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Tuesday August 23, 2011

PACE’s Response to NAPEO’s‘Small Business Efficiency Act of 2011’ (H.R. 2466)

At a time in our history when it is becoming increasingly obvious how excessive regulation hurts our economy as a whole, and small business in particular – which includes most PEO’s and almost all of their clients – NAPEO is again attempting to pass federal legislation that will add another layer of heavy handed bureaucracy to our already struggling industry. Not everything in this legislation is bad. However, the same onerous provisions are in this bill that were in previous bills sponsored by NAPEO…and these provisions have the potential to make life miserable for all but the largest companies in the PEO industry. And the compliance costs will be exorbitant.

The NAPEO mantra has been that this legislation will create “legal certainty” for our industry and small business clients at the federal level. We at PACE believe this concept of “legal certainty” is unattainable or, at best, is a moving target that will require amendments and additions to this legislation in the future that will only add to the complexity and expense of compliance. Just look at what has happened at the state level where licensing laws have been in place for a while. Has compliance become easier…or less expensive? Has it ensured legal certainty? Or, as is usually the case, have the few positives of any of this well-intended legislation been overshadowed by the negative unintended consequences…not the least of which is placing your fate in the hands of government bureaucrats or some “impartial” licensing board?

Let’s look at some of the specific provisions of this bill (linkhereto see the entire bill).

The couple of positives we see are:

1.One: Treating the PEO and client as the successor employer when they enter/leave the co-employment relationship. This obviously makes it easier for both sides to establish/terminate a co-employment relationship in the middle of a calendar year for tax purposes.

2.Two:Absolving the client of any federal tax liability for federal taxes they have already paid to the PEO. While we have not heard of this being a serious problem for client companies of PEO’s who have not paid their federal tax liabilities (assuming the client did pay the PEO in good faith), we believe this would be positive provision.

Now for the negatives:

IRS certification. This is the essence of the entire bill. It sets out the basic requirements for becoming a certified professional employer organization (CPEO) and places the enforcement of those requirements in the hands of the Secretary of the Treasury and the IRS. It also gives the Secretary (i.e., the IRS bureaucracy) total latitude over establishing the rules and regulations “to carry out the purposes” of this legislation. While touted as “voluntary” certification, a PEO will have a very difficult time competing as a non-certified PEO…so it might as well be mandatory, and probably will be at some point. We know of no other industry in this country that would agree to cede this much control over their existence to the IRS.

Some of the more onerous requirements for certification are:

1·One: Owners, officers and “others” in a PEO must meet requirements “with respect to tax status, background, experience, business location, and financial audits” as specified by the Secretary of the Treasury. In other words, the Secretary can determine if you are allowed to own or establish a PEO.
2.Two:A PEO must post a bond of at least 5% of the previous year’s federal tax liability, up to $1,000,000 (at least initially). For those of you already in several states with licensing laws, your bonding capacity is probably already stretched to the max…unless you are one of the very large PEO’s.
3.Three: Quarterly financial reviews and annual audits as specified by and to be submitted to the Secretary (i.e., the IRS). Very expensive.
4.Four:A PEO must contractually assume responsibility for the payment of wages, taxes, benefits, etc. of all worksite employees “without regard to the receipt or adequacy of payment from the customer”. This is like handing a blank check to an unhappy, unscrupulous or financially stressed customer.

These are just a few of the troubling provisions in this bill. Please read it carefully and let us…and NAPEO…know if you share our concerns. We at PACE believe that responsible federal legislation could be crafted to be benefit of the industry as a whole, and not just a few select companies. H.R. 2466 is not that legislation.

PACE Board of Directors
August, 2011

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