PEOs Enhance the Unemployment Insurance Compensation Program
PEOs are Employers of Record
PEOs have traditionally been considered the employer of record for payment of federal income and unemployment taxes. Section 3401(d) of the Internal Revenue Code provides that an entity is an "employer" for federal employment tax purposes if the entity has legal control of the payment of wages. This definition of "employer" under Section 3401(d)(1) has also been applied to FICA and FUTA taxes. Otte v. United States, 419 U.S. 43 (1974).
Case law affirms the PEO's liability for payment of employment taxes when the PEO has assumed responsibility for such payment regardless of receipt or adequacy of payment from the client. (See General Motors Corporation v. U.S., 91-1 U.S.T.C. 50,032 (E.D. Mich. 1990)). Similarly, many states which statutorily recognize the PEO relationship hold that the PEO is the responsible entity for payment of unemployment taxes and such taxes are based on the PEO's tax rate.
PEOs Create Efficiencies in the Unemployment Compensation System
Collection of unemployment taxes from small businesses is burdensome and costly for the government; in addition, small businesses are often not in complete compliance with all federal and state tax laws. When a PEO assumes liability as employer of record for payment of federal and state employment taxes, the government burden of collecting unemployment obligations from a myriad of small businesses is relieved. In addition, because PEOs hire professional human resource experts, consistent compliance with complex federal and state unemployment tax laws is assured, as is the timely payment of unemployment taxes.
Unemployment compensation claims may be reduced as a result of the PEO relationship. The enhanced access to benefits provided by PEOs creates a more stable workforce. As a part of their suite of human resource management services, PEOs are able to offer small to mid-sized companies professional employee relations and professional claims management services. These services may include reassigning worksite employees from one client to another to minimize unemployment claims, when reassignment does not interfere with the business interests of the client. Services also may include assistance at labor board hearings and with appeals of labor board decisions.
PEOs Maintain the Integrity of Unemployment Insurance Systems
NAPEO members are committed to maintaining the solvency and equity of the unemployment insurance system. PEO arrangements in some cases provide additional revenues to state funds when additional taxes are paid on behalf of worksite employees who become employed by the PEO in mid-year, after the client company had already paid taxes on the worker's wages up to the taxable maximum.
The incentives PEOs have to further the efficiency and viability of the system are the same incentives shared by every large and small employer, employers whose workers suffer the most involuntary unemployment pay the highest rates.
NAPEO members may access additional resources
related to PEOs and unemployment insurance including NAPEO UI Task Force reports, a comparison of state unemployment laws, and a study by Ernst & Young on the impact of PEOs on the unemployment insurance system.
GAO Report - UNEMPLOYMENT INSURANCE TRUST FUNDS