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Leased Employees and PEOs

Under a typical employee leasing arrangement, a client company fires its employees, who are subsequently hired by an employee leasing company and leased back to the original employer by the employee leasing company.

There is a concern that employers may use PEOs, and employee leasing arrangements generally, to circumvent the tax rules requiring that employee benefits be provided in a nondiscriminatory manner (i.e., not preferring highly compensated employees).

PEOs assert that the employment relationship between the client-company and the work-site employees never terminates with the client company retaining the day-to-day control over the workers in carrying on the client-company's trade or business, and, PEO becomes a "co-employer", performing some functions typically associated with a common law employment relationship

The common law employer must be identified to determine whether a:

Authorities have mixed opinions on whether the PEO or the client company is the common law employer.

The service has not taken a formal position on who is the employer in employee leasing cases and has announced that it will not rule. However, in a 1998 Technical Advice Memorandum (TAM) the Service's position was that leased employees are not per se employees of either the client company or the PEO; and, the facts must be analyzed in each case.

Thus, assuming a worker is a common law employee, the realistic possibilities in a three-party employment arrangement involving a PEO and a client company with respect to who is the employer are the following: