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.

Proposed FMLA Rules will affect PEOs

The DOL has published a NPRM - notice of proposed rule making - in preparation for adopting new regulations under the Family & Medical Leave Act. The proposed rules may modify a PEOs responsibilities under the FMLA. Unfortunately, the proposed rules leave more questioned UNanswered than answered.

Here are the most relevant sections of the proposed rules. I've bolded sections that seem particularly troublesome:

§825.106 Joint employer coverage.

(a) Where two or more businesses exercise some control over the work or working conditions of the employee, the businesses may be joint employers under FMLA. Joint employers may be separate and distinct entities with separate owners, managers and facilities. Where the employee performs work which simultaneously benefits two or more employers, or works for two or more employers at different times during the workweek, a joint employment relationship generally will be considered to exist in situations such as:

(1) Where there is an arrangement between employers to share an employee's services or to interchange employees;

(2) Where one employer acts directly or indirectly in the interest of the other employer in relation to the employee; or,

(3) Where the employers are not completely disassociated with respect to the employee's employment and may be deemed to share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under common control with the other employer.

(b)(1) A determination of whether or not a joint employment relationship exists is not determined by the application of any single criterion, but rather the entire relationship is to be viewed in its totality. For example, joint employment will ordinarily be found to exist when a temporary or leasing agency supplies employees to a second employer.

(2) A type of company that is often called a "Professional Employment Organization" (PEO) or "HR Outsourcing Vendor" contracts with client employers merely to perform administrative functions--including payroll, benefits, regulatory paperwork, and updating employment policies. A PEO does not enter into a joint employment relationship with the employees of its client companies provided it merely performs these administrative functions. On the other hand, if in a particular fact situation, a PEO has the right to hire, fire, assign, or direct and control the client's employees, or benefits from the work that the employees perform, such a PEO would be a joint employer with the client employer.

(c) In joint employment relationships, only the primary employer is responsible for giving required notices to its employees, providing FMLA leave, and maintenance of health benefits. Factors considered in determining which is the "primary" employer include authority/responsibility to hire and fire, assign/place the employee, make payroll, and provide employment benefits. For employees of temporary help or leasing agencies, for example, the placement agency most commonly would be the primary employer.

(d) Employees jointly employed by two employers must be counted by both employers, whether or not maintained on one of the employer's payroll, in determining employer coverage and employee eligibility. For example, an employer who jointly employs 15 workers from a leasing or temporary help agency and 40 permanent workers is covered by FMLA. (A special rule applies to employees jointly employed who physically work at a facility of the secondary employer for a period of at least one year. See §825.111(a)(3).) An employee on leave who is working for a secondary employer is considered employed by the secondary employer, and must be counted for coverage and eligibility purposes, as long as the employer has a reasonable expectation that that employee will return to employment with that employer.

(e) Job restoration is the primary responsibility of the primary employer. The secondary employer is responsible for accepting the employee returning from FMLA leave in place of the replacement employee if the secondary employer continues to utilize an employee from the temporary or leasing agency, and the agency chooses to place the employee with the secondary employer. A secondary employer is also responsible for compliance with the prohibited acts provisions with respect to its temporary/leased employees, whether or not the secondary employer is covered by FMLA (see §825.220(a))The prohibited acts include prohibitions against interfering with an employee's attempt to exercise rights under the Act, or discharging or discriminating against an employee for opposing a practice which is unlawful under FMLA. A covered secondary employer will be responsible for compliance with all the provisions of the FMLA with respect to its regular, permanent workforce.



These bolded sentences are the result of some Really Big Lawfirms trying to explain a difference between staff leasing and PEO, and telling the DOL that PEOs are not really employers and do not really have much to do with the client company's employees. It also appears that in their comments to the DOL, these Really Big Lawfirms also lumped temp staffing in under the heading of "employee leasing." The end result is destined to be confusion.

Lets make the rather optimistic assumption that we can figure out whether or not a PEO is a joint employer and whether it is the primary or secondary employer, then the proposed rules may bring a small amount of clarity to the situation. A very small amount. The proposed rules largely mirror the existing rules, with additions that reflect the DOL's opinion letters on PEOs and FMLA.

New regulations on Social Security No-Match letters

Immigrations & Customs Enforcement (ICE) just published new final regulations related to employer obligations when receiving "no-match letters" from the Social Security Administration. The real issue here is, of course, not social security taxes. The real issue is the employer's obligation to determine whether it is only employing persons lawfully entitled to work in the United States - i.e. I-9 compliance.

Basically, the regulations provide a safe-harbor for employers. The employer will be protected from sanctions, if it exercises due diligence to promptly re-verify an employee's information and does not otherwise know that the employee lacks work authorization.

More to follow, once I have digested the full set of regulations.

Ohio-Does client owe workers' comp. premium if PEO fails to pay?

In a June 28, 2007 decision an Ohio Court of Appeals looked at whether the client of a PEO would be responsible for unpaid workers' compensation premiums if the PEO fails to pay its own workers' compensation insurance premium bill. State Ex Rel K.A.B.E. Ents, Inc. v. Mabe, 2007 WL 1847662 (Ohio App. 10th Dist. June 28, 2007).

Here, K.A.B.E. entered into a PEO arrangement with Reliance Resources, a PEO under Ohio law. Reliance held a workers' compensation insurance policy. Reliance Resources failed to pay the premiums due for the first six months of 2003. The Ohio Bureau of Workers' Compensation advised K.A.B.E. that it was required to report the employees as its own for this time period and that K.A.B.E. was required to pay the workers' compensation premiums for this time period.

The Court found that the PEO's failure to pay the workers' compensation premiums triggered a statutory obligation on the client company to report the employees as its own and to also pay the full amount of the unpaid workers' compensation premiums owed by the PEO on its employees. The court expressly rejected the client's argument that it should be responsible for the unpaid premiums only after it received notice that the PEO had failed to pay.

Exclusive Remedy Protection for the PEO customer

In a recent decision, the Texas court of appeals in Dallas held that the client company of a Texas licensed PEO is protected by exclusive remedy. Vega v. Silva, 223 S.W.3d 746 (Tex.App.—Dallas 2007). Link here

This decision is completely consistent with the language of the Texas PEO licensing statute and so is no surprise. This decision is the first Texas court decision squarely addressing the issue.The case is based on an auto accident in which two worksite employees of a PEO were injured on their way to work in a vehicle owned by the client company. The driver was a worksite employee.

The injured passenger brought suit against the client company and claimed that the client was not covered by exclusive remedy protection flowing from the PEO’s workers compensation insurance policy.

The Court of Appeals easily found that the Client Company was protected. “[B]oth the staff leasing company and the client company are subject to the exclusive remedy provisions of the workers’ compensation act.”

Based on evidence that the PEO was licensed in Texas, held and workers’ compensation policy and that the client company was the PEO’s customer the court held that: “We conclude that [the client company] conclusively proved the affirmative defense that the exclusive remedy provisions of the workers’ compensation act applies in this case.”

The Texas Supreme Court previously addressed the consequences of a client entering into a PEO arrangement with a PEO that does not carry workers’ compensation insurance. Tex. Workers’ Compensation Ins. Fund v. Del Industrial, Inc., 35 S.W.3d 591 (Tex. 2000). The Supreme Court’s decision in Del Industries strongly supports the conclusion that exclusive remedy protects the client company, provided the PEO holds a Texas license and carries Texas workers’ compensation insurance. Although the hints are there, Del Industries does not actually decide the question.

Client Insurance & Certificates of Insurance

Most PEOs include in their customer service agreement a clause requiring the client company to maintain GL insurance and to provide the PEO with a certificate of insurance. In addition, many PEOs also require the client to name the PEO as an additional insured. These are basic steps towards safeguarding the PEO against the risk of litigation arising out of the client's business operations.

But - PEOs cannot become complacent. It is absolutely essential that PEOs have in place a process to monitor and verify that the customer has actually provided the certificate of insurance, that the customer has renewed coverage with no lapses and that any required additional insured endorsement is in place. Too many PEOs treat this as a one-time task, to be worried about only at the time the client is signed on.

If you want to sleep at night, you must establish a smooth, well functioning business process that provides for verification and monitoring. Once the lawsuit is filed, it is too late.

In addition, PEOs must evaluate the insurance requirements for each client individually based on the nature of the client's business operations and their risk posture. For some clients, $500,000 in GL will be adequate. For others, ten times that much will not be enough. PEO management must set the insurance requirements for each client based on a review of that client.

TDLR revises enforcement plan

The Texas Department of Licensing & Regulation recently adopted a revised enforcement plan addressing all of the licenses issued by the Department.

The enforcement plan gives license holders notice of the specific ranges of penalties and license sanctions that apply to specific alleged violations of the statutes and rules enforced by the Department. The enforcement plan also presents the criteria that are considered by the Department's Enforcement staff in determining the amount of a proposed administrative penalty or the magnitude of a proposed sanction.

The enforcement plan describes in some detail the range of penalties that the Department may assess for various kinds of violations, and the factors that will be taken into account in setting the specific penalty in a particular case. The enforcement plan includes penalty matrices that are specific to each of the license programs administered by the TDLR.

The introduction and general description of the enforcement plan can be found here.

The penalty matrix that is specific to PEOs and Staff Leasing firms is here.

The revised enforcement plan was adopted by the TDLR at the Commission's regularly scheduled meeting held December 6, 2006. Notice of the revised enforcement plan was filed with the Texas Register on December 18, 2006, and will be published in the December 29, 2006, publication.

PEOs and staff leasing firms benefit from this, as it reduces the risk of the Department threatening penalties out of keeping with the seriousness of the offense. While the Department's enforcement efforts under the current Executive Director appear to have been reasonable, in prior years the Department often threatened to assert the statutory maximum fine or to revoke a license in a minor case as a method of "encouraging" a settlement.

There are only a few types of violations for which the TDLR will seek revocation of the license on the first offense:

• Giving materially false or forged evidence in connection with obtaining a license, or during disciplinary proceedings - 91.061(4), 72.70(d) and 60.63(b)
• Failure to comply with a previous order of the Commission or the Executive Director - 51.353(a) and 72.90
• Obtaining a license by fraud or false representation - 60.63(b)
• Failure to pay the Department for a dishonored check - 60.82

The moral of this story - don't give the TDLR a hot check!

Time to revisit old contracts

I recently worked on a problem for a PEO client that made me think about the problem of good customers. You know, the customers who signed up in the early days of your PEO - before you actually knew what you were doing. If you are like most PEOs, you have some clients that are under really old versions of your customer service agreement.

PEO owners need to periodically review the contracts they have their clients under. You may find that some clients are under contracts so outdated, that an update is needed. There is nothing easy about recontracting these clients.

One strategy for securing the client's cooperation is to tell them the truth - you are a good client and have been with us a long time. However, state law has changed over the years, and we want to make sure that our agreements are in compliance with current state law regulating the PEO business.

Time to rethink minimum wage agreements?

For some time now, some PEOs have adopted minimum wage agreements in an effort to moderate the financial risk posed by a client company that fails to pay. A recent Department of Labor opinion letter may require rethinking the wisdom of that strategy.

In a March 10, 2006 opinion letter, the Acting Administrator of the DOL weighed in on the question of whether (& how) an employer may make deductions from an employee's wages. DOL Opinion Letter FLSA2006-7.

Specifically, the DOL was asked to consider whether an employer could make deduction from an employee's wages if the employee damaged company provided equipment, such as a laptop computer or cellphone. The opinion letter flatly says "No" to such deductions for all exempt employees, and warns that any such deduction from the wages of a non-exempt employee cannot reduce the employee below minimum wage.

OK, so how does this impact PEO minimum wage agreements? First, lets review the basic strategy. The idea is that the PEO enters into an agreement with the worksite employees providing for a reduced wage rate for any pay period that the client company fails to pay its invoice from the PEO. In essence, the worksite employees agree, in advance, to a lower (usually minimum wage) rate of pay when the client fails to pay.

The DOL opinion letter calls this strategy in question. First, the opinion letter notes that the regulations require exempt employees to receive their full salary, without reductions.
"an exempt employee must receive the full salary for any week in which the employee performs any work." 29 C.F.R. 541.602(a). More worrisome is the comment - "The Wage and Hour Division (WHD) interprets these regulatory provisions to mean that if a particular type of deduction is not specifically listed in Section 541.602(b) (formerly section 541.118(a)) then that deduction would result in a violation of the 'salary basis' test."

In addition, the opinion letter notes: "It is WHD's long-standing position that an exempt employee must actually receive the full predetermined salary amount for any week in which the employee performs any work unless one of the specific regulatory exceptions is met."

The risk is that under the DOL's view, such deductions are incompatible with exempt status. In otherword, you risk the loss of the employee's status as exempt from overtime, and could end up owing the employee overtime.

The opinion letter focused on deductions or charges for damage to company provided equipment. In the typical minimum wage agreement, the PEO and the worksite agree in advance to two different wage rates depending on whether or not the client pays the invoice. It is not at all clear that this distinction will be enough to survive the scrutiny of either the DOL or the courts.

Further, the opinion letter looked at similar deductions made from the wages of non-exempt employees, usually those paid on an hourly basis. In the case of non-exempt employees, the DOL cautioned that deductions from wages should not take the employee below minimum wage.
So where does this leave PEOs? I think this opinion letter requires PEOs to reconsider their use of minimum wage agreements. Certainly any such agreement with an exempt employee must be looked at very carefully. The DOL opinion letter seems to support the idea with respect to non-exempt/hourly employees.

Joint Employment, PEOs & the Fair Labor Standards Act

What does an FLSA case against a Saudi Prince have to do with overtime pay risks for PEOs? Surprisingly enough, quite a lot. The federal court of appeals for the Fourth Circuit recently decided an FLSA unpaid overtime case on the basis of joint employment. Schultz et al v. Capital International Security, 4th Circuit, 2006.

The plaintiffs were five bodyguards employed through a security company that had the contract to supply personal protection to a Saudi Prince. The plaintiffs worked 12 hours shifts at the Prince's residence, but were paid a flat salary with no overtime. The bodyguards worked for several different security companies that held successive contracts to provide a security detail for the Prince.

Ultimately, the Prince fired the security company and one of the Prince's employees set up a new security company (Capital International Security) to provide the security detail. Capital International Security exercised little to no supervision over the bodyguards, for example the Prince's personal staff replaced personnel without consulting Capital International Security. The Prince's personnel staff also handled such details as scheduling, compensation, discipline, and termination of the bodyguards. Capital International Security had little involvement in these matters. Although Capital International Security provided the bodyguards with some equipment, the Prince provided cars, cellphones, cameras and office supplies.

At one point Capital International Security made a half-hearted attempt to convert bodyguards from employees into independent contractors. The Fourth Circuit had no trouble seeing past the ruse, and coming to the obvious conclusion that the bodyguards were truly employees.

From a PEO point of view the more interesting questions related to whether the bodyguards could only sue Capital International Security, the Prince or both. The Fourth Circuit began by quoting from the FLSA joint employment regulations "all joint employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of" the Fair Labor Standards Act. See, 29 C.F.R. 791.2(a). In addition, joint employment must be determined by taking "into account the real economic relationship between the employer who uses and benefits from the services of the workers and the party that hires or assigns the workers to that employer." The ultimate determination must be based upon the "circumstances of the whole activity." Given the regulations, the Court easily determined that the Prince and Capital International Security were joint employers of the bodyguards. The Court thus found that Capital International Security was jointly and severally liable for the unpaid overtime owed the Plaintiffs.

This case clearly suggests how a court might analyze an FLSA claim involving a PEO and its client company. Under the facts of this case, Capital International Security was functioning somewhat like a PEO, with the Prince as its client. As in a PEO arrangement, the Prince (i.e. Prince) effectively set the wage rates, controlled hiring/firing/discipline, established the rules governing the details of the work to be done, and supplied virtually all of the supplies and equipment needed by the workers.

The regulations make this determination by the Fourth Circuit easy:
If the facts establish that the employee is employed jointly by two or more employers, i.e. that employment by one employer is not completely disassociated from employment by the other employer(s), all of the employee's work for all of the joint employers during the workweek is considered as one employment for the purposes of the [FLSA].
29 C.F.R. 791(2)(a). Section 791.1(2)(b) gives additional examples of situations in which "a joint employment relationship will be considered to exist." For example, "where one employer is acting directly or indirectly in the interest of the other employer (or employers) in relation to the employee."

The Fourth Circuits opinion clearly shows how the Department of Labor or a private litigant could easily argue for PEO liability for wage & hour violations that were actually the fault of the client company.

As always, bear in mind that this article is a brief discussion of a complex issue. Treat this a magazine article, not as legal advice for a specific situation.

Proposed rules on Social Security "no match" letters

The Department of Homeland Security has issued a proposed rule that would address employer obligations when notified that an employee's social security number appears to be invalid or to not match the employee.

The proposed rule can be found here. Public comment is due by August 14, 2006.

The proposed regulation addresses two different situations: the employer receives a "no match" letter from the Social Security Adminsitration asserting that the employee's social security number appears to be invalid or the employer receives a similar letter from the Department of Homeland Security related to immigration status. Importantly, the proposed rule would provide a "safe-harbor" procedure giving the employer a clear rule on what it is supposed to do to avoid liability.

The proposed regulation would require employers to:
a) promptly check their records on receipt of a no-match letter to see if the problem is simple clerical error - such as a misspelled name or transposed digits in the social security number. If so, the employer would be required to correct its records, and inform the relevant agency. These steps would have to be completed within 14 days.

b) If not resolved as in (a), the employer would have to request the employee to confirm that the information is correct. If the employer's records are not correct, the employer would have to take prompt action to correct and then verify with the relevant agency. This may require the employee to take the matter up directly with the relevant agency. Again, the employer would need to act within 14 days.

c) if not resolved as in (a) or (b) within 60 days, the employer would have to follow a new verification procedure, essentially completing a brand new I-9 form as if the employee were newly hired. If the employer cannot verify the employee's status, then the employer must either choose to dismiss the employee or face the risk of sanctions for employment of an unauthorized alien.

Since the I-9 law and rules include non-discrimination provisions, employers will have to apply the same process uniformly to all employees that are the subject of no-match letters.

New interim regulation permits electronic storage of I-9 forms

A newly adopted interim regulation will (finally) permit employers to electronically store images of I-9 forms. The Department of Homeland Security adopted the interim regulation effective June 15, 2006. Public comments are solicited through August 16, 2006.

The interim regulation can be found here.


The interim regulation seems pretty straighforward. The I-9 rules are amended to explicitly list electronic storage as a permitted method of recordkeeping for the I-9 forms. In addition, the interim regualtion permits electronic signatures. Slightly different standards apply, but both the employee and the employer are permitted to sign the form I-9 electronically.

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.