Question 199: With regard to Rev. Proc. 2002-21, would a staffing company that only handles temps fall under the definition of PEO? Would this ruling apply to temp agencies not engaged in long-term staff leasing? This is a crazy and scary ruling!
Answer: The answer given below was how I responded at the time, and it presents how the Rev. Proc. can be applied. However, subsequently, I have concluded that the IRS will likely not apply it in that manner. Click here for my analysis that the IRS will not enforce the Rev. Proc. against temp agencies.
On the one hand, we need to realize that there is a huge distinction between a true temp agency, such as you are describing, and a staffing firm that handles long-term staffing and payroll arrangements. There are cases and IRS rulings holding that the temp agency is the true common law employer of temps on its payroll. That's not true of most staffing firms. For more on this, see Chapter 4 of my book, Who's the Employer.
However, having said that, Rev. Proc. 2002-21 does not distinguish between the two. Why do I say that? Consider the three major parties in the transaction. Let's start with the party in the middle: the recipient or client organization (CO). The Rev. Proc. says, "The term 'Client Organization' (CO) means an organization that enters into a service agreement with a PEO under which Worksite Employees provide services to the organization." So far, that can equally describe the client of a temp agency as well as the client of a long term staffing firm.
Now we go to the definition of Worksite Employee. The Rev. Proc. says, "The term 'Worksite Employees' means employees who receive amounts from a PEO for providing services to a CO pursuant to a service agreement between the PEO and the CO." I don't see anything in that sentence that excludes temps from the definition.
And so now we turn to the definition of PEO. Oops, there isn't one! But if you use the operational defintion of PEO which I discussed in Q&A 198, anybody who provides Worksite Employees is a PEO.
I disagree that this is a "crazy and scary ruling." For the entities for which this ruling was intended-- firms dealing in long-term staffing arrangements-- it makes a great deal of sense. However, it makes substantially less sense when applied to hospitals and temp agencies. As I've said before, I don't think this is the last word from the IRS on this subject.
There are still some seats open for my June 25 webcast regarding Rev. Proc. 2002-21. Click here for more information. I will be reviewing the matter in detail. This discussion will benefit not only those who advise PEOs, temp agencies, and others who may be regarded as PEOs, but also those who advise plan sponsors who have workers on the payroll of PEOs.
Also, you can review detailed coverage of the Rev. Proc. at my web site.