By Stephen J. Dunn and Karen B. Berkery
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
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.
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-
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
• 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
losses, purge files on employees who suffered must be analyzed to determine whether a Stephen J. Dunn is a prin-
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 firstname.lastname@example.org.
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 email@example.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.
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),
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.