Who's the Employer?

Answer: PEOs or staffing firms provide a useful service in our economy. The value that the marketplace puts on these services is shown by the millions of workers who are currently on the payroll of such organizations.

Of course, the choice to use such firms rests primarily with their client, the company for whom the workers perform services. There are many reasons an employer might choose to use such a firm, and different firms indeed have different reasons. Some want the better benefits that the purchasing power of a larger organization, such as a PEO, can provide. Some want the convenience of having someone else do payroll tax forms. (I have seen the IRS virtually insist that a small employer use such an arrangement in order to make sure that payroll taxes would be handled properly in the future.) Some want to move some or all of their employees into a lower benefit structure.

Whatever the company's reason, in a free society the worker always has a choice. The worker can accept the arrangement, or can peddle his services elsewhere. That's the joy of a relatively free market economy. You can vote with your feet. Whether involvement in a particular PEO or staffing firm arrangement will be good for a particular worker will depend heavily on the terms of that arrangement and the other opportunities available to the worker.

NAPEO is quite concerned about distinguishing its members from other types of arrangements, and does not want its members referred to as "staffing firms" or "payrolling arrangements." And certainly there are significant differences between the different firms and the arrangements that they offer. Any company contemplating such an arrangement would be well advised to determine carefully its own goals, shop around, see what is available, and make an informed decision after consulting with its professional advisors.

I am not nearly as concerned with what a relationship is called as I am with the effects of that relationship on tax and retirement plan obligations. Those effects will be determined by the substance of the relationship, not by the label affixed to it. That principle is the centerpiece of decades of litigation over worker tax status.

This is why I have said for years that most such arrangements leave the client, or recipient, company as the common law employer of the workers. To that end, I appreciate NAPEO's repeated assertion that "The employment relationship with the original employer continues and is expected to continue should the PEO arrangement be terminated." Indeed that is so; case after case has found it to be so.

In light of that admission, I am quite puzzled by NAPEO's statement that:

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