Looming Deadline for PEO UI election in Colorado

PEOs with operations in Colorado are facing a looming deadline to make a one-time election whether to pay unemployment insurance taxes on their own account & rate, or to pay the UI taxes on the account/rate of their client companies.

2008 amendments to the Colorado PEO statute, had established that PEOs were to be treated as the sole employer for UI tax purposes. However, Colorado Senate Bill 09-258 effectively reverses that change, and instead imposes a "gotcha."

PEOs must file a written designation by 12/31/2009 electing to pay the UI taxes on their own account/rate. If a PEO fails to meet the 12/31 deadline to make a written election to pay on their own account, then the new statute states that the PEO has made an irrevocable election to pay on the client accounts/rates. In other words, if you miss the deadline there is no chance to make a change later.

If you do elect to pay on the PEO basis, SB 09-258 does allow a one-time later choice to report & pay on the client basis. However, once you elect to pay on a client basis, there is no going back.

Also, SB 09-258 makes the election binding on ALL of the PEO's entities under common ownership, managment or control. In other words, a PEO group cannot have two Colorado PEOs - one that pays UI taxes on the PEO account/rate and a second Colorado entity that pays UI taxes on the client account/rate.

Amendements to PEO statute signed by Texas governor

Amendments to the Texas PEO licensing statute (HB 2249) passed both houses of the Texas legislature, and were signed into law by the Governor on 5/27/2009. Most of the law will go into effect on September 1, 2009. Changes in the financial statement requirement however will not be effective until December 31, 2011.

Authorization for TDLR to accept electronic filings via an authorized assurance organization as part of the licensing process. This is entirely optional on the part of PEOs, who will continue to have the option to satisfy all licensing requirements in the current fashion. ESAC is authorized as such an assurance organization in other states, and can be expected to seek authorization in Texas. For PEOs that participate in ESAC, this will make compliance with state licensing easier. This is particularly true for ESAC participating PEOs with operations in multiple states.

Change in the financial requirements. The new law will require audited financial statments, plus the financial requirments are now defined as a positive working capital requirement, rather than net worth. The numbers have not changed, $50,000, $75,000 or $100,000 - depending on the number of covered employees. The statute expressly delays the audit requirement to 12/31/2011. This means that PEOs operating in Texas will have to supply an audited financial statement with the first license application or first license renewal filed on or after 12/31/2011.

Clairification that a client company will continue to be eligible for state employment based tax credits, grants or other incentives based on the co-employees.

While some PEOs will oppose the change to working capital and required audits, these changes were essentially inevitable. The tide has been moving in these directions for some time. It just took a while to hit Texas.

USERRA & Discrimination against returning military service members

Recent news reports indicate that the U.S. Department of Justice is taking an aggressive stance against companies (and government agencies) that discriminate against military service members who seek to return to their civilian jobs following completion of their military service. USERRA is the federal prohibiting employers from discriminating against returning service members, and effectively guaranteeing job reinstatement. The DOJ is aggressively filing suit to pursue these claims. http://www.law.com/jsp/article.jsp?id=1202430518180

PEOs are well positioned to assist their client companies to understand and comply with this somewhat obscure employment statute. For most small to midsized employers, USERRA is not well known.

Amendements to PEO statute pass Texas House

HB2249, which would amend the existing Texas PEO licensing statute has been passed by the Texas House of Representatives, and will now head to the Senate for consideration. As reported earlier, this bill would change the nature of the financial requirements from net worth to working capital, would require audited financial statements, and would provide an option for somewhat streamlined reporting and filing via an approved assurance organization.

The changes here are positive for the industry, and in the case of audits probably inevitable.

Draft legislation affecting Texas PEOs

The Texas legislature is considering legislation that would modify the licensing of Professional Employer Organization - PEO - firms under the Texas Staff Leasing Licensing Act. See House Bill 2249 - Search by bill number (HB 2249) at the Texas Legislature website

The proposed legislation would only make a small number of changes:

• Change the current "net worth" requirement to one of "working capital", while leaving the dollar amounts in place. Under existing law, most PEOs must show $100,000 in net worth, under this proposal the requirement would become $100,000 in working capital.
  
• Require the submission of audited financial statements. This would do away with the current law permitting financial statements that were merely reviewed or compiled by an outside CPA.
• The proposed legislation would delay the effective date of the change to working capital and audited financial statements to December 31, 2010. The other portions of the proposed legislation would go into effect, if passed, on September 1, 2009.
  
• Allow for optional / voluntary electronic filing of reports, forms and license renewals or applications via an approved "Assurance Organization." For PEOs with multi-state operations, this is beneficial as this option will help reduce the paperwork burden of keeping in compliance in multiple states.
  
• Add a clear provision that state tax credits or similar benefits to employers, will go to clients based on the Client's total employment of both co-employed staff and direct staff. This avoids the risk that participation in a PEO arrangement would bar a client from participating in certain state government programs such as tax credits.

The proposed legislation is pretty straightforward. The shift to states requiring Professional Employer Organizations to submit audited financial statements has been accelerating for some time, so it should be no surprise that Texas is now considering this change. Similarly, as more and more PEOs move to multi-state operations, the idea of electronic filing via an assurance organization, is likewise an idea that makes sense. For now, PEOs can consider ESAC as the source for this electronic filing and reporting, assuming it is approved as an Assurance Organization. Note that this approval is not automatic, as ESAC is not written into the statute. Those not interested in participating in ESAC are free to submit all filings in the traditional manner, or band together with like minded folks and establish an alternative organizations that meets the requirements specified in the statute.

Will it pass? Only time will tell. Much depends on the general climate of the Texas Legislature, including whether the Legislature becomes bogged down in addressed the economic climate.

PEO arrangements with Texas Law Firms

PEOs have often wanted to do business with lawfirm clients. High wages, low workers' compensation risks, and fairly stable business operations tend to make lawyers attractive to PEOs. The stumbling block in Texas for many years was an old State Bar Ethics Committee opinion that appeared to prohibit Texas lawyers from entering into PEO arrangements.

That is no longer the case, and has not been for some time. In 2005, the State Bar Ethics Committee issued Opinion no. 560 which squarely allows Texas lawyers to enter into PEO arrangements for their firms, without running afoul of the ethics rules. Opinion 560 can be found here.

Here is the Committee's summary of their decision:

"Under the Texas Disciplinary Rules of Professional Conduct, a law firm may contract with an employee leasing company for the provision of limited employee compensation and benefit services for the law firm's employees so long as the law firm maintains exclusive control over the hiring and termination of its employees, there is no sharing of employees among various clients of the employee leasing company, the leasing company has no managerial or supervisory rights over the law firm's employees, and the leasing company has no access to client information."

Opinion 560 squarely supersedes the older opions on the subjcet, No. 508 and 515. Since the publication of this opinion in 2005, Texas has been consistent with the modern authorities in other states, which have also permitted lawyers to enter into PEO arrangements.

Because this is a state by state kind of issue, PEOs will need to look at this question for each state in which they propose to do business with a lawfirm. Unfortunately, there is no "one size fits all" answer here. While it is true that this issue is a problem of professional ethics for the lawfirm and not directly for the PEO, do you really want to sell a lawfirm on a PEO deal only to have them figure our somewhat later that they just put their law licenses at risk?

PEOs would be well served to provide a lawfirm specific addendum to their customer service agreement confirming that the lawfirm customer and the PEO have agreed to terms consistent with that state's ethics opinions. In addition, PEOs might want to consider whether to permit the lawfirm to easily cancel the contract in the future if the lawfirm believes that the arrangement would be ethcially improper. I can't imagine a worse situation than a PEO trying to hold an unhappy lawfirm client into the PEO arrangement.

New I-9 forms delayed

On February 2, the U.S. Citizenship and Immigration Services (USCIS) announced that it delayed by 60 days, until April 3, 2009, the effective date for using the revised Form I-9, originally scheduled to go into effect today.

Here comes the tricky bit - Employers who use the new form prior to the April 3, 2009 effective date are subject to civil monetary penalties.

Be careful, and don't jump the gun. ONLY use the form which is currently in effect, not the new one.