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.