STATE OF WISCONSIN
LABOR AND INDUSTRY REVIEW COMMISSION
P O BOX 8126, MADISON, WI 53708-8126 (608/266-9850)

 

THE WATERSTONE GROUP EMPLOYER, Employer

 

UNEMPLOYMENT INSURANCE CONTRIBUTION LIABILITY DECISION
Account No. 580344, Hearing No. S0300060MD


An administrative law judge (ALJ) for the Division of Unemployment Insurance of the Department of Workforce Development issued a decision in this matter. A timely petition for review was filed.

The commission has considered the petition and the positions of the parties, and it has reviewed the evidence submitted to the ALJ. Based on its review, the commission agrees with the decision of the ALJ, and it adopts the findings and conclusion in that decision as its own, except that it makes the following modifications:

Paragraph six of the appeal tribunal's FINDINGS OF FACT AND CONCLUSIONS OF LAW is deleted, and the following is substituted therefor:

In addition to the evidence of the clients setting the wage rates in fact, there is evidence that the clients do so under contract as well. One of the contractual agreements between Waterstone and its clients states, for example, that Waterstone "will pay wages as reported by CLIENT." The agreement requires the client to transmit to Waterstone the weekly salaries of salaried co-employees and to notify Waterstone in advance of wage rate changes. It must be obvious that, if Waterstone were setting the rate of pay of the co-employees, it would not need notification in advance from a client of wage rate changes. The evidence establishes further that commission employees receive commissions calculated according to the client's (and not Waterstone's) commission schedule. All of these provisions suggest that it is the client that sets the rate of pay, and not Waterstone, under contract.

DECISION

The decision of the administrative law judge, as modified, is affirmed. Accordingly, as of March 21, 2003, it is necessary that Waterstone's clients report their employees under their own account numbers.

Dated and mailed July 28, 2004
waterst . smd : 105 : 2   ER 453  ER 460

/s/ James T. Flynn, Chairman

/s/ David B. Falstad, Commissioner

/s/ Robert Glaser, Commissioner

MEMORANDUM OPINION


The commission has affirmed the appeal tribunal decision, as modified, because it agrees with the administrative law judge that Waterstone has not established that it sets the rates of pay of the employees in question, both under contract and in fact. Waterstone argues that its arrangement with its clients reflects actual industry practice, but that argument is properly directed to the Legislature or the Advisory Council. The provision in issue, Wis. Stat. § 108.02(21e)(b), is clear that the professional employer organization, and not the client, set the rate of pay of the employees in question.

A secondary matter is whether Waterstone meets another criterion of Wis. Stat. § 108.02(21e), that the professional employer organization have the right to hire and terminate the employees who perform services for the client, and the right to reassign employees to other clients. This provision does not require that the professional employer organization have the exclusive right to hire, terminate, and reassign co-employees.  The evidence establishes that both Waterstone and the client in question have these rights. The evidence establishes that Waterstone has the right in fact to hire, terminate, and reassign employees who perform services for its clients. Waterstone's contractual agreement also gives it those rights; while the client also has the rights of hire and discharge, that is not dispositive. The statutory criterion does not require that the professional employer organization be the exclusive holder of those rights.


cc:
Corporate Counsel Bruce A. McIlnay
Attorney Michael J. Mathis

 


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Note: In view of the potential significance of this decision, the complete text of the Appeal Tribunal Decision is included here. 

The Appeal Tribunal Decision is reproduced here as modified by the commission's decision:

 

  Hearing No. S030006OMW
In the matter of:
Employer 1: The Waterstone Group Employer, Appellant
UI Account No. 580344
 
Adminstrative Law Judge:
Gretchen Mrozinski
Dated and Mailed:
November 26, 2003

THE DEPARTMENT'S INITIAL DETERMINATION HELD: that The Waterstone Group Employment Administration Services, LLC ("Waterstone"), does not qualify as an "Employe Service Company" for purposes of Unemployment Insurance. Accordingly, Waterstone's customers must report their employees under their own account numbers.

Waterstone timely appealed. A hearing was held on September 30, 2003. Based upon the persuasive evidence in this matter, the Appeal Tribunal makes the following

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Waterstone is a company that assumes a role as co-employer with its clients. In this arrangement, Waterstone is assigned the responsibility and liability for major employment administration activities and duties. Among other things, Waterstone pays the employee's wages, is responsible for all federal and state payroll taxes, provides and administers various benefit programs, obtains and maintains worker's compensation insurance, maintains personnel files and participates in the direction and control of the employees. However, Waterstone does not set the wage rate of the employees. Waterstone's clients determine how much the employees should be paid. In addition, Waterstone's clients recruit the employees.

The issue is whether Waterstone qualifies as a Professional Employer Organization ("PEO") within the meaning of Wis. Stat. § 108.02(21e). (1)   Waterstone contended that it does qualify as a PEO. This contention cannot be sustained.

Wisconsin Stat. § 108.02(21e) reads:

PROFESSIONAL EMPLOYER ORGANIZATION. "Professional employer organization" means any person who contracts to provide the nontemporary, ongoing employee workforce of a client under a written leasing contract and who under contract and in fact:

(a) Has the right to hire and terminate the employees who perform service for the client and to reassign the employees to other clients;

(b) Sets the rate of pay of the employees, whether or not through negotiations;

(c) Has the obligation to and pays employees from its own accounts;

(d) Has a general right of direction and control over the employees, including corporate officers, which right may be shared with the client to the degree necessary to allow the client to conduct its business, meet any fiduciary responsibility, or comply with any applicable regulatory or statutory requirements;

(e) Assumes responsibility for the unemployment insurance coverage of the employees, files all required reports, pays all required contributions or reimbursements due on the wages of the employees, and otherwise complies with all of the provisions of this chapter that are applicable to employers on behalf of the client;

(f) Has the obligation to establish, fund, and administer employee benefit plans for the employees; and

(g) Provides notice of the employee leasing arrangement to the employees.

The major point of contention in this case centered on Wis. Stat. § 108.02(21e)(b). Waterstone argued in the alternative. First, Waterstone argued that it ultimately sets the pay rate of employees because it would reject a wage rate offered by the client if that rate was illegal (such as below minimum wage). Waterstone then argued that for practical and business purposes, the client sets the wage rate and that to require Waterstone to set the wage rate would result in an absurd and/or unfair application of the above section.  (2)   Waterstone argues that it would be difficult if not impossible for an entity to qualify as a PEO if the law requires the PEO to set the wage rate. Waterstone's arguments are not without merit.

While it is true that Waterstone could ultimately reject a wage offered by the client to the employee if the wage was illegal, that "power" does not establish that Waterstone ultimately sets the wage rate of the employees: This tribunal does not believe that Waterstone's clients would suggest an illegal wage rate to begin with. As such, the power to reject an illegal wage rate is immaterial to determining who actually sets the wage rate. The reality of the situation is that Waterstone's clients set the wage rate -- not Waterstone. Waterstone's clients advise Waterstone when they have found an employee that they intend to employ. Waterstone then employs that worker under the terms and conditions offered by the client, as long as such terms and conditions are legal. Accordingly, Waterstone does not set the rate of pay of the employees.

In addition to the evidence of the clients setting the wage rates in fact, there is evidence that the clients do so under contract as well. One of the contractual agreements between Waterstone and its clients states, for example, that Waterstone "will pay wages as reported by CLIENT." The agreement requires the client to transmit to Waterstone the weekly salaries of salaried co-employees and to notify Waterstone in advance of wage rate changes. It must be obvious that, if Waterstone were setting the rate of pay of the co-employees, it would not need notification in advance from a client of wage rate changes. The evidence establishes further that commission employees receive commissions calculated according to the client's (and not Waterstone's) commission schedule. All of these provisions suggest that it is the client that sets the rate of pay, and not Waterstone, under contract.

The appeal tribunal therefore finds that Waterstone does not qualify as a Professional Employer Organization within the meaning of Wis. Stat. § 108.02(21e).

DECISION

The initial determination is affirmed. As of March 21, 2003, it is necessary that Waterstone's clients report their employees under their own account numbers.

APPEAL TRIBUNAL
BY:
/s/ Gretchen Mrozinski
    Administrative Law Judge

 

Appeal Tribunal Decision Footnotes:

(1)( Back ) Both parties agreed that the correct statutory section in this case is Wis. Stat. § 108.02(21 e). Although the determination referenced "Employee Service Company" that title has been phased out and replaced with the aforementioned section.

(2)( Back ) Waterstone's argument is that the client is in the best position to determine how much to pay the employee based upon the client's needs and business practices.

 


uploaded 2004/08/09