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.