inc. v. Texas Workers' Compensation Commission ( Austin Court of Appeals 2/3/2005).

Under the Hazardous Employer program, empoyers with injury rates above the average for their industry are subject to being designated as "hazardous employers" by the state. This desigation is reported to the employer's workers' compensation carrier, and continues in effect until the employer improves its injury rates enough to be classified as "hazardous" under the formula.

This case was brought after a temporary staffing firm was designated as "hazardous." The Austin Court of Appeals agreed that the effect of the program was to punish employers that fail to provide a safe workplace and fail to improve safety. The Court of Appeals found that the federal Occupational Safety & Health Act comprehensively regulates this issue, and thus the Texas program is not enforceable.

The Hazardous Employer program has proven to be a regular problem for PEOs. The Commission has applied the hazardous employer formula to PEOs by analyzing injury rates at each client location, a PEO with a stellar safety record overall, can be targeted by the state on the basis of a single client location with a poor safety record.

Fee Reductions - final adoption of new rules

The PEO license fee reductions proposed by TDLR will become effective as of February 1, 2005. The rule changes will significantly reduce the fees to be paid by Texas PEOs.

The final rules can be found here on the TDLR's website.

The final rules were published in the January 28, 2005 Texas Register, and can be read online here.

NCCI Guide to State Workers' Comp Issues for Employee Leasing Firms

PEOs might be interested in NCCI's guide to state specific workers' compensation insurance requirements for "employee leasing firms." This state-by-state guide covers policy, reporting, and ratining issues. Although prepared in 2001, this guide is a good place to start in evaluating PEO workers' compensation issues.
http://www.ncci.com/nccisearch/Industry/Employee/elhome.htm

M-1 filings : MEWAs and the DOL - 3/1/2005 deadline

PEOs should remember that the deadline for filing the annual M-1 reports is swiftly approaching. The filing deadline is March 1, 2005 with an extension to May 1, 2005 available.

DOL press release regarding M-1 filing for 2004.
http://www.dol.gov/ebsa/newsroom/pr1220a04.html


The DOL now has an online filing system to speed the filing. To use the online filing process, go to www.askebsa.dol.gov/mewa/

Past M-1 filings are available on-line. Search the DOL's on-line database of M-1 filings.
http://www.askebsa.dol.gov/epds/

TDLR (finally) implements fee reductions

The TDLR has finally gotten around to actually implementing the fee reductions proposed and recommended some time ago.

The fee reductions will result in changes to the TDLR's regulations, and will be found in 16 Texas Administrative Code ("TAC), Chapter 72, Staff Leasing Services, §§72.80 and 72.81. In addition to reducing most fees, the TDLR also did away with the application/administrative fees. Thus rule §72.82 will be eliminated.

The adoption was filed with the Texas Register on January 12, 2005, and will be published in the January 28, 2005, issue of the Texas Register. The fee changes will be effective February 1, 2005. Obviously, if possible PEOs will want to wait until 2/1 to submit applications

The TDLR's explanation of the new rule, including the rationale for the changes can be found at: http://www.license.state.tx.us/sls/slsprop.htm

Texas PEOs are enjopying the benefit of the TDLR's administration of a new state-wide electrical licensing law. The addition of this new licensing program allows the TDLR to spread its overhead acros tens of thousands of new license holders.

Texas CPA firms as PEO clients

In a November 20, 2003 informal staff opinion, the Texas State Board of Public Accountancy held that provided that CPAs could enter into PEO arrangements.

Here is the quick summary on what the Board said:

In addition, the Board considers any arrangement that cedes control of a CPA firm to a non-CPA to be a violation of the Act. However, in the arrangement described above, the PEO would not have any control over the work performed by CPAs, nor would the PEO have an ownership interest in the client. The PEO would provide human resource management services to the CPA firm and would not provide public accounting services to the public through the CPA firm. Therefore, a contract as described above would not violate the Act.

In effect, the Texas Board imposed three requirements:

1. The PEO cannot not have an ownership interest in the CPA firm.
2. The PEO may not hold itself out as providing accounting or auditing services.
3. The PEO cannot direct or control the work done by the CPA firm or its employees.

DC Bar Association Ethics Opinion on PEO Arrangements with law firms

The District of Columbia Bar Association has recently issued an ethics opinion addressing whether lawyers and law firms may enter into PEO arrangements. D.C. Ethics Opinion 304 (2001).

In general the D.C. opinion takes a permissive line, finding no inherent ethical problem with a lawyer or law firm entering into a PEO arrangement. However the opinion expresses serious reservations about two common elements of PEO arrangements: the PEO's reservation of a shared right to hire & fire the work site employees, and the PEO's right to inspect the client company's books and records.

Here is what the D.C opinion says on these issues:

Finally, some PEOs adhere to published standards of a trade organization known as the Employer Services Assurance Corporation (“ESAC”). ESAC requires that a PEO share with the “client” (i.e., the law firm), and in some instances exercise exclusively, the power to hire and fire employees (who here would include lawyers and legal assistants as well as clerical and secretarial staff), that the PEO have at least a shared right to direct and control the work of the employees, and that ESAC have access to client (i.e., law firm) work sites and records. A lawyer owner who permitted the removal of these rights and responsibilities wholly or partly from the management of the law firm would violate the Rules of Professional Conduct. Hence the use of a PEO by law firms in this jurisdiction is prohibited if the arrangement gives the PEO actual (as opposed to merely legal) authority over the hiring or firing of lawyers or legal assistants, or authorizes the PEO to direct or control the provision of legal services by any employee of the law firm. The responsibilities in question include the duties to exercise independent judgment on behalf of clients, see D.C. R. Prof. Conduct 2.1, 1.8(e)(2), maintain client confidences and secrets, see id. 1.6, 1.8(e)(1), act zealously on behalf of the client’s interests, see id. 1.3(a), avoid conflicts, see id. 1.7, and supervise the conduct of the others working for the firm, see id. 5.1, 5.3. By contrast, the ASO form, or the PEO form without such objectionable attributes, does not appear to raise any of these concerns.

Thus we answer the inquiry in the affirmative, subject to the limitations and concerns noted above. Use of an employee management company by a law firm is permissible only if it does not affect the firm’s provision of legal services and does not limit or infringe any of the duties and responsibilities of lawyers set out in the D.C. Rules of Professional Conduct.

The italicized sentence in the first paragraph quoted above is probably the heart of the matter. While the PEO may retain a "legal right" to hire and fire, the law firm cannot lose actual control over hiring and firing.

I think both the issue of hiring and firing and the question of access to the law firm's records could be addressed by an addendum to the customer service agreement providing that the PEO will only hire and fire in consultation with its law firm client, and that the PEO's access to the law firm's books and records is limited to that necessary to address payroll, UI, and workers' compensation issues.

Texas PEO Arrangements with Law Firms

PEO arrangements with lawfirms (and other professional practices) raise particular and unique problems. In 1995, an ethics opinion from the Texas Bar Association effectively held that lawyers may not enter into PEO arrangements. Texas Ethics Opinion 508 (1995)

The opinion finds that a PEO arrangement is impermissible becuase of potential conflict of interest problems. Here is what the opinion states:

To avoid conflicts of interest, a law firm should be able to determine internally, from its own records and by consultation between members of that firm, whether a conflict of interest exists. Under the arrangement described above, a law firm leasing lawyers from the employee leasing company necessarily would have to consult and exchange information with each other law firm leasing lawyers from the same company to insure that no conflict exists.

The disclosure of confidential and privileged information about a client (even the fact that a person is a client of a law firm may be confidential and privileged) likely would be necessary to eliminate any conflict or potential conflict of interest.

CONCLUSION
Because of the potential for conflicts of interest between clients of different law firms to whom lawyer employees are leased by the employee leasing company, the employee leasing arrangement described above is not permissible.

In effect, the opinion finds that there is a potential conflict of interest that the law firm could never avoid.

In Texas, the effect of this holding may be mitigated (at least somewhat) by the subsequent amendements to the Texas PEO licensing statute. The relevant part of the licensing statute is::

Sec. 91.004. Effect of Other Law on Clients and Employees.

(a) This chapter does not exempt a client of a license holder, or any assigned employee, from any other license requirements imposed under local, state, or federal law.

(b) An employee who is licensed, registered, or certified under law and who is assigned to a client company is considered to be an employee of the client company for the purpose of that license, registration, or certification.

(c) A license holder is not engaged in the unauthorized practice of an occupation, trade, or profession that is licensed, certified, or otherwise regulated by a governmental entity solely by entering into a staff leasing agreement with a client company and assigned employees.

This question is really one for the lawfirm client company, rather than a problem for the PEO. Only the law firm and its lawyers are responsible for compliance with the ethical rules governing lawyers. For the PEO, the wisest course of action is to point out this issue to the potential law firm client and allow them to make up their own mind. For many law firms, the subsequent statutory amendements provides enough assurance that the law firm will still engage a PEO's services.