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US Department of Labor proposes major overhaul of FMLA regulations that may affect Professional Employer Organizations

On February 11, 2008, the U.S. Department of Labor (DOL) published a proposed major overhaul of its FMLA regulations, including a specific amendment to the joint employer coverage regulation that will address PEO arrangements and clarifies the differences between staffing arrangements and Professional Employer Organizations. The FMLA changes are currently open for comment and interested PEOs need to make comments to the DOL prior to the April 11, 2008 deadline. Below are the pertinent sections in the Federal Register provisions affecting Professional Employer Organizations . See Document Page 6 - Register page 7880.

In Wage and Hour Opinion Letter FMLA–111 (Sept. 11, 2000), the Department considered the application of the FMLA regulations’ ‘‘joint employment’’ test in current § 825.106 to a ‘‘Professional Employer Organization’’ (PEO). The PEO in question had a contract with the client company under which it appeared to enter into an employer-employee relationship with the client’s employees (who were leased back to the client and continued to work at the client’s worksite pursuant to the terms of the contract). The PEO in this case assumed substantial employer rights, responsibilities and risks, including the responsibility for personnel management, health benefits, workers’ compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. Moreover, the PEO in this case had the right to hire, fire, assign, and direct and control the employees. Based on the facts described in the incoming letter, the Opinion Letter concluded that the PEO was in a joint employment relationship with its client companies for these reasons:

1. The PEO was a separately owned and distinct entity under contract with the client to lease employees for the purpose of handling ‘‘critical human resource responsibilities and employer risks for the client.’’

2. The PEO was acting directly in the interest of the client in assuming human resource responsibilities.

3. The PEO appeared to also share control of the leased employees consistent with the client’s responsibility for its product or service.

The Opinion Letter stated that ‘‘it would appear that’’ the PEO is the ‘‘primary employer’’ for those employees ‘‘leased’’ under contract with the client. Thus, under existing § 825.106, the PEO would be responsible for giving required FMLA notices to its employees, providing FMLA leave, maintaining group health insurance benefits during the leave, and restoring the employee to the same or equivalent job upon return from leave. The ‘‘secondary employer’’ (i.e., the client company) would be responsible for accepting the employee returning from FMLA leave if the PEO chose to place the employee with the client company. The Opinion Letter concluded that the client company, as the ‘‘secondary employer,’’ whether a covered employer or not under the FMLA, was prohibited from interfering with a ‘‘leased’’ employee’s attempt to exercise rights under the Act, or discharging or discriminating against an employee for opposing a practice that is unlawful under the Act.

While no specific questions concerning PEOs were contained in the RFI, the Department did seek information on ‘‘any issues that may arise when an employee is jointly employed by two or more employers’’ (71 FR at 69509). In response to the RFI, a number of stakeholders commented that it is not correct to consider PEOs (sometimes called ‘‘HR Outsourcing Vendors’’) to be joint employers with their client companies and explained the differences between a temporary staffing agency and a PEO. ‘‘A temporary staffing agency is a labor supplier. It supplies employees to a client while a PEO is a service provider providing services to existing employees of a company.’’ See comments by Jackson-Lewis. Unlike a temporary staffing agency, a PEO does not have the ability to place an employee returning from FMLA leave with a different client employer. Id.

The AFL–CIO commented that PEOs engage in a practice known as ‘‘payrolling,’’ in which the client employers transfer the payroll and related responsibilities for some or all of their employees to the PEO, and that typically, the PEO also makes payments on behalf of the client employer into State workers’ compensation and unemployment insurance funds, but the PEO does not provide placement services. In contrast with temporary staffing agencies, the AFL–CIO commented, PEOs do not match people to jobs.

The law firm of Littler Mendelson advised that ‘‘Employee leasing arrangements’’—like those involving temporary services firms and other staffing companies—refer to arrangements in which the staffing firm places its own employees at a customer’s place of business to perform services for the recipient’s enterprise. The PEO, in contrast, assumes certain administrative functions for its clients such as payroll and benefits coverage and administration (including workers’ compensation insurance and health insurance). The PEO typically has no direct responsibility over the employees of its clients including ‘‘hiring, training, supervision, evaluation, discipline or discharge, among other critical employer functions.’’

The law firm of Fulbright & Jaworski commented that PEO responsibilities vary by organization and contract, but that most are not involved in the dayto- day operations of their client’s business and do not exercise the right to hire, fire, supervise or manage daily activities of employees. The firm urged the Department to clarify that opinion letter FMLA–111 (Sept. 11, 2000) is about an atypical PEO that actually exercised control over the client’s employees.

The Department proposes to amend § 825.106(b) to clarify that PEOs that contract with client employers merely to perform administrative functions, including payroll, benefits, regulatory paperwork, and updating employment policies, are not joint employers with their clients, provided they merely perform such administrative functions. On the other hand, if in a particular fact situation a PEO has the right to hire, fire, assign, or direct and control the employees, or benefits from the work that the employees perform, such a PEO would be a joint employer with the client company.

Some of the comments concerning PEOs suggest confusion over how to count employees jointly employed for purposes of employer coverage (‘‘over 50 workers’’) and employee eligibility (‘‘over 50 employees within 75 miles’’). Some of these comments suggest that all of the employees of both the primary and secondary employers (and even those of other secondary employers) must be combined and counted together for purposes of these two tests. However, under the existing § 825.106(d) only those employees who are jointly employed by the primary and each of the secondary employers are included in the employee counts of both firms. The home office employees of the primary employer and the employees placed with other secondary employers are not included, for example, in the employee counts for each secondary employer.

For the reasons discussed above, existing paragraph (b) of § 825.106 is proposed to be changed to paragraph (b)(1) and a new paragraph (b)(2) is proposed to be added to clarify how the joint employment rules apply to PEOs. Under the proposal, PEOs that contract with client employers merely to perform administrative functions—including payroll, benefits, regulatory paperwork, and updating employment policies—are not joint employers with their clients, provided: (1) They do not have the right to exercise control over the activities of the client’s employees, and do not have the right to hire, fire or supervise them, or determine their rates of pay, and (2)do not benefit from the work that the employees perform. On the other hand, if in a particular fact situation a PEO has the right to hire, fire, assign, or direct and control the employees, or benefits from the work that the employees perform, such a PEO would be a joint employer with the client employer. The proposal also includes a cross-reference in paragraph (d) to proposed § 825.111(a)(3), which, as discussed below, would change the determination of the ‘‘worksite’’ for purposes of employee eligibility with respect to employees who are placed by a primary employer at the worksite of a secondary employer for more than 12 months.