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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Temporary Employees Lose Under Rev. Proc. 2002-21

(Posted May 27, 2002)

Question 185: I work for a temp agency. They send me out to different jobs that need short term clerical support. I've never been more than two months at a particular job site, but I have work to do most of the year. Now the agency is telling me it can't cover me under their 401(k) plan after 2003 because of a new IRS ruling. Is that right?

Answer: It might not be right, but it's pretty darn accurate.

Rev. Rul. 75-41 and case law both support the notion that a true temp, like you, is the common law employee of the temp agency and not the common law employee of the agency's client (the companies at your job sites). By contrast, most case law holds that workers involved in long-term staffing firm arrangements are employees of the staffing firm's client. (For additional details on this point, see Chapter 4 of my book Who's the Employer.)

Unfortunately, Rev. Proc. 2002-21 lumps temps like you in with "permatemps" under long-term staffing arrangements. You are all considered "worksite employees" under the terms of the Rev. Proc.

Under those terms, a Professional Employer Organization (PEO) cannot rely on an IRS determination letter for its plan if it maintains a single employer plan covering its worksite employees after 2003. With no definition of PEO in the Rev. Proc., it is likely that your agency would be treated as a PEO.

As a result, very few PEOs will be willing to maintain single employer plans after 2003. It's like driving a car without auto insurance. You'll probably never need it, but if you do, you really need it.

There are only two viable alternatives that the Rev. Proc. leaves to a PEO sponsoring its own single employer plan: terminate the plan or convert it to a multiple employer plan. A multiple employer plan can make sense for a PEO and client in a long-term staffing arrangement. But there's no way a client company is going to cosponsor a PEO plan to cover a few temps who will only be there a week to two months. The only option left is plan termination.

Having said all this, the author believes it is unlikely that the IRS will enforce this difficult restriction against temps. Click here for my analysis.

Click here for more information about the Rev. Proc.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.