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Answers are provided by S. Derrin Watson
State Law and Professional Employer Organizations
(Posted January 10, 2002)
Question 137: I know you take the position that professional employer organizations are generally not the employer of the workers on their payroll which they lease to others. However, in my state there is a law which says that the workers are employees of the PEO. So, can we go ahead and set up a single employer plan for the PEO on that basis?
Answer: No. State laws can do a great deal, but they cannot determine as a conclusion what the status of a worker is under federal tax law.
State laws frequently, for one purpose or another, treat people as employees who would not be considered employees under general common law principles. For example, in California employment status for social insurance purposes (e.g. unemployment insurance) can consider factors such as which party is better able to bear the risk of loss from unemployment -- a factor that never has been part of the common law test. This was adopted because of the welfare aspects of California's system.
The Supreme Court, in deciding what an employee was for ERISA purposes, explicitly rejected such an approach. Instead, the court ruled that traditional common law principles of general applicability are to be followed. State statutes or state court rulings do not change those principles.
Having said that, state law can have an effect. While states cannot, for employee plan or federal tax purposes, formally say "you are the employer," they can say "your rights and duties in this relationship are as follows." Those rights and duties, in turn, can have an affect on common law status under ERISA. For example, in a Florida case, the court took into consideration a state law which said that the PEO was liable for paying wages whether their client paid them or not. (However, the court also held that wasn't enough to make the PEO the employer.)
These issues are discussed in more detail in Chapter 4 of my book, Who's the Employer?.
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