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Alternatives to Hiring Employees Directly

Temporary Employees
Professional Employer Organizations
Best Practices for Temporary Staffing Firms and Professional Employer Organizations
Co-employment or joint employment; "single employer"
Independent contractors

Temporary employees    Top of Page

  1. Temporary employees hired directly by a company are the company's employees for all intents and purposes and can file unemployment claims when the job runs out. However, if a student fills a summer job and goes back to school when the next school term starts, TWC precedent cases hold that such a student would be disqualified from unemployment benefits as a "voluntary quit" (see TWC's Appeals Policy and Precedent Manual, VL 495.00, Appeal No. 983-CAC-72, for one example).

  2. Alternative: hire temporary employees through a temporary help service.

  3. In such a case, the temporary service is the employer and will deal with any unemployment claims from such employees.

  4. Hourly labor cost is higher, but at least there will be no unemployment claims to worry about.

  5. Temporary employees can be considered employees of both the client company and the staffing firm for purposes of wage and hour statutes and other laws under joint employment rules - cover this issue in any staffing agreement that you sign.

  6. "1000-hour rule" - this is a requirement under the federal pension and benefits protection law known as ERISA - it requires that if an employee works at least 1000 hours in a 12-month period, and if the company has some kind of pension or retirement benefit plan, the company must give that employee the chance to participate in the plan - that rule does not apply to other types of benefits, though (see ERISA section).

Professional Employer Organizations    Top of Page

  1. In Texas, professional employer organizations (PEOs) are considered the "employers" of workers assigned to various clients, as long as the PEOs are properly licensed and certified under applicable statutes (Chapter 91 of the Texas Labor Code).

  2. Under Section 91.032(a)(2) of the Labor Code, a PEO is liable for unpaid wages, even if it has not been paid by the client company, but it is liable for other types of compensation that the client company may have promised to pay the employees only if it has contracted to assume such liability (see Section 91.032(c)).

  3. In an unemployment claim situation, a former employee of a PEO is subject to potential disqualification for voluntarily leaving work if he or she was subject to a policy requiring the employee to contact the PEO after a work separation, but such a disqualification requires the PEO to prove that the employee was given written notice of such a requirement at the time of the work separation by either the client company or the PEO (see Section 207.045(i) of the Texas Labor Code).

"Payrolling"    Top of Page

  1. With payrolling, a client company sometimes attempts to escape the unemployment tax obligations of an employer by assigning its employees to an outside entity known as a payrolling company for payroll purposes only - the payrolling company, though, does not act as an employer in any other way.

  2. Texas considers such workers to be employed by the clients, not by the payrolling entity.

  3. This is also the rule with "common paymaster" situations, in which separate, related companies establish an entity solely for the purpose of handling personnel and payroll matters for the members of that group, or else allow one of the members of the group to handle payroll matters for the rest of the group's members, either for an administrative fee or as a matter of convenience. The definition of "employing unit" is key to understanding the concept of payrolling; it is defined in Section 201.011(11) of the Act as "a person who ... has employed an individual to perform services for the person in this state." A "person" would be an individual, a partnership, or a corporation. Section 201.046 of the Act provides that the employer is the employing unit that receives the benefit of the work performed, regardless of whether the employees are hired and paid by the employing unit or its agent. In a payrolling situation involving a common paymaster, each separate employing unit receives the benefit of the services provided by the employees working at each location. Employing units with separate identities, i.e., separate corporate charters and the like, are separate business entities and thus separate employing units. TWC's position in this area of the law is explained in Tax Letter No. 7-80, as well as in Rule 13 decisions, including TD-98-066-0998 (January 5, 1999), TD-05-053-0505 (September 29, 2005), TD-08-024-0108 (August 26, 2008), and TD-09-013-0109 (May 27, 2009), holding that "payrolling companies" are not single employing units for the purposes of reporting wages and paying state UI tax.

  4. The only exceptions to that general rule are for clients of licensed PEOs (see above) and, pursuant to 26 U.S.C. § 3306(p) of the federal law and Section 201.011(11) of the Texas Labor Code, any employees who are concurrently employed by two or more related corporations, one of which is acting as the common paymaster for the other(s).

  5. Payrolling should not be confused with the single and joint employer concepts that may apply in other employment law situations.

  6. For online tips from the IRS on how to use third-party payroll service providers, see https://www.irs.gov/government-entities/third-party-payer-arrangements-payroll-service-providers-and-reporting-agents.

Best Practices for Temporary Staffing Firms and Professional Employer Organizations    Top of Page

To minimize risk that TWC will conclude that a staffing relationship is merely payrolling, the temporary staffing firm or PEO needs to act like the real employer:

  1. Reserve the right in the client service agreement to exercise as many of the prerogatives of an employer, at least on paper, as possible, i.e., hiring, firing, reassignment, training, pay, benefits, and so on.

  2. Have employees fill out employment applications.

  3. Run all new temps/leased employees through the I-9 process.

  4. Report them to the Attorney General's office as new hires.

  5. Do at least minimal background/reference checks.

  6. Get W-4s filled out.

  7. Give workers' comp coverage notices (Notice 5 for non-coverage, Notice 6 for coverage).

  8. Give them company policy handbooks.

  9. Have them sign clear acknowledgement of receipt forms listing the temporary help firm or the PEO as the employer.

  10. Any benefits should be given in the name of the temporary help firm or the PEO.

  11. Pay stubs should identify the temporary help firm or the PEO as the employer.

  12. Do not let client firms include assigned employees in the client firm's internal employee e-mail distribution groups, employee rosters, or mailing lists

  13. Give all statutorily-required notices for UI purposes (Section 207.045(h) for temporary help firms and 207.045(i) for PEOs).

  14. Report wages and pay UI and other payroll taxes to TWC and IRS.

  15. Upon commencement of health plan coverage, termination of the employment relationship, and other qualifying events, give COBRA notices to the ex-employee and affected beneficiaries when applicable.

  16. Give reminders of who the employer is throughout the employment relationship and at the conclusion of the assignment, along with clear written instructions on how to recontact the employer for reassignment.

Co-employment or joint employment; "single employer"    Top of Page

  1. Especially in the case of temporary help firms and PEOs, but also with other companies, the possibility of joint employment exists - if two independent entities jointly exercise enough of the attributes of an employer with respect to certain workers, it may be possible that the two entities will be considered "joint employers" of those workers for purposes of various employment laws.

  2. A similar concept is that of the "single employer", which occurs when two nominally separate companies are so closely interrelated that they form a single employing unit for purposes of various employment laws affecting workplace rights. From a 1965 Supreme Court case called Radio Union v. Broadcast Service (380 U.S. 255, 257), the four criteria for determining whether two companies are really a single employer for employment law purposes are: (1) interrelation of operations; (2) centralized control of labor relations; (3) common management; and (4) common ownership or financial control. According to the Fifth Circuit Court of Appeals (the federal appeals court responsible for interpretation of federal law for Texas, Louisiana, and Mississippi), the most important criterion is the second one, i.e., centralized control of labor relations (see Schweitzer v. Advanced Telemarketing Corp., 104 F.3d 761, 764 (5th Cir.1997)). If one person or department does essentially all of the hiring, personnel administration, payroll, and firing for both companies, then there is a high probability that a court or agency will find that a single employer situation exists.

  3. On the important issue of centralized control of labor relations, a useful case under the FLSA is In re Enterprise Rent-A-Car, 683 F.3d 462, 471 (3d Cir. 2012), which listed the following relevant factors: "1) the alleged employer's authority to hire and fire the relevant employees; 2) the alleged employer's authority to promulgate work rules and assignments and to set the employees' conditions of employment: compensation, benefits, and work schedules, including the rate and method of payment; 3) the alleged employer's involvement in day-to-day employee supervision, including employee discipline; and 4) the alleged employer's actual control of employee records, such as payroll, insurance, or taxes.".

  4. Franchise-based employers: to minimize co-employment liability, franchisors should separate themselves as much as possible from the personnel decisions of their franchisees, including recruiting, hiring, training, paying, scheduling, corrective actions, and work separations.

  5. Caution: this concept is unrelated to the situation of payrolling. Simply because two or more companies may be so closely related that they qualify as single or joint employers for purposes of discrimination, wage and hour, and other employment laws affecting workplace rights does not mean that the related companies may engage in the practice of payrolling for state unemployment tax purposes. In Texas, each employing unit should have its own unemployment tax account and report the wages of its own employees to TWC. For more information, see the topic on payrolling.

Independent contractors    Top of Page

  1. Independent contractors are self-employed - they are independent business entities in a position to make a profit or loss based upon how they manage their own independent enterprise - an "employer" of such an individual is merely one of the clients of that contractor.

  2. Most states and IRS use similar tests to determine whether given workers are employees or independent contractors.

  3. Whether the test applied is the common-law direction and control test, the ABC test, the economic realities test, or the IRS eleven-factor test, the issues are basically the same - all the tests boil down to whether the employer exercises direction and control over the performance of the services of the worker.

  4. All the laws presume that a worker performing services for pay is an employee - if an employer thinks otherwise, it has the burden of proof in almost any possible legal situation.

  5. Keep these characteristics of independent contractor arrangements in mind:

    1. The employer generally seeks the independent contractor out, not vice versa.
    2. The employer has to negotiate terms with the independent contractor.
    3. Training is not an issue - contractors are experts and should not need training.
    4. The employer is buying a finished project or completed service, rather than hours of work on an ongoing basis.
    5. Non-competition agreement → no - such an agreement is strong proof that the worker's services are directly integrated into the primary service provided by the employer.
    6. Non-solicitation agreement → maybe - keep it narrowly tailored to protect the company's relations with the clients served by the contractor - anything stronger than that will resemble a non-competition agreement.
    7. Non-disclosure agreement → usually OK, but be careful - keep it as narrow and tightly-focused as possible to protect the confidential information to which the contractor will have access during the project.
  6. TWC tax examiners look for certain "red flags":

    1. Terms such as "1099 employees" or "contract labor"
    2. Having contractors wear company badges or uniforms indicating their affiliation with the company
    3. Giving contractors a company e-mail address or cc'ing them on company e-mails (instead, send them completely separate e-mails)
    4. Inviting contractors to company parties and other events using the same invitation that goes to regular employees
    5. Giving contractors company benefits or wage advances
    6. Having contractors sign company policy handbooks
    7. Non-competition agreements (as noted above)
  7. In an audit situation, an employer should try to show:

    1. Contractors' business cards indicating how the contractors are in business for themselves
    2. Contractors' invoices to your company on their own stationery
    3. Copies of any advertisements they use for their own businesses
    4. Links to the contractors' websites
    5. Written contracts for provision of services or performance of a project, one of the provisions of which covers recourse for premature termination of the contract and non-completion of the work (that is to help show that there is not an at-will employment relationship)
    6. E-mails, letters, or other documentation relating to negotiating the parameters of the work

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