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Pti Contract Employment Michigan - PDF

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					     By Stephen J. Dunn and Karen B. Berkery




EMPLOY


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                                                                                                                                                                EMPLOYEE LEASING
EE                                                    LEASING
                                                      The Risks for Lessees
    n the increasingly popular practice of em-          employer, but not necessarily present in every        them. After PSSI filed a Chapter 11 bank-



I   ployee leasing, a ‘‘professional employer           case, are the furnishing of tools and the fur-        ruptcy petition in 1992, it entered into an
                                                        nishing of a place to work to the individual
    organization’’ (PEO) hires employees and                                                                  agreement with Payroll Transfers, Inc. (PTI),
                                                        who performs the services. In general, if an in-
    leases them to a company needing their              dividual is subject to the control or direction       under which PTI hired PSSI’s guards and
    services (lessee). The lessee pays the PEO          of another merely as to the result to be accom-       leased them back to PSSI. After the transfer
for the workers’ services at agreed-upon rates          plished by the work and not as to the means           of guards to PTI, PSSI continued supervising
sufficient to cover the workers’ net wages,             and methods for accomplishing the result, he is       the guards. However, PTI undertook to pay
                                                        not an employee.4
payroll taxes and benefits, and profit for the                                                                the guards and related employment taxes,
lessor. Some employers have transferred their                                                                 and filed employment tax returns as to them.
                                                          Under this definition, leased workers
entire work force to a PEO and ‘‘leased’’ it                                                                  When PTI failed to pay Social Security and
                                                      would nearly always be regarded as employ-
back, believing that in so doing they have re-                                                                FUTA taxes as to the guards, the IRS filed an
                                                      ees of the lessee.
lieved themselves of their obligations under                                                                  administrative claim for the taxes in PSSI’s
                                                          Further, regulations under the federal in-
employment tax laws, employee benefit laws,                                                                   Chapter 11 case. The U.S. Bankruptcy Court
                                                      come tax withholding statutes,5 the Social
and labor and employment laws. Those em-                                                                      for the Middle District of Florida denied
                                                      Security Act,6 and the Federal Unemploy-
ployers may be surprised to learn that they                                                                   PSSI’s motion for summary judgment on the
                                                      ment Tax Act7 provide:
likely remain liable for noncompliance with                                                                   IRS’ claim, holding that the guards remained




                                                                                                                                                                AUGUST 2005
those laws, as legal standards defining the             If the relationship of employer and employee          employees of PSSI.9
employer/employee relationship are not so               exists, the designation or description of the re-         The Professional Security case comports
easily overcome.                                        lationship by the parties as anything other           with the IRS Chief Counsel’s advice to IRS
                                                        than that of employer and employee is imma-           field personnel regarding federal employ-
                                                        terial. Thus, if such relationship exists, it is of
EMPLOYMENT TAX LAWS                                     no consequence that the employee is designated
                                                                                                              ment tax treatment of PEO client companies
    The definition of an employer-employee              as a partner, coadventurer, independent con-          as employers of workers they had leased from
relationship is the same under the federal in-          tractor, or the like.                                 the PEO. For example, in Revenue Ruling
come tax withholding statute,1 the Federal                                                                    87-41,10 the IRS cataloged 20 common law
                                                                                                              factors for determining the existence of an




                                                                                                                                                                ♦
Deposit Insurance (Social Security) Act,2 and             Finally, under the Supremacy Clause of
the Federal Unemployment Tax Act:3                    the U.S. Constitution, the IRS is not bound             employer-employee relationship, regardless
                                                      by leases, contracts, or other creatures of state       of the parties’ own interpretation of their
  Generally the relationship of employer and

                                                                                                                                                                MICHIGAN BAR JOURNAL
                                                      law that purport to create, or renounce, em-            relationship. In Letter Ruling 200415008,
  employee exists when the person for whom
  services are performed has the right to control     ployment status. Accordingly, taxing authori-           Chief Counsel’s office further noted that
  and direct the individual who performs the          ties may look to the substance of the employ-           two employers can simultaneously employ
  services, not only as to the result to be accom-    er’s relationships when determining which               the same worker. Letter Ruling 200415008
  plished by the work but also as to the details      parties should be considered employees, re-             involved a PEO that had filed a Chapter 7
  and means by which that result is accom-
                                                      gardless of how the parties themselves por-             bankruptcy case and owed substantial
  plished. That is, an employee is subject to the
  will and control of the employer not only as to     tray their relationship.                                amounts of federal employment taxes on
  what shall be done but how it shall be done.            The illustrative case of In re Professional         workers it had leased to its clients. Chief
  In this connection, it is not necessary that the    Security Services, Inc 8 involved a company             Counsel’s office advised that, if a worker is a
  employer actually direct or control the manner      (PSSI) that hired security guards and placed            common law employee of a client, the client
  in which the services are performed; it is suffi-
                                                      them in condominium complexes. PSSI pro-                is liable for accrued but unpaid federal em-
  cient if he has the right to do so. The right to
  discharge is also an important factor indicat-      vided guards with written work rules and reg-           ployment taxes on the worker, notwithstand-
  ing that the person possessing that right is an     ulations, performed polygraph tests on them,            ing the contractual relationship between the
  employer. Other factors characteristic of an        tested them for drug usage, and supervised              PEO and the client.


                                                                                                                                                  23
 EMPLOYEE LEASING




                                 learly, if an employer decides to lease



                       C         employees from a PEO, the em-
                                 ployer should take steps to assure it-
                                 self that the PEO is performing all
                                 federal and state employment tax
                       obligations as to the leased employees. Em-
                       ployers should also note that the terms ‘‘em-
                       ployee’’ and ‘‘employer’’ have the same mean-
                                                                                                   FAST FACTS
                                                                                 While lease arrangements may streamline accounting, payroll,
                       ing under the Michigan Income Tax Act of
                                                                                    and other administrative costs, an employer who leases
                       1967 as they do under the federal income tax                employees is probably not insulated from claims brought
                       withholding statutes.11 Consequently, if a                      under various state and federal employment laws.
                       lessee is subject to federal income tax with-              Employers should never assume their liability is diminished
                       holding on its leased workers’ wages, it is also                      simply because they lease employees.
                       subject to Michigan income tax withholding
                       on those workers’ wages.

                       RETIREMENT PLAN LAWS                                ceive a benefit of any type from an employee       but also make sure the plan documents ex-
                           Internal Revenue Code (IRC) Section             benefit plan . . . or whose beneficiaries may      pressly exclude leased or contractual workers
                       414(n) addresses the lessor-lessee relationship     be eligible to receive any such benefit.’’14 In    from participation.
                       for purposes of the minimum participation           Nationwide Mutual Ins Co v Darden,15 the
                       standards of IRC Section 410 and other pro-         Supreme Court held that, for purposes of           FEDERAL AND MICHIGAN
                       visions of the IRC affecting qualified em-          ERISA, common law agency principles deter-         EMPLOYMENT LAWS
                       ployer benefit plans. IRC Section 414(n)(1)         mine whether an individual is an employee.             The Fair Labor Standards Act (FLSA)17
                       provides that, with respect to any person (re-          In 1995, temporary employees of the Pa-        regulates workers’ wages, hours, overtime,
                       cipient) for whom a leased employee per-            cific Coast & Electric Co. (PC&E) sued for         and related matters. Regulations issued by
                       forms services:                                     benefits under PC&E’s employee benefit             the Department of Labor (DOL) apply the
                           • the leased employee shall be treated as       plans despite their nominal status as employ-      FLSA to situations where two employers si-
                              an employee of the recipient; and            ees of Stafco, a PEO created by the parent         multaneously employ the same employee
 AUGUST 2005




                           • contributions or benefits provided by         company. The district court in Burrey v Pa-        (‘‘co-employment’’ or ‘‘joint employment’’),
                              the lessor that are attributable to serv-    cific Coast & Electric Co held that, due to        and specify that joint employment may exist
                              ices performed for the recipient shall be    PC&E’s lease with Stafco, the plaintiffs were      where (1) there is an arrangement between
                              treated as provided by the recipient.        not employees of PC&E, and dismissed the           employers to share the employee services;
                           ‘‘Leased employee’’ for this purpose means      case.16 On appeal, the Ninth Circuit held          (2) one employer is acting in the interest of
                       any person not an employee of the recipient         that, notwithstanding the leases, the 20 com-      another employer in relation to the employee;
                       who provides services if:                           mon law factors of Rev. Rul. 87-41 deter-          and (3) the employers may be ‘‘deemed to
                           • such services are provided pursuant to        mined whether the plaintiffs were employees        share control’’ of the employee. In a joint
                              an agreement between the recipient and       of PG&E. The court of appeals remanded             employment situation, both employers can
♦




                              any other person (lessor);                   the case to the district court for reconsidera-    be held liable under the FLSA as to their
                           • such person has performed such serv-          tion of the plaintiffs’ employment status.         joint employee.
MICHIGAN BAR JOURNAL




                              ices for the recipient (or for the recipi-       However, in the similar case of Anne               Joint employers also risk potential liability
                              ent and related persons) on a substan-       Navey Clark v E.I. DuPont de Nemours &             under the National Labor Relations Act.18 In
                              tially full-time basis for a period of at    Co, the Fourth Circuit Court of Appeals            April 2004, the D.C. Circuit Court of Ap-
                              least one year; and                          held that, where the defendant had always          peals19 affirmed an NLRB ruling that Dun-
                           • such services are performed under the         expressly excluded leased employees from its       kin’ Donuts and Aldworth Co. (which leased
                              primary direction and control of the         benefit plans, the plaintiff was not entitled      employees to Dunkin’ Donuts) were joint
                              recipient.12                                 to participate in the benefit plans at issue. It   employers who had committed numerous vi-
                           An action for benefits under a plan gov-        would appear that an employer wishing to           olations of the NLRA, including refusal to
                       erned by the Employee Retirement Income             ensure that leased workers are excluded from       recognize and bargain with the employees’
                       Security Act of 1974 (ERISA) may be brought         its employee benefit plans (and, hopefully,        union while undermining union support by
                       only by a ‘‘participant’’ in or a ‘‘beneficiary’’   to avoid related litigation) should not only       preventing a fair election. The Board ordered
                       of the plan.13 ERISA defines ‘‘participant’’ as     carefully review the 20 factors of Rev. Rul.       that Dunkin’ Donuts and Aldworth offer re-
                       ‘‘any employee or former employee of an em-         87-41 to make sure they do not weigh in            instatement to employees who were unlaw-
                       ployer. . . who is or may become liable to re-      favor of an employer-employee relationship,        fully discharged, compensate employees for


                              24
losses, purge files on employees who suffered     must be analyzed to determine whether a                                     Stephen J. Dunn is a prin-




                                                                                                                                                                EMPLOYEE LEASING
illegal discharges or discipline, post remedial   leased employee is an employee of the staff-                                cipal in Kitch Drutchas
                                                                                                                              Wagner Valitutti & Sher-
notices, and engage in collective bargaining      ing firm (lessor) or the lessee in a given situa-                           brook in Detroit, Michi-
with the union.                                   tion, there is a strong likelihood that the                                 gan, and leads the firm’s
    The Equal Employment Opportunity              lessor and the lessee would be considered                                   tax law practice group.
Commission enforces civil rights under vari-      joint employers of the leased employee. In                                  Mr. Dunn earned his
ous federal statutes and provides oversight       this situation, the employee count from both                                B.S.B.A. cum laude from
                                                                                                                              Aquinas College in 1978,
and coordination of all federal equal employ-     the lessor and the lessee is combined to de-                                his J.D. from Notre Dame
ment opportunity regulations, practices, and      termine whether the joint employers have            Law School in 1985, and his LL.M. (Taxation)
policies. In 1997, the EEOC issued enforce-       the requisite number of employees for the           from Washington University in St. Louis in 1991.
ment guidance on the application of EEO           Act to apply to them.                               He is also a Michigan CPA. Mr. Dunn can be
                                                                                                      reached at dunns1@kitch.com.
laws to contingent workers placed by tempo-           If the lessor and the lessee are determined
rary employment agencies and ‘‘other staff-       to be joint employers, the EEOC has said                                     Karen B. Berkery is a
ing firms.’’20 The guidance addressed the ap-     that they are jointly and severally liable for                               principal in Kitch Drut-
                                                                                                                               chas Wagner Valitutti &
plication of Title VII and the ADEA, ADA,         wages and other compensatory damages un-                                     Sherbrook in Detroit,
and EPA to individuals placed in job assign-      der laws enforced by the EEOC. Punitive                                      Michigan, and leads the
ments by temporary employment agencies            damages, under Title VII and the ADA, and                                    firm’s labor & employ-
and other staffing firms, specifically contin-    liquidated damages under the ADEA, are in-                                   ment law practice group.
gent workers. The EEOC identified as ‘‘con-       dividually assessed and borne by each respon-                                Ms. Berkery earned her
                                                                                                                               B.A. with honors and dis-
tract firms’’ those that contract with a client   dent in accordance with its respective degree                                tinction from Douglass
to perform a certain service on a long-term       of maliciousness or reckless misconduct.            College, Rutgers University in 1981, and her J.D.
basis and place their own employees, includ-                                                          cum laude from State University of New York at
ing supervisors, at the client’s work site to                                                         Buffalo in 1984. Ms. Berkery can be reached at
carry out the service. Like a temporary em-       CONCLUSION                                          berkk1@kitch.com.
ployment agency, a ‘‘contract firm’’ typically       While lease arrangements may streamline
recruits, screens, and hires its workers, and     accounting, payroll, and other administrative       FOOTNOTES
sometimes trains them. A contract firm pays       costs, an employer who leases employees is           1.   26 USC 3401–3406.
                                                                                                       2.   26 USC 3101–3128.
workers, withholds employment taxes from          probably not insulated from claims brought           3.   26 USC 3301–3311.




                                                                                                                                                                AUGUST 2005
their wages, and provides them with workers’      under various state and federal employment           4.   26 CFR 31.3401(c)-1(b), 31.3121(d)-1(c)(2),
                                                                                                            31.3306(I)-1(b).
compensation coverage.                            laws. Potential joint employer liability can         5.   Treas Reg 31.3401(c)-1(e).
                                                                                                       6.   Treas Reg 31.3121(d)-1(a)(3).
                                                                                                       7.   Treas Reg 31.3306(i)-1(d).
Some employers have transferred their                                                                  8.   Docket No 92-5776-8P1, 1993 TNT 240-27, 94-
                                                                                                            1 USTC ¶ 50,148 (Bankr, MD Fla, Nov. 4, 1993).
  entire work force to a PEO and ‘‘leased’’ it back,                                                   9.   See United States v Imre Garami, Docket No 94-
                                                                                                            1261-CIV-ORL-19, 1995 TNT 147-8, 76 AFTR2d
   believing that in so doing they have relieved                                                            ¶ 95-5163, 95-2 USTC ¶ 50,520 (MD Fla Jun 28,
                                                                                                            1995). See also In re Earthmovers, Inc, 96-2 USTC
                                                                                                            ¶ 50,549 (Bankr, MD Fla Aug 7, 1996).




                                                                                                                                                                ♦
themselves of their obligations under                                                                 10.   87-1 CB 296.
                                                                                                      11.   MCL 206.8.
     employment tax laws, employee benefit laws,                                                      12.   In Publication 560, the IRS made an exception to
                                                                                                            the requirement that a leased employee be treated


                                                                                                                                                                MICHIGAN BAR JOURNAL
                                                                                                            as an employee of the recipient where the leased
         and labor and employment laws.                                                                     employee is covered by a money purchase pension
                                                                                                            plan of the lessor providing full and immediate
                                                                                                            vesting and a nonintegrated employee contribu-
     The EEOC described a model in which          sometimes appear unexpectedly; for example,               tion of at least 10 percent of compensation for
an employer transfers its employees to a          it is unlikely that Wal-Mart ever expected to             each participant.
                                                                                                      13.   29 USC 1132(A)(1).
‘‘staffing firm’’ and leases them back for the    be charged with knowingly employing illegal         14.   29 USC 1002(7).
purpose of transferring to the staffing firm      workers when its subcontractors had 345 un-         15.   503 US 318 (1992).
                                                                                                      16.   159 F3d 388 (CA 9, 1998). See also Vizcaino v
responsibility of administering wages and in-     documented foreign workers arrested. How-                 Microsoft Corporation, 173 F3d 713 (CA 9, 1999),
surance benefits as to the leased employees.      ever, Wal-Mart has reportedly agreed to pay               cert. denied, 120 S Ct 844 (2000).
The EEOC concluded that the staffing firm         $11 million to settle the federal investigation,    17.   FLSA, 29 USC 201 et seq.
                                                                                                      18.   29 USC 151 et seq.
did not have the right to exercise control        and its employee leasing arrangement is par-        19.   Dunkin’ Donuts Mid-Atlantic Distribution Center
over the leased employees, and that the           tially responsible.21 Employers should never              Inc v NLRB, No 02-1334, April 2, 2004.
                                                                                                      20.   EEOC Notice No 915.002, Dec. 1997.
staffing firm would not be considered the         assume their liability is diminished simply         21.   Barbaro, Wal Mart to Pay $11 Million, Washing-
leased employees’ employer. While the facts       because they lease employees. ♦                           ton Post, Mar. 19, 2005.



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