PA 08-105—sHB 5113

Labor and Public Employees Committee

General Law Committee

Finance, Revenue and Bonding Committee

Government Administration and Elections Committee

AN ACT CONCERNING PROFESSIONAL EMPLOYER ORGANIZATIONS AND EMPLOYEE MISCLASSIFICATION

SUMMARY: This act requires professional employer organizations (PEOs) to register with the Labor Department (DOL) and creates standards for them, including financial capacity standards. It defines the organizations as businesses that provide employer services for their clients and have entered coemployment agreements with their clients' employees. It sets application requirements and allows more than one PEO to form a group and meet the reporting and financial requirements as a group.

The act sets standards for the contracts between the organizations and their clients.

It prohibits the organizations from, among other things, committing willful violations of its provisions and authorizes the labor commissioner to discipline violators.

The act states its relationship to other labor laws and laws creating certain economic development programs.

The act also establishes a permanent enforcement commission to coordinate prosecutions of employers who misclassify their employees in order to avoid state and federal labor, employment, and tax law obligations.

EFFECTIVE DATES: January 1, 2009, except the definition section is effective October 1, 2008; the provisions on the act's relationship to state labor law and the creation of the employee misclassification enforcement commission are effective July 1, 2008; and the provision authorizing implementing regulations is effective on passage.

1 & 3 — REGISTRATION REQUIRED

The act prohibits anyone from providing, advertising, or otherwise holding oneself out as providing professional employer services without being registered as a PEO with the Labor Department.

It requires each PEO not operating in this state on January 1, 2009, to complete its initial registration before providing services.

It requires each PEO operating in this state on or before January 1, 2009, to register by March 1, 2009. The initial registration is valid until 180 days after the end of the organization's first fiscal year that is more than one year after March 1, 2009. Each PEO or PEO group must file with the commissioner the beginning and ending date of its fiscal year and notify and file any changes in dates with the commissioner.

The act requires the Labor Department to (1) keep a list of registered PEOs and (2) develop forms necessary to promote the efficient administration of the registration requirements. All registered PEOs must notify the commissioner of the address of their principal place of business and each office or proposed office in the state. The commissioner must also be informed of any address change within five working days.

Under the act, the initial registration fee must be no more than $1,500 and the renewal fee must be no more than $1,000.

Definitions

The act defines a “professional employer organization” as any person engaged in the business of providing professional employer services, regardless of whether the person uses the term or conducts business as a PEO, staff leasing company, registered staff leasing company, employee leasing company, administrative employer, or any other name. The act defines “person” as any individual, partnership, corporation, limited liability corporation, association, or other legal entity.

“Professional employer services” means entering into coemployment relationships in which all or a majority of the employees providing services to a client or to a division or work unit of a client are covered employees.

A “coemployment relationship” is an ongoing relationship in which the rights, duties, and obligations of an employer are allocated between a PEO and a client pursuant to a professional employer agreement. A “client” is any person who, as an employer, enters into a professional employer agreement with a PEO. A “covered employee” is an individual who (1) is an employee of a client that has a coemployment relationship with a PEO, (2) has received written notice of the coemployment, and (3) has received a written summary of the obligations and responsibilities of the client and the PEO under the professional employer agreement.

Under the act, a PEO does not include:

1. arrangements in which a person, other than a person whose principal business activity is entering into professional employer arrangements, shares employees with a commonly owned company within the meaning of Section 414(b) and (c) of the Internal Revenue Code;

2. independent contractor arrangements in which the contractor assumes responsibility for the product produced or service performed and retains and exercises primary direction and control over the work performed by the individuals whose services are supplied; or

3. temporary help services that employ individuals directly to furnish part-time or temporary help to others.

Initial Application Requirements

An application for an initial PEO registration must include:

1. the name or names under which the applicant will conduct or has conducted business before the application date;

2. the addresses of the business's principal office and each office in Connecticut;

3. the applicant's federal and state taxpayer and employer identification numbers;

4. a list, by jurisdiction, of any name under which the applicant operated in the five years before the application date, including any alternative names, names of predecessors or immediate successor businesses, and, if known, any other successor businesses;

5. an ownership statement that includes the name and business experience of any person that, individually or with others, owns, controls, or will control, directly or indirectly, 25% or more of the applicant's equity interests;

6. a management statement that includes the name and business experience of any person who serves or will serve as president, chief executive officer, or otherwise has or will have the authority to act as senior executive officer; and

7. a statement of the applicant's financial condition.

The act requires each applicant engaged in the business of providing professional employer services before January 1, 2009, to submit its most recent audit, which must have been conducted within 13 months before the application date.

If an applicant has not had sufficient operating history to have audited financial statements based on at least 12 months of operating history, the act requires the applicant to meet financial capacity requirements (specified below) and submit financial statements prepared by an independent, licensed certified public accountant. In the statement, the accountant must attest that:

1. it is the applicant's most recent financial statement,

2. the accountant reviewed the statement within six months of the registration,

3. the applicant is not delinquent in paying state or federal taxes, and

4. the applicant meets the financial capacity standards set in the act.

All information obtained from a PEO or PEO group under the act is subject to disclosure in accordance with the state Freedom of Information Act.

Renewal Application

The act requires registrations to be renewed annually. A PEO may apply for renewal by submitting, not later than 180 days after the end of its fiscal year, (1) an audit for the preceding fiscal year and (2) a notice of any changes from the information provided in its immediately preceding application. An applicant may apply for an extension with the department, but this request must be accompanied by a letter from its auditor stating the reasons for the delay and the anticipated audit completion date. The financial statement must be:

1. prepared in accordance with generally accepted accounting principles,

2. audited by an independent and properly licensed certified public accountant, and

3. without qualification as to any increase in the going concern status of the PEO.

1 & 3 — PEO GROUPS

A “professional employer organization group” is two or more PEOs that are majority-owned or commonly controlled by the same entity, parent, or controlling persons. The act allows PEOs in a PEO group to satisfy the act's reporting and financial requirements on a combined or consolidated basis if each member of the group guarantees the obligations under the act of each other group member. In the case of a group that submits a combined or consolidated audited financial statement including entities that are not PEOs or that are not in the PEO group, the controlling entity of the PEO group must guarantee the obligations of the PEO in the group.

PEOs or PEO groups are required to notify the commissioner of their controlling entity's name and address.

3 — LIMITED REGISTRATION

The act allows the labor commissioner to issue a limited registration to a PEO that provides sufficient evidence that it:

1. is domiciled outside this state and is licensed or registered as a PEO in another state,

2. does not maintain an office or directly solicit clients located or domiciled within Connecticut, and

3. does not have more than 50 covered employees employed or domiciled in this state at any time.

Limited registrations are valid for one year and must be renewed annually at the completion of the registrant's fiscal year. The fee for limited registrations and renewals is established by the commissioner and must not be more than $1,000.

4 — FINANCIAL CAPACITY REQUIREMENTS

The act requires PEOs or PEO groups to meet one of two financial capacity standards. The first is to maintain a minimum of $150,000 in working capital, as defined by generally accepted accounting principles, as reflected in the financial statements submitted to the department with the initial registration or annual renewal.

A registrant with less than $150,000 in working capital at renewal has 180 days to attain the $150,000. During the 180 days, the registrant must submit quarterly statements accompanied by the chief executive officer's attestation that all wages, taxes, workers' compensation premiums, and employee benefits have been paid.

The second way of demonstrating financial capacity is to provide a bond, irrevocable letter of credit, or securities to the Labor Department with a minimum value of $150,000. The bond must be held by a depository designated by the commissioner, securing payment by the organization of all taxes, wages, benefits, or other entitlements due to or with respect to covered employees.

In lieu of these requirements, the act authorizes the commissioner to accept an affidavit or certification of a bonded, independent, and qualified assurance organization approved by the commissioner certifying qualifications of a PEO.

The act exempts a PEO with a limited registration from the financial capacity requirements.

5 — PROFESSIONAL EMPLOYER AGREEMENT

The act requires PEOs and their clients to allocate their rights, duties, and obligations in an agreement and specifically requires the agreement to:

1. provide for the (a) allocation of employer rights and obligations between the client and the PEO with respect to the covered employees and (b) PEO and the client to assume the responsibilities required by the act and

2. require the PEO to (a) pay wages to covered employees; (b) withhold, collect, report, and remit payroll-related and unemployment taxes; and (c) make payments for employee benefits for covered employees to the extent the PEO has assumed responsibility in the agreement.

Unless the agreement expressly states otherwise, the act provides that:

1. a client is solely responsible for the quality, adequacy, or safety of the goods or services produced or sold by the client's business;

2. a client is solely responsible for directing, supervising, training, and controlling the covered employees' work with respect to the client's business activities, and for the acts, errors, or omissions of the covered employees with regard to such activities;

3. a client is not liable for the acts, errors, or omissions of a PEO or of any covered employee of the client when the covered employee is acting under the express direction and control of the PEO;

4. a PEO is not be liable for the acts, errors, or omissions of a client or its covered employees when they are acting under the client's express direction and control; and

5. a covered employee is not, solely as the result of being a covered employee of a PEO, an employee of the organization for purposes of general liability insurance, fidelity bonds, surety bonds, employer's liability that is not covered by workers' compensation, or employer's liability insurance carried by the PEO, unless the covered employee is included by specific reference in the PEO agreement and applicable prearranged employment contract, insurance contract, or bond.

2 — EXISTING RIGHTS

The act provides that it does not, and professional employer agreements must not, (1) diminish existing rights between covered employees and a client existing before the effective date of either the act or the professional employer agreement or (2) create any new or additional enforceable right of a covered employee against a PEO that is not specifically provided by the professional employer agreement or the act.

6 — DISCIPLINE

The act subjects PEOs and their controlling persons to discipline by the labor commissioner for:

1. willfully violating the act's registration, financial capacity, and written agreement provisions;

2. being convicted of a crime that relates to (a) the operation of a PEO, (b) fraud or deceit, or (c) the ability of the PEO or its controlling person to operate a PEO;

3. knowingly making a material misrepresentation to the Labor Department or other governmental agency;

4. misappropriating any funds of a client employer; or

5. using fraudulent or coercive practices to obtain or retain business or demonstrating gross financial irresponsibility.

The act authorizes the labor commissioner, after notice and opportunity for hearing, upon finding that a PEO or its controlling person has committed a prohibited act, to:

1. deny a registration application;

2. revoke, restrict, or refuse to renew a registration;

3. impose an administrative fine up to $1,000 for each material violation;

4. place the PEO or its controlling person on probation for a period determined by the commissioner, subject to reasonable conditions he specifies; or

5. issue a cease and desist order.

In addition to the above mentioned penalties, a PEO or PEO group or its officers or agents found in violation of the act's PEO provisions is liable to DOL for a civil penalty of $300 for each violation. Upon complaint of the commissioner, the attorney general must institute a civil action to recover any penalties the act creates that are due to the state. Any amounts recovered by the civil action must be deposited in the General Fund.

6 — GENERAL FUND DEPOSITS

Registration and renewal fees and penalties collected under the act must be deposited in the General Fund and credited to a separate, nonlapsing appropriation to the Labor Department for other current expenses. The department may use the funds for the cost of administering and enforcing the PEO registration program.

2 & 7 — RELATIONSHIP TO EXISTING LAWS

The act specifies that it does not eliminate or diminish (1) employee protections and employer responsibilities under the state labor law, regulations, or DOL policies or (2) DOL's ability to enforce them. It also does not diminish any other rights of covered employees and clients that existed before the PEO agreement or give covered employees enforceable rights against PEOs other than those the agreement or the act establishes.

The act specifies that a covered employee who must be licensed, registered, or certified under any provision of the general statutes must be deemed to be solely an employee of the client for credentialing purposes. Further, a PEO must not be deemed to engage in any occupation, trade, profession, or other activity subject to licensing, registration, or certification requirements, or otherwise regulated by a governmental entity, solely by entering into and maintaining a coemployment relationship.

For the purpose of determining tax credits and other economic incentives provided by this state or another government and based on employment, the act deems the client's covered employees to be solely employees of the client.

Under the act, a client's status or certification as a small, minority-owned, disadvantaged, or woman-owned business enterprise or as a historically underutilized business is not affected by entering a professional employer agreement.

8 — REGULATIONS

The act permits the commissioner to adopt implementing regulations by July 1, 2009. It requires the regulations to include:

1. guidelines for electronic filing of applications, documents, reports, and other filings by bonded, independent, and qualified assurance organizations approved by the commissioner to satisfy the act's requirements;

2. criteria for notice and written summaries to covered employees of the PEO arrangement, including whether all or part of a client's employees are covered; and

3. required notice of who is the controlling entity of a PEO or PEO group.

9 — EMPLOYEE MISCLASSIFICATION ENFORCEMENT COMMISSION

The act establishes a joint enforcement commission to address the problem of employers avoiding state and federal labor, employment, and tax law obligations by misclassifying their employees. The commission must meet at least quarterly and (1) coordinate the civil prosecution of state and federal employment law violations involving employee misclassification and (2) report any suspected violation of state criminal statutes to the chief state's attorney or the state's attorney serving the district where the violation allegedly occurred. The most common form of misclassification involves an employer treating employees as independent contractors to avoid paying workers' compensation insurance premiums and unemployment taxes.

The commission members are the labor and revenue services commissioners, workers' compensation commission chairperson, attorney general, and chief state's attorney, or their designees.

By February 1, 2010, and every following year, the commission must submit its report, with recommendations, to the governor and the Labor and Public Employees Committee.

BACKGROUND

Related Public Act

PA 08-156 also creates a joint employment misclassification commission for the same purpose and with the same membership.

OLR Tracking: JM: SP: PF: ts