June 2011

By: Nancy E. Joerg, Esq.

While it is true that an Illinois Employee Leasing Company (also known as a “PEO”) allows employers to bundle and better manage payroll, workers’ compensation, human resource compliance and employee benefits, those looking to also use a PEO to get a better unemployment insurance contribution rate (contribution rate) should be aware that this is far from a guarantee.

Some employers are under the misconception that if they lease employees from a PEO (thereby becoming a “client company”), they can automatically use the PEO’s more favorable contribution rate. While this may be true in some instances, it is not always the case.

The Illinois Department of Employment Security (IDES) follows very stringent statutory requirements that must be met in order to determine if a PEO’s client company can use the better contribution rate. See 820 ILCS 405/206.1. The following illustrates these requirements by breaking them down into three straightforward steps:

STEP 1: In order to use the PEO’s contribution rate, the leasing contract with the client company must provide:

• That the PEO pays the individual directly from its own accounts;
• That the PEO, either exclusively or with the client company, retains the right to direct and control the individual in the performance of the services; and
• That the PEO, either exclusively or with the client company, retains the right to hire and terminate the individual.

STEP 2: If the leasing contract meets the Step 1 requirements, then the PEO must file an IDES Report containing:

• The name of the client company;
• A general description of the client company’s business and locations;
• The client company’s unemployment insurance account number (if any);
• The effective date of the employee leasing company’s contract with the client company; and
• The report must be accompanied by either a power of attorney to represent the client company or a certification by an officer or employee of the employee leasing company that the information in the report is true and correct to the best of his or her knowledge. See 56 Ill. Adm. Code 2732.306.

STEP 3: After checking the leasing contract for compliance with Step 1 and filing the report required by Step 2, each of the PEO’s client companies must pass muster under a specific mathematical formula provided by 820 ILCS 405/206.1(C).

In its simplest terms, the issue comes down to who the IDES recognizes as the employer of a leased employee for purposes of unemployment insurance. If the PEO and the client company meet all of the statutory requirements outlined in Steps 1-3 above, then the IDES will likely recognize the PEO as the employer; allowing the PEO to report wages on behalf of the client company under the PEO’s contribution rate. However, a client company that does not meet the statutory requirements is not relieved from reporting wages for the leased employees and must continue to do so under its existing rate.

For example, let’s say a PEO leases employees to three different client companies, A, B and C. Further, let’s assume that the PEO leasing contract meets Step 1 above and that the PEO has sent the IDES the required report for all three client companies required by Step 2 above. Upon review, the IDES determines that only client companies A and B meet the statutory mathematical requirements in Step 3. In practical application, the PEO will be allowed to do all the wage reporting for client companies A and B under its single contribution rate, but client company C will have to continue reporting separately under its different less favorable rate. Note that this has no impact on any other aspect of the employee leasing contract between the PEO and client company C.

Because of the complexities and detailed involvement the IDES has placed on whose contribution rate controls in an employee leasing situation, employers that use or are thinking about using a leasing company need someone who can wade through the minutiae and give them a straight answer. The consequence for improper wage reporting based on confusion or missteps in the above process may lead to the IDES imposing interest and penalties on both the client company and the PEO.

Questions? Call Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: 630-377-1554.