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.