Many small businesses get worker’s compensation insurance coverage by joining a PEO who is the holder of the work comp policy. Work comp claims affect the experience rating of the PEO and more claims create higher insurance costs for the PEO and their small business clients. This is why PEOs are motivated partners to help keep workers’ comp costs in check.

A section in the proposed bill – State Bill 820 states:

“failure by a client company to report a leased employee’s hiring to an employee leasing company may not serve as a basis for the denial of workers’ compensation benefits for an unreported client company employee”

Right there is an invitation for Workers’ Compensation Fraud Opportunities. Here’s a fictional scenario of what could happen:

John owns a company that obtains worker’s compensation coverage through a Florida based Professional Employer Organization (PEO). Last weekend John had a big party at his house. The beer was flowing and everybody was having a grand old time. Everybody was drinking lots of beer and playing corn hole. John’s unemployed brother in law Eddie was dancing, playing air guitar and proving he was the king of the corn hole court. Rather than throwing the bean bag underhanded, Eddie preferred to thrown with a round house side-arm technique. Unfortunately, the next day Eddie could barely lift his arm and it turns out he had torn his shoulder rotator cuff. John knows that Eddie does not have any health insurance coverage.
2021 Florida Senate Bill for Employee Leasing Workers Compensation Coverage

John knows that all he has to do is claim Eddie was an “unreported” employee of his company so he can claim he was injured on the job and is entitled to make a worker’s compensation insurance claim to cover his medical expenses.

Current Florida law prevents this fraud by requiring that only John’s active leased W2 employees receiving payroll through their PEO are covered by worker’s comp insurance.

It’s hard to say who actually wrote this legislation and who is behind the push to make it in to law. If you believe this proposed legislation should be scrapped or amended, contact Senator Perry and let him know.

Concerned parties should contact Senator Keith Perry:

https://www.linkedin.com/in/keithperry97/

https://www.facebook.com/KeithPerryFL

https://votekeithperry.com/

email: Keith@VoteKeithPerry.com

Clients and prospective clients of any PEO may need to understand some things about this IRS certification. First of all there is no legal requirement for a PEO to gain IRS certification.  It is entirely up to each PEO to determine if they want to incur the additional cost and administrative burden of obtaining and maintaining IRS certification.

Certified by the IRS

About the IRS Certification Program

The Small Business Efficiency Act (SBEA) modified the Internal Revenue Code, and provided statutory authority for those PEOs that have elected to pursue IRS certification.  IRS certified PEOs (CPEOs) are officially authorized by the IRS to collect and remit federal employment taxes under the PEO’s Employer Identification Number (EIN) for wages paid to worksite employees.  PEOs that choose to participate in the IRS certification program must meet specific requirements regarding tax status, background, industry experience and financial reporting.  The IRS process for a PEO to obtain and maintain IRS certification requires:

• Payment of an annual fee to the IRS
• Background verification and tax compliance history review of PEO owners and stakeholders
• Submission of third party CPA opinion statements and annual audited financial statements
• Independent surety bonding for federal tax liabilities
  The IRS certification program requires a CPEO to post a bond each year guaranteeing payment of its federal employment tax liabilities. Bonding for the PEOs must be set to 5% of their collective annual federal tax liabilities with a minimum of $50K up to a maximum of $1M.Full Rules for CPEOs are available in IRS Internal Revenue Bulletin 2017-3 Rev. Proc 2017-14.

Why did the IRS offer a certification program for PEOs?

It’s really pretty simple; avoiding bad press for the PEO industry.  Over the last twenty years there have been a few PEOs that have gone out of business either through mismanagement or (rarely) outright fraud.   As in every industry with a fiduciary responsibility to customers there will be mistakes and some bad actors; banking, investing and insurance have all had some high-profile failures.   In our twenty years as industry advisors we have seen only a very, very few PEOs fail and the vast majority of client/PEO relationships successfully last for decades.  As for potential tax fraud by a PEO who collects employment related taxes and then fudges on the IRS deposits, the threat of being sentenced to federal prison is a pretty good deterrent.   In the few cases where a PEO has failed, it has gained press attention (Google never forgets) and in turn that tends to tarnish the whole PEO industry.

In response, some PEO industry leaders banded together through the National Association of Professional Employer Organizations (known as NAPEO), to construct a certification program and lobby the US congress for its implementation.  To advocates, this program was viewed as a win-win for both the IRS and the PEO industry.  The IRS gets increased confidence and oversight regarding the payment by the PEO of employment related taxes for the PEOs worksite employees and clients.   In turn, certification advocates in the PEO industry were seeking a way to assure prospective clients that employment related taxes are being handled appropriately.  Like any business, winning new clients is competitive and PEOs touting IRS certification are no doubt considering it will deliver a marketplace advantage.

Potential advantages for clients of a CPEO

• Payroll Tax Liability

  Clients who join a CPEO cannot be held liable for unpaid federal employment related taxes for the duration of their time in a CPEO relationship.  Technically in a standard PEO relationship the IRS can legally hold a PEO client liable for unpaid employment related taxes in the event that the PEO failed to make the required tax deposits. In the very few cases we are aware of where the client payed the PEO and the PEO failed to make those tax deposits, the IRS has most commonly declined to pursue the PEO client for such monies. No matter how uncommon, it has remained a concern for PEO clients for years. Clients of a CPEO are released from that potential liability.

• Wage Base Restarts – Successor Employer Treatment

  The IRS provision for CPOEs allows them to be treated as a successor employer regarding federal employment taxes – FUTA and OASDI – social security taxes. These taxes are subject to annual wage cutoff thresholds.  Some companies joining a PEO late in the calendar year have not been credited for earlier current year employment tax contributions due to the change in federal employer identification number (FEIN) reporting the wages.   In the payroll world this is called a wage base restart. A company (and their worksite employees) that joins a CPEO midyear will not be required to restart wage base calculations for federal employment related taxes.  This advantage will primarily affect PEO clients that have employees with annual wages over $127,200 – the social security tax threshold for 2017.  PEO clients with average annual wages below this amount will not see much financial advantage in joining a CPEO versus a standard PEO in a midyear transition.   This treatment also applies in reverse to any CPEO client that elects to leave the CPEO during the year. Since the CPEO program only covers federal employer taxes, successor employer status for state taxes (SUTA) will not be affected by the new certified PEO regulations.

• Tax Credit Eligibility

  In addition a client’s eligibility for other federal tax credit programs will not be impacted by using a CPEO. Since some tax credits eligibility accrues to the employer of record, some have questioned whether a PEO client can apply for tax credits when technically their PEO is the employer of record since form 941 wages are reported under the EIN of the PEO.   Some of the more common employer based tax credits are:

• IRS Section 45B – Related to cash tip credits (common PEO clients in the hospitality industry)
• IRS Section 45R- Related to employee health insurance expenses for small employers
• IRS Section 51- Related to Work Opportunity Credit
• IRS Section 1396 -Related to Empowerment Zone Employment Credit

Under the new CPEO rules, it is now codified that all of the listed federal tax credits will be eligible to the benefit of the CPEO client and that a CPEO has the obligation to calculate and report the eligible financial amounts to their CPEO clients.For more details refer to Internal Revenue Bulletin:  2016-21, REG–127561–15 Section 6

Will joining a Certified PEO Cost More?

Since the CPEO program is just now getting underway, only time will tell whether PEOs charge their clients more in order to offer a certified PEO service solution.  Each PEO who seeks and obtains IRS certification will have increased costs for maintaining program compliance and surety bonding.  It can be expected that those higher operating costs have to be recovered somehow and might result in slightly higher fees charged to clients seeking an IRS certified services suite.

Potential PEO Industry Impacts

According to the National Association of Professional Employer Organizations there are from 780 to 980 PEOs operating in the USA.  Smaller PEOs, may find the costs associated with certification (surety bonding in particular) to be much more marginally expensive than it will for larger PEOs who have a much higher number of clients to spread those relatively fixed costs.  Over the years the CPEO program has been developing, we have spoken with our StaffMarket member PEOs about their plans for obtaining IRS certification. Many are excited to finally have clarity about lack of potential tax liability they can guarantee to prospective clients. Others have expressed dismay that the associated additional expenses incurred to obtain CPEO status may place them at a price disadvantage to some of the larger PEOs. Furthermore there has been industry grumbling that the larger PEOs have been pushing this program with the Department Of Treasury as a strategy to gain a marketplace price advantage and possibly force industry consolidation.  Another possibility is that some smaller PEO operators will offer both a “certified” CPEO option as well as a standard PEO option to their clients, possibly at different price points. There is no doubt that many PEO clients enjoy the “high-touch” personal service of a smaller PEO. Let’s hope those clients of smaller PEOs who also demand certified PEO services are willing to pay a little more to get it.

Once the IRS names those PEOs who have obtained certified status, StaffMarket will track that information and StaffMarket analysts will be glad to review both standard PEO and CPEO solutions available that also meet your company’s other workers compensation, health insurance and HR needs.

Photo credit to Dave Miller at Flickr. Note this photo is of the IRS agent Frank Hamer- responsible for killing Bonnie Parker and Clyde Barrow.

Key players in pressing for this change include Genesis HR Solutions president Diane Stevenson and NAPEO’s Melissa Kelly.

Click here for a listing of PEOs serving business in New Hampshire.

Removing the Red Tape

If you want the bull to run, remove the red tape

“These nuisance fees created unnecessary red tape and placed an undue burden on businesses, while at the same time resulted in no significant revenues for the state,” Cuomo said in the announcement. “This action will eliminate unnecessary costs and paperwork, helping to allow these businesses to reinvest and grow in New York.”

New York PEO Fees being reduced

Included in the fees be reduced are two fees pertaining to PEOs operating in the state of New York

1. Professional Employer Organization Exemption Fee: A $250 annual fee to professional employer organizations that are already licensed in another state. The professional employer organization must have no office and less than 25 employees in New York to qualify for an exemption.
2. Professional Employer Organization Initial Registration and Renewal Fees: A $1,000 initial registration fee to professional employer organizations to allow the leasing of employees to businesses in New York. An additional $500 renewal fee is charged annually.

While the fee reductions may not be considered significant, it will provide more encouragement for PEOs with operations primarily in other states to enter the New York markets. Long known as one of the highest taxed states in the USA, New York appears to be making efforts to change its image as a red tape and taxation jungle.  That’s a good thing.

image courtesy of enkl22 @ flickr.

Just when employers thought the mine field of Human Resources rules were not dangerous enough, along comes a proposed expansion on Title VII rules for employers from the US Department of Labor. The new proposed rules address a range of areas including equal opportunity and fair pay for women in the workplace, discriminatory wage practices, sexual harassment, workplace accommodations for pregnancy, sex stereotyping, gender identity protections and family care giving discrimination.

Regarding “sex stereotyping”, the Office of Federal Contract Compliance Programs (“OFCCP”) proposed rules offer the following examples:

• Failure to promote a woman, or otherwise subjecting her to adverse employment treatment, based on sex stereotypes about dress, including wearing jewelry, makeup or high heels.
• Harassing a man because he is considered insufficiently masculine.
• Adverse treatment of an employee because he or she does not conform to sex-role expectations by being in a relationship with a person of the same sex.
• Adverse treatment of an employee or applicant because of his or her actual or perceived gender identity or transgender status.Adverse treatment of an employee or applicant based on sex-based stereotypes about caregiver responsibilities.
• Denial of opportunities to mothers of children based on the sex-stereotyped belief that women with children should not or will not work long hours, regardless of whether the contractor thinks it is acting in the employee’s or children’s best interest.

According to Connie Bertram writing for jdsupra:

“To comply with the new requirements, contractors should audit their existing policies, training and practices to comport with them. Most significantly, contractors should ensure that their policies and training clarify that managers may not make employment decisions based on (or make statement concerning) sexual stereotypes, such as perceptions about how women and men should act and dress, who should care for children and perceived limitations of family responsibilities. In addition, many contractors will need to update their ADA accommodation policies to afford accommodations to pregnant employees consistent with the proposed regulations.”

Total Insanity

How does a business owner or manager accused of violating these “rules” begin to defend themselves? Not noted in the “rules” are any penalties or repercussions for those who falsely accuse a manager of a violation.

At StaffMarket our company has a male staff member with hair down to the middle of his back. No biggie…. But If someone in the office says his hair looks “pretty”, I suppose that is questioning his masculinity and is grounds for a discrimination lawsuit.   TOTALLY INSANE!!!!

We wonder why new business formation is near an all-time low in the USA? With these kinds of insane workplace rules foisted on the private sector by the well intentioned but economically illiterate and politically motivated bureaucrats, who would want to start a business and become and employer? For now these proposed rules would only apply to government contractors, but as is often the case, they have a way of making their way in to the general private sector. If the USA ever wants to regain a robust and prosperous economy these kinds litigation landmines and business killers need to be struck down. In lieu of that occurring, PEOs become valuable partners dedicated to knowing the HR rules, training staff, documenting actions and sharing the risks associated with being an employer. For small businesses joining a PEO is a viable regulatory compliance and risk shifting strategy.

There are several provision in the draft that need to be understood by any PEO operating in Texas that is considering creating a self-funded health benefits plans.

Health Underwriting

One interesting provision 13.543 “Offers of Enrollment” make a rule that an approved PEO: Here is an excerpt:

§13.543. Marketing Materials; Offers of Enrollment.

(a)Marketing material. An approved PEO’s marketing material must be fair and accurate, and may not represent the plan or cost of coverage under the plan in a way that is materially inaccurate or misleading.

(b) Offer of enrollment. An approved PEO:

(1) may not choose whether to offer enrollment in the plan to a prospective client employer based on the prospective client employer’s claims history or its employees’ health status related factors; and

(2) must provide a prospective client employer a good-faith estimate of the cost of coverage under the plan and an accurate and concise description of the basis on which the cost of coverage was calculated, including:

(A) anticipated claims and loss adjustment expenses; and
(B) any other expenses, services or items charged.

(c) Enrollment of small employer’s employees. If an approved PEO enrolls plan participants employed by a client employer that meets the definition of “small employer” in Insurance Code §1501.002, the approved PEO may not decline to enroll employees of any of the approved PEO’s other client employers that meet that definition.

(d) Cancellation of agreement. An approved PEO may not cancel its client services agreement with a client employer because of health benefit claims made by plan participants employed by the client employer.