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Who's the Employer?

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

Leased Employees Represented by Collective Bargaining Unit

(Posted January 18, 2003)

Question 247: If leased employees are represented by a collective bargaining unit, does the recipient client get to exclude them when doing its coverage test under IRC 410(b)? If not, it would be at the mercy of a union that bargained for pay instead of benefits because it would end up paying twice for the services. But I can't read the Code to say that the exclusion applies, because the "employer" (client) wasn't part of the bargaining process.

Answer: You've put your finger on a thorny issue, although I see it somewhat differently.

I first became aware of the issue at last year's ASPA Los Angeles Benefits Conference, when I shared the podium with James Holland of the IRS. Mr. Holland brought up the point that many staffing firms claimed, as one of the incentives for using the staffing firm, that the firm had entered into collective bargaining with its employees, and under the resulting agreement there was to be no retirement benefit. The firms claimed this meant that the recipient organizations (their customers) could exclude the worksite employees under IRC 410(b)(3)(A). Mr. Holland said that upon closer examination it would be clear that any such "agreement" was collusive in nature, and that the union, if one truly existed, was in the staffing firm's hip pocket, so to speak. In such a case the exclusion of IRC 410(b)(3)(A) would not apply, because the "bargaining" would not have been in good faith or the result of what either the IRS or the DOL would determine to be a bona fide collective bargaining agreement.

So this is an issue that's already on the IRS' radar screen. Companies should beware of unionization claims by staffing firms. The old rule applies here: "If it seems too good to be true, it probably is."

Mr. Holland did not even raise the question you did. He did not say, "Of course, even if the agreement were valid, how could the recipient take advantage of it?" Let's take a look at that question. We'll turn to the regulations on collective bargaining:

A collectively bargained employee is an employee who is included in a unit of employees covered by an agreement that the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, provided that there is evidence that retirement benefits were the subject of good faith bargaining between employee representatives and the employer or employers. An employee is a collectively bargained employee regardless of whether the employee benefits under any plan of the employer. See section 7701(a)(46) and section 301.7701-17T of this chapter for additional requirements applicable to the collective bargaining agreement.
(Treas. Reg. 1.410(b)-6(d)(2)(i).)

For purposes of paragraph (d)(2)(i) of this section, an employee is included in a unit of employees covered by a collective bargaining agreement if and only if the employee is represented by a bona fide employee representative that is a party to the collective bargaining agreement under which the plan is maintained.
(Treas. Reg. 1.410(b)-6(d)(2)(iii)(A).)

Section 7701(a)(46) of the Code adds to those regulations the requirement that, "In determining whether there is a collective bargaining agreement between employee representatives and 1 or more employers, the term "employee representatives" shall not include any organization more than one-half of the members of which are employees who are owners, officers, or executives of the employer. An agreement shall not be treated as a collective bargaining agreement unless it is a bona fide agreement between bona fide employee representatives and 1 or more employers."

Does each employer which intends to make use of the 410(b)(3)(A) have to be a signatory party to the collective bargaining agreement? I see no such requirement in the regulations. In other words, assume a bona fide collective bargaining agreement said something to the effect that, "Employee representatives and the employers signing this agreement have entered into good faith bargaining regarding retirement benefits, and the employees, in return for higher compensation, have waived their right to be covered under any retirement plan maintained by the employers or by any company which leases worksite employees from the employers." I see no reason under the Code and regulations why a recipient of a leased employee under IRC 414(n) could not treat such a worker as an excludable union employee.

But in a staffing firm situation first we must address the question of whether the agreement was entered into with one or more employers of the workers. If the staffing firm is not the common law employer of its workers-- most are not-- and instead the staffing firm is the only "employer" signator to the agreement, then it is not a valid collective bargaining agreement under IRC 7701(a)(46).

For a complete discussion of the employer status of staffing firms, see chapter 4 of my book, Who's the Employer. Subscribers to the web edition can click here to access that chapter.

So the bottom line is:

If there is a bona fide union,
If the staffing firm is the common law employer,
If there is a bona fide collective bargaining agreement, and
If that agreement waives participation in the plans of the staffing firm's clients

then the client can safely exclude the leased employees covered by the agreement. That's a lot of "ifs," and all of them are inherently factual issues.

Of course, a CO/recipient which is concerned about the issue can simply find a staffing firm which is not covered by such an agreement, and which offers lower wages as a result.

I will be discussing leased employees at two upcoming conferences. The first is ASPA's Los Angeles Benefits Conference; there I hope to be joined on the podium by Richard Wickersham of the IRS. The second is Corbel's Advanced Pension Conference in Orlando, Feb. 12-14, 2003. At that conference I will be discussing how to analyze controlled group and affiliated service group situations, as well as new developments in the 401(k) world.

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.