Ursula Ramsey (North Carolina), The Professional Employer Organization Regulatory Regime, 20 UC L. SF Bus. J. 95 (2024)

Employment taxes constitute over thirty percent of the revenue collected by the Internal Revenue Service (“IRS”). For fiscal year 2022, the IRS’s employment tax collections totaled over 1.3 billion dollars. Over the past few decades, a new industry has emerged that provides payroll, human resources, and employment tax services to its small to mid-sized business clients.to its small to mid-sized business clients payroll, human resources, and employment tax services. On behalf of business clients, these professional employer organizations (“PEOs”) remit the employment taxes associated with 216 billion dollars in worksite employee wages. This number represents the wages of four million worksite employees. Though there are 487 PEOs operating in the United States with over 170,000 client companies, the industry has received little scholarly study. Beyond the government’s interest in the efficient collection of employment taxes, regulation in the PEO industry warrants attention to ensure that those 170,000 small businesses receive the services for which they contract. Additionally, regulation in the industry warrants attention to ensure that those four million workers receive the protections to which they are entitled by law.

At present, the PEO industry is regulated by a mix of state licensure and regulation, voluntary membership in private industry organizations, and the IRS’s voluntary certification program. This article is about the effectiveness of the current PEO regulatory regime. It argues that the current regime fails to achieve its potential and uses new governance theory to propose changes to enhance the effectiveness of modern PEO regulation. Part I explains the PEO model and incorporates case law to illustrate the relationship between a PEO, its client company, and workers. Part II traces the development of both the PEO industry and its regulatory regime. In Part III, the article provides an overview of new governance theory. From there, Part IV applies new governance principles to five illustrations from the current PEO regulatory regime to highlight opportunities for improved governance.

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