|
![](/SiteCollectionImages/WisconsinLawyer/wlogo.jpg) |
Navigation |
Vol. 72, No. 9, September 1999 |
A New Approach To Employment Administration
Developing a relationship with a professional employer organization
can help law firms more evenly compete for quality employees and reallocate
limited resources to focus on client service.
By James J. Gettel & Bruce A. McIlnay
hile people are the
greatest assets of any law firm, managing human resources is one of the
most expensive and time-consuming administrative tasks in a law firm. Wages,
payroll taxes, and employee benefits are among a firm's biggest expenses.
The time spent effectively managing these costs adds more expense. The largest
law firms employ professional, full-time staff to manage their human resources.
This staff can shop for, set up, and administer payroll, insurance, and
benefit plans. Staff
also is responsible for compliance with tax and employment regulations.
In most firms, however, these time-consuming but vital functions fall to
experienced lawyers, whose time could be more effectively spent serving
clients.
Law firms can benefit from services designed to help businesses focus
on their core competencies.1 Professional
Employer Organizations (PEOs) have evolved to provide a practical, economical,
and ethical alternative for out-sourcing law firm employment administration.
This article explains how a PEO can make a law firm more competitive in
the market for quality employees and more effective in firm administration,
and offers tips on selecting a PEO. It also describes the recent development
of "coemployment" law to support PEO arrangements, and addresses
relevant ethical considerations arising from the coemployment relationship.
The Advantages of PEOs
Increasingly, businesses are using PEOs to manage complex employee-related
matters.2 By contract, PEOs assume
a variety of responsibilities for their clients, including payroll management,
employee benefit plan design and administration, and tax and human resources
compliance.
The PEO delivers services by becoming a "coemployer" of the
customer's employees. As coemployers, the PEO and the customer become partners
in the employment of their workers. The PEO provides specific employment
administration services but the customer retains responsibilities for employee
supervision, training, evaluation, discipline, compensation, and other essential
terms of employment.3
By using PEO services, a business redirects many noncore business responsibilities
to an outside supplier.4 PEOs help
their customers focus on their primary business rather than on the business
of employment. PEOs can reduce the costs and improve the quality of employment
administration services and employee benefits.
Competing in the Labor Market. PEOs help smaller businesses attract,
retain, and support valuable employees by providing a competitive benefit
package and quality employment administration that otherwise might be unaffordable.
With unemployment rates in Wisconsin well below 5 percent, Wisconsin businesses
face difficult challenges in attracting and retaining qualified employees.5 To compete for employees, businesses must
offer competitive pay and benefits in addition to a challenging career.
Firms also must be responsive to changing employee needs and concerns.
The largest businesses have economies of scale in payroll, benefits,
and human resource administration that permit these services to be economically
provided by professional, in-house staff. Large businesses also enjoy a
competitive advantage in the market for benefit products like insurance.6 These economies can be great advantages in
competing for quality employees.
PEOs can level the playing field. PEOs allow small and medium-sized businesses
to offer competitive and affordable benefits such as health, disability,
dental, and life insurance, a 401(k) retirement plan, and a flexible spending
account plan. By aggregating the employees of multiple customers to increase
buying power, PEOs secure and administer superior benefits for their customers
at substantially better prices than smaller firms could obtain for similar
benefits.7
Reducing Administrative Burdens. PEOs also offer professional
administrative services. Businesses that cannot afford to hire a professional
human resource manager must rely on busy professionals to take responsibility
in areas for which they have little or no expertise. Every issue can require
study, and employees must wait for answers. In contrast, PEOs are employment
professionals. PEOs regularly handle paperwork, such as payroll tax filings,
for multiple companies; provide efficient and responsive claims processing
and management for benefit plans, unemployment insurance, and worker's compensation;
and assist with human resources compliance, including employee handbooks,
forms, policies, procedures, communications, and fiduciary responsibilities.
The professional skills of the PEO benefit primary employers and employees
alike. The primary employer is relieved of the time-consuming and expensive
tasks of shopping for and comparing insurance and benefit plans, administering
the plans they choose, and staying informed about and complying with a myriad
of tax- and employment-related regulations. The employee can receive better
benefits and timely advice concerning benefits and other employment issues.
Ease in Tracking Costs. In a typical PEO arrangement, employees
submit the information necessary to calculate periodic payroll to the PEO.
The PEO, in turn, prepares the payroll checks, makes the required withholdings
for taxes and benefits, and makes necessary deposits with taxing authorities
or benefit plan sponsors. The PEO sends the customer one invoice per pay
period, which saves the customer the time and expense of calculating the
amounts of various withholdings; and relieves the customer from the burden
of making separate deposits with the several taxing authorities. The PEO's
invoice represents a concise tally of a firm's total labor costs.
Most PEOs charge a percentage markup on gross payroll to cover mandatory
payroll taxes, benefit costs, and a margin for the PEO. Some PEOs will estimate
benefit costs, while others provide a direct pass through of actual costs.
Typically, the PEO is seeking a fixed, gross dollar margin per employee
per year. As a result, the percentage of payroll attributable to this component
may be reduced for more highly compensated employees. This fact makes it
attractive to a professional firm to include all employees in its PEO contract.
This means that attorneys can track not just the cost of their support staff
but what it costs to pay the attorneys themselves.
The Development of "Coemployment" Laws for PEOs
PEOs Improve on Earlier Models. The PEO coemployment arrangement
should not be confused with historical "staff leasing" arrangements.
Early staff leasing arrangements involved firing employees and then "leasing"
them back from a third party. The PEO arrangement does not involve the "leasing"
practice of "fire, hire, and lease back." Instead, the PEO becomes
a coemployer, not a substitute employer.
Neither is a PEO a temporary employment agency. In a traditional "leasing"
arrangement, people are assigned to a customer on a supplemental or temporary
basis for a specific project or for a fixed, usually short, time. The PEO
arrangement is created for exactly the opposite result assisting customers
in making a long-term investment in their employees.
Unlike present PEOs, early staff leasing arrangements were limited in
scope and produced only isolated cost savings. Staff leasing became disfavored
by regulators who considered it abusive. During the 1970s, small business
owners could receive pension benefits without providing the same benefits
to their other employees whom they leased from a staff leasing company.
Congress closed this loophole in 1982 with the enactment of section 414(n)
of the Internal Revenue Code.8
Some early employee leasing firms got into trouble as they shifted from
pension-driven programs to offering low-cost health insurance, unemployment
insurance, or worker's compensation insurance coverage. Often the cost savings
were illusory, based on underpricing self-funded health insurance, or artificially
low worker's compensation experience modifiers, or state unemployment insurance
rates. Leasing companies began to fail and regulators took the position
that the leasing companies were not true employers. Regulators sought to
hold the leasing companies' clients liable for unpaid employment taxes and
employee benefits. Today's PEOs, based on the concept of coemployment, have
improved dramatically over staff leasing companies of the past.
Coemployment Moves Beyond Common Law Concepts. The coemployment
relationship in a PEO arrangement is different from other multiparty employment
relationships recognized at common law. This difference permits the PEO
and its customer to allocate responsibilities and risks in the employment
relationship.
Traditionally, whether an employment relationship exists is determined
by reference to the common law of agency.9 The
Restatement (Second) of Agency10 is
a helpful summary of the common law approach.
The Restatement describes three types of multiparty employment relationships
recognized at common law. First, "joint employment" occurs when
a single employee, under contract with two employers, and under the control
of both, simultaneously performs services for both employers that are the
same as, or closely related to, the services performed for the other.11 Second, "dual employment" occurs
when an employee is hired by two separate employers at the same time (with
or without knowledge of the other) to perform separate tasks for each.12Third, and best recognized at common law,
is the "loaned servant" employment relationship that occurs when
a servant is directed or permitted by his or her master to perform services
for another and, thus, becomes the servant of the party to which the servant
was "loaned." The "loaned servant" may become another's
servant as to some acts and not as to others.13
All three traditional
types of multiparty employment arrangements contemplate an employment relationship
by the employee with both employers. In joint employment and dual employment,
both employers simultaneously employ the employee. Similarly, the loaned
servant cases concern the question of whether the borrowing person becomes
a "special employer." This analysis implicitly assumes that the
first employer must retain at least some indicia of an employer and does
not completely surrender its rights and obligations as an employer.
While the common law recognizes multiparty employment arrangements, it
generally seeks to allocate responsibility between employers according to
who controls the employee in a given instance. Depending upon the circumstances,
either employer can be held responsible for all liabilities arising from
the employment relationship. This result could leave one of the employers
responsible for aspects of the employment relationship that it sought to
allocate to the other.
The PEO arrangement is different from traditional employment relationships
because coemployment makes each employer responsible for different aspects
of the employment relationship. In this type of relationship, it is possible
that neither employer has all the characteristics of a common law employer.
This should not mean that the employment relationship fails, leaving the
employee an independent contractor or an employee of only one company or
the other.
The proper analysis should be whether the PEO has enough of the characteristics
of an employer to be considered a coemployer together with the primary employer.
In the PEO arrangement, it takes two employers to create the full employment
relationship, with each employer assuming different responsibilities of
a single employment relationship. The law is beginning to recognize that
both employers in a PEO arrangement do not each have to meet all of the
common law criteria for establishing employment relationships. Instead,
as long as the PEO and the customer jointly satisfy the criteria, a common
law employment relationship will still exist.
Next Page![--->](/art/buttons/fwdarrow.gif)
|