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Who's the Employer?

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

Rev. Proc. 2002-21 and Leased Employees

(Posted June 3, 2002)

Question 191: How does Rev. Proc. 2002-21 affect a worker's status as a leased employee?

Answer: Technically, it has no affect at all, assuming the status has been determined correctly. However, it serves as a serious warning that the status might not have been determined correctly.

IRC 414(n) deals with leased employees and does absolutely nothing to alter or add requirements to plans sponsored by PEOs. Rev. Proc. 2002-21 focuses on the PEO, and theoretically does nothing to modify the leased employee arrangement.

Suppose Walter Edson (WE) is a worksite employee on the payroll of Prudent PEO. WE performs all his services for Calif. Oranges (CO) and works under CO's primary direction and control. He can have one of the following combinations of status:

WE could be CO's common law employee and not a common law employee of Prudent.
WE could be the PEO's common law employee and not a common law employee of CO. In that case, WE is either:
- A leased employee of CO if he has served them on a substantially full-time basis (1500 hours) for a year; or
- Simply a worksite employee who has not yet attained the status of leased employee.
WE could be the common law employee of the PEO and CO simultaneously.

Notice that of the various alternatives listed, he can be a leased employee only if he is not the common law employee of the CO. Many PEOs have taken the position that their workers either have status 2 or status 3. In other words, the PEO claims to be a common law employer (or the common law employer) of the workers. If the CO denies that it is the common law employer, then the leased employee rules for status 2 come into play.

Rev. Proc. 2002-21 warns that this might not be the case, that the workers may be common law employees of the CO (status 1). In that case, all the normal incidents of employee status would be present, whether or not the worker has been credited with 1,500 hours in a year.

In any event, as a result of Rev. Proc. 2002-21, it is likely that almost all PEO-sponsored plans either will be terminated or will be converted to multiple employer plans by 2004. Obviously this can have a profound effect on the workers involved, regardless of their status.

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.