Chapter 04-124

2004 -- S 2378 SUBSTITUTE A AS AMENDED

Enacted 06/18/04

A N A C T

RELATING TO BUSINESSES AND PROFESSIONS

Introduced By: Senators Badeau, and Connors

Date Introduced: February 11, 2004

It is enacted by the General Assembly as follows:

SECTION 1. Title 5 of the General Laws entitled "Businesses and Professions" is hereby

amended by adding thereto the following chapter:

CHAPTER 75

PROFESSIONAL EMPLOYER ORGANIZATIONS ACT OF 2004

5-75-1. Legislative finding. – The legislature finds that: (a) Professional employer

organizations provide a valuable service to commerce and the citizens of this state by increasing

the opportunities of employers to develop cost-effective methods of satisfying their personnel

requirements and providing employees with access to certain employment benefits which might

otherwise not be available them;

(b) Professional employer organizations operating in this state should be properly

recognized and regulated by the division of taxation, as provided in this chapter and section 44-

30-71.4; and

preserve all rights to which covered employees would be entitled under a traditional employment

relationship.

5-75-2. Definitions. – As used in this chapter:

(a) “Administrative fee” means the fee charged to a client by a professional employer

organization for professional employer services. The administrative fee shall not be deemed to

include any amount of a fee by the professional employer organization that is for wages and

salaries, benefits, workers’ compensation, payroll taxes, withholding, or other assessments paid

by the professional employer organization to or on behalf of covered employees under the

professional employer agreement.

(b) “Client” means any person who enters into a professional employer agreement with a

PEO.

(d) “Co-employment relationship” shall mean:

(1) As between co-employers, a relationship whereby the rights, duties, and obligations

of an employer which arise out of an employment relationship have been allocated between co-

employers pursuant to a professional employer agreement and this chapter and which is intended

to be an ongoing relationship, rather than a temporary or project specific relationship;

(2) As between each PEO and a covered employee as to which a professional employer

agreement applies, an employment relationship whereby such PEO is entitled to enforce those

rights, and obligated to perform those duties and obligations, allocated to such PEO by the

professional employer agreement and this chapter;

(3) As between each client and a covered employee to which a professional employer

agreement applies an employment relationship whereby such client is entitled to enforce those

rights, and obligated to provide and perform those employer obligations allocated to such client

by the professional employer agreement and this chapter and whereby such client is responsible

for any employer right or obligation not otherwise allocated by the professional employer

agreement or this chapter;

(4) As to rights enforceable by an employee under state law, covered employees shall be

entitled to enforce against the PEO those rights: (i) allocated to such PEO by the professional

employer agreement and this chapter; or (ii) shared by the PEO and the client and the PEO under

the professional employer agreement and this chapter. All other rights, duties and obligations

enforceable by an employee under the state shall continue to be enforceable against the client

pursuant to state law.

(e) “Covered employee” means an individual having a co-employment relationship with a

PEO and a client who meets all of the following criteria: (1) the individual has executed an

employment agreement with the PEO; (2) the individual is a party to a co-employment

relationship with a PEO and a client; and (3) the individual’s co-employment relationship is

pursuant to a professional employer agreement subject to this chapter. Individuals who are

officers, directors, shareholders, partners, and managers of the client will be covered employees

to the extent the PEO and the client have expressly agreed in the professional employer

agreement that such individuals would be covered employees and provided such individuals meet

the criteria of this paragraph and act as operational managers or perform services for the client.

(f) “Department” means the department of administration, division of taxation.

(g) “Director” means the tax administrator.

(h) “Person” means any individual, partnership, corporation, limited liability company,

association, or any other form of legally recognized entity.

(i) “Professional employer agreement” means a written contract by and between a client

and a PEO that provides:

(1) for the co-employment of covered employees;

(2) for the allocation and sharing between the client and the PEO employer

responsibilities (including hiring, firing and disciplining) with respect to the covered employees;

and

(3) that the PEO and the client assume the responsibilities required by this chapter.

(j) “Professional employer organization” or “PEO” means any person engaged in the

business of providing professional employer services. A person engaged in the business of

providing professional employer services shall be subject to registration under this chapter

regardless of its use of the term “professional employer organization,” “PEO,” “staff leasing

company,” “registered staff leasing company,” “employee leasing company,” or any other name.

The following shall not be deemed to be professional employer organizations or

professional employment services for purposes of this chapter:

(1) Arrangements wherein a person, whose principal business activity is not entering into

professional employer arrangements and which does not hold itself out as a PEO, shares

employees with a commonly owned company within the meaning of sections 414(b) and (c) of

the Internal Revenue Code of 1986, as amended;

(2) Arrangements by which a person assumes responsibility for the product produced or

service performed by such person or his/her agents and retains and exercises primary direction

and control over the work performed by the individuals whose services are supplied under such

arrangements; or

(3) Providing temporary help services.

(k) “Professional Employer Services” shall mean the service of entering into co-

employment relationships under this chapter in which all or a majority of the employees

providing services to a client or to a division or work unit of client are covered employees.

(l) “Registrant” means a PEO registered under this chapter.

(m) “temporary help services” means a service consisting of a person:

(1) Recruiting and hiring its own employees;

(2) Finding other organizations that need the services of those employees;

(3) Assigning those employees to perform work at or services for the other organizations

to support or supplement the other organizations’ workforces, or to provide assistance in special

work situations such as, but not limited to, employee absences, skill shortages, seasonal

workloads, or to perform special assignments or projects, and

(4) Customarily attempting to reassign the employees to other organizations when they

finish each assignment.

5-75-3. Rights, duties and obligations unaffected by this chapter. - (a) Collective

bargaining agreements. Nothing in this chapter or in any professional employer agreement shall

affect, modify or amend any collective bargaining agreement, or the rights or obligations of any

client, PEO, or covered employee under the federal National Labor Relations Act, the federal

Railway Labor Act or the State of Rhode Island Labor Relations Act.

(b) Licensing. Nothing contained in this chapter or any professional employer agreement

shall affect, modify or amend any state, local, or federal licensing, registration, or certification

requirement applicable to any client or covered employee.

(1) A covered employee who must be licensed, registered, or certified according to law or

regulation is deemed solely an employee of the client for purposes of any such license,

registration, or certification requirement.

(2) A PEO shall not be deemed to engage in any occupation, trade, profession, or other

activity that is subject to licensing, registration, or certification requirements, or is otherwise

regulated by a governmental entity solely by entering into and maintaining a co-employment

relationship with a covered employee who is subject to such requirements or regulations.

(3) Unless otherwise expressly agreed to by the client in the professional employer

agreement, a client shall have the sole right to direct and control the professional or licensed

activities of covered employees and of client’s business.

other economic incentives provided by this state and based on employment, covered employees

shall be deemed employees solely of the client. A client shall be entitled to the benefit of any tax

credit, economic incentive, or other benefit arising as the result of the employment of covered

employees of such client. If the grant or amount of any such incentives is based on number of

employees, then each client shall be treated as employing only those covered employees actually

working in the client’s business operations and covered employees working for other clients of

the PEO shall not be counted. Each PEO will provide, upon request by a client or an agency or

department of this state, employment information reasonably required by any agency or

department of this state responsible for administration of any such tax credit or economic

incentive and necessary to support any request, claim, application, or other action by a client

seeking any such tax credit or economic incentive. To the extent the client is receiving such

benefit, the PEO shall not be entitled to receive such benefit or incentive.

(d) Disadvantage business. With respect to a bid, contract, purchase order, or agreement

entered into with the state or a political subdivision of the state, a client company’s status or

certification as a small, minority-owned, disadvantage, or woman-owned business enterprise or as

an historically underutilized business is not affected because the client company has entered into

an agreement with a registrant or uses the services of a registrant.

5-75-4. Registration requirements. - (a) Registration required. Except as otherwise

provided in this chapter, no person shall provide, advertise, or otherwise hold itself out as

providing professional employer services in this state, unless such person is registered under this

chapter and in conformance with the requirements of section 44-30-71.4.

(b) Registration information. Each applicant for registration under this chapter, shall

provide the division of taxation with the following information:

(1) The name or names under which the PEO conducts business;

(2) The address of the principal place of business of the PEO and the address of each

office it maintains in this state;

(3) The PEO’s taxpayer or employer identification number;

(4) A list by jurisdiction of each name under which the PEO has operated in the

preceding five (5) years, including any alternative names, names of predecessors and, if known,

successor business entities;

(5) A statement of ownership, which shall include the name and evidence of the business

experience of any person that, individually or acting in concert with one or more other persons,

owns or controls, directly or indirectly, twenty-five percent (25%) or more of the equity interests

of the PEO;

(6) A statement of management, which shall include the name and evidence of the

business experience of any person who serves as president, chief executive officer, or otherwise

has the authority to act as senior executive officer of the PEO; and

(7) A list of clients including client name, physical address, telephone number and federal

identification number.

(1) Each PEO operating within this state as of the effective date of this chapter shall

complete its initial registration not later than one hundred eighty (180) days after the effective

date of this chapter. Such initial registration shall be valid through the subsequent July 31 of the

registration year.

(2) Each PEO not operating within this state as of the effective date of this chapter shall

complete its initial registration prior to commencement of operations within this state.

(d) Renewal. On August 1st of each subsequent year such registrant shall renew its

registration by notifying the division of taxation of any changes in the information provided in

such registrant's most recent registration or renewal which shall be effective for an annual term

from August 1 through July 31 of the subsequent year.

(e) Group registration. Any two or more PEO’s held under common control of any other

person or persons acting in concert may be registered as a PEO group. A PEO group may satisfy

any reporting and financial requirements of this registration law on a consolidated basis.

(f) Alternative Registration. The division of taxation may by rule and regulation provide

for the acceptance of an affidavit or certification of a bonded, independent and qualified

assurance organization that has been approved by the department certifying qualifications of a

professional employer organization in lieu of the requirements of section 5-75-6.

(g) List. The state tax administrator shall maintain a list of professional employer

organizations registered under this chapter.

(h) Forms. The state tax administrator may prescribe forms necessary to promote the

efficient administration of this section.

(i) Record confidentiality. All records, reports and other information obtained from a

PEO under this chapter, except to the extent necessary for the proper administration of this

chapter by the state tax administrator, shall be confidential and shall not be published or open to

public inspection other than to public employees in the performance of their public duties.

5-75-5. Fees. -- (a) Initial registration. Upon filing an initial registration statement under

this chapter, a PEO shall pay an annual initial registration fee not to exceed five hundred dollars

($500). Such fee shall be prorated based upon an expiration date of July 31.

(b) Renewal. Upon each annual renewal of a registration statement filed under this

chapter, a PEO shall pay a renewal fee not to exceed two hundred fifty dollars ($250).

subsection, shall pay a fee in the amount not to exceed two hundred fifty dollars ($250) upon

initial application for limited registration and upon each annual renewal of such limited

registration.

(d) Alternative registration. A PEO seeking alternative registration shall pay an initial and

annual fee not to exceed two hundred fifty dollars ($250). Such fee to be prorated based upon an

expiration date of July 31.

(e) The state tax administrator shall determine, by rule, any other fee to be charged under

this chapter. Such fees shall not exceed those reasonably necessary for the administration of the

registration chapter. Such fees shall not exceed those reasonably necessary for the administration

of the registration process.

5-75-6. Financial capability. Net worth and bonding. – Each PEO shall maintain a

bond or securities with a minimum market value of fifty thousand dollars ($50,000) held by a

depository designated by the department securing payment by the PEO of all taxes, wages,

benefits or other entitlement due to or with respect to covered employees, if the PEO does not

make such payments when due. A PEO registered under this chapter and certified by the division

of taxation for at least two (2) years shall be exempt from the bonding requirements of this

section.

5-75-7. General requirements and provisions . -- (a) Contractual relationship. Except

as specifically provided in this chapter, the co-employment relationship between the client and

the PEO, and between each co-employer and each covered employee, shall be governed by the

professional employer agreement.

(1) Nothing contained in any professional employer agreement or this chapter shall be

deemed to:

(i) Diminish, abolish or remove rights of covered employees as to clients or obligations

of such client as to a covered employee, existing prior to the effective date of a professional

employer agreement.

(ii) Terminate an employment relationship existing prior to the effective date of a

professional employer agreement.

(iii) Create any new or additional enforceable right of a covered employee against a PEO

not specifically allocated to such PEO in the professional employer agreement or this chapter.

(iv) Terminate the joint and several liability provision under R.I.G.L. section 44-30-71.4,

or the protections afforded the client of a PEO in possession of a current

certification/authorization to engage in business issued by the division of taxation and without

notification that the certification has been suspended or revoked.

(2) Each professional employer agreement shall include the following:

(i) The PEO shall reserve a right of direction and control over the covered employees;

provided, that the client may retain the right to exercise such direction and control over covered

employees as is necessary to conduct the client's business, to discharge any fiduciary

responsibility which it may have, or to comply with any applicable licensure requirements;

(ii) The PEO shall have responsibility to pay wages to covered employees; to withhold,

collect, report and remit payroll-related and unemployment taxes; and, to the extent the PEO has

assumed responsibility in the professional employer agreement, to make payments for employee

benefits for covered employees. As used in this section, the term "wages" does not include any

obligation between a client and a covered employee for payments beyond or in addition to the

covered employee's salary, draw or regular rate of pay, such as bonuses, commissions, severance

pay, deferred compensation, profit sharing or vacation, sick or other paid time-off pay, unless the

PEO has expressly agreed to assume liability for such payments in the professional employer

agreement;

(iii) The PEO shall have the responsibility to withhold, collect, report and remit payroll

related and unemployment taxes. For purposes of chapters 39-41 (Rhode Island Temporary

Disability Insurance Act) and chapters 42-44 (Employment Security Act) of title 28, and this

section, the term “wages” shall be defined in accordance with section 28-42-3 (28).

(iv) PEO and the client shall both have a right to hire, terminate and discipline the

covered employees; and

(v) The responsibility to obtain workers’ compensation coverage for covered employees,

from a carrier licensed to do business in this state and otherwise in compliance with all applicable

requirements, shall be specifically allocated to either the client or the PEO in the professional

employer agreement.

(b) Allocation of rights, duties, and obligations. Except as specifically provided in this

chapter or in the professional employer agreement, in each co-employment relationship:

(1) The client shall be entitled to exercise all rights, and shall be obligated to perform all

duties and responsibilities, otherwise applicable to an employer in an employment relationship;

and

(2) The PEO shall be entitled to exercise only those rights, and obligated to perform only

those duties and responsibilities, specifically required by this chapter or set forth PEO as co-

employer with respect to any covered employee shall be limited to those arising pursuant to the

professional employer agreement and this chapter during the term of co-employment by the PEO

of such covered employee.

(3) Unless otherwise expressly agreed by the PEO and the client in a professional

employer agreement, the client retains the exclusive right to direct and control the covered

employees as is necessary to conduct the client's business, to discharge any of the client's

fiduciary responsibilities, or to comply with any licensure requirements applicable to client or to

the covered employees.

entered into by a PEO, such PEO shall provide written notice to each covered employee affected

by such agreement of the general nature of the co-employment relationship between and among

the PEO, the client, and such covered employee. Such notice shall include notice to employees of

the client's and the PEO's obligations under section 7 (D) (4) below.

(d) Limitations on liability. Except to the extent otherwise expressly provided by the

applicable professional employer agreement:

(1) A client shall be solely responsible for the quality, adequacy or safety of the goods or

services produced or sold in client's business.

(2) A client shall be solely responsible for directing, supervising, training and controlling

the work of the covered employees with respect to the business activities of the client and solely

responsible for the acts, errors or omissions of the covered employees with regard to such

activities.

(3) A client shall not be liable for the acts, errors or omissions of a PEO, or of any

covered employee of the client and a PEO when such covered employee is acting under the

express direction and control of the PEO.

(4) Nothing in this subsection shall serve to limit any contractual liability or obligation

specifically provided in a professional employer agreement, nor shall this subsection in any way

limit the liabilities and obligations of any PEO or client as defined elsewhere in this chapter.

(5) A covered employee is not, solely as the result of being a covered employee of a

PEO, an employee of the PEO for purposes of general liability insurance, fidelity bonds, surety

bonds, employer's liability which is not covered by workers' compensation, or liquor liability

insurance carried by the PEO unless the covered employees are included by specific reference in

the professional employer agreement and applicable prearranged employment contract, insurance

contract or bond.

(e) Services not insured. A registrant under this chapter is not engaged in the sale of

insurance by offering, marketing, selling, administering or providing PEO services or employee

benefit plans for covered employees.

(f) Taxation:

(1) Covered employees whose services are subject to sales tax shall be deemed

employees of the client for purposes of collecting and levying sales tax on the services performed

by the covered employee. Nothing contained in this chapter shall relieve a client of any sales tax

liability with respect to its goods or services.

(2) Any tax upon professional employer services shall be limited to the administrative

fee.

(3) Any tax assessed on a per capita or per employee basis shall be assessed against the

client for covered employees and against the professional employer organization for its

employees who are not covered employees co-employed with a client.

(4) In the case of tax imposed or calculated upon the basis of total payroll, the

professional employer organization shall be eligible to apply any small business allowance or

exemption available to the client for the covered employees for purpose of computing the tax.

5-75-8. Benefit plans. – (a) A client and a PEO shall each be deemed an employer for

purposes of sponsoring retirement and welfare benefit plans for its covered employees.

(b) A fully-insured welfare benefit plan offered to the covered employees of a single PEO

shall be considered a single employer welfare benefit plan.

Island Small Employer Health Insurance Availability Act), a PEO shall be considered the

employer of all of its covered employees and all covered employees of one or more clients

participating in a health benefit plan sponsored by a single PEO shall be considered employees of

the PEO.

(d) If a PEO offers to its covered employees any health benefit plan which is not fully-

insured by an authorized insurer, the plan shall:

(1) Utilize a third-party administrator licensed to do business in this state;

(2) Hold all plan assets, including participant contributions, in a trust account; and

(3) Provide sound reserves for such plan as determined using generally accepted actuarial

standards.

5-75-9. Workers' compensation. – (a) The responsibility to obtain workers'

compensation coverage for covered employees, from a carrier licensed to do business in this state

and otherwise in compliance with all applicable requirements, shall be specifically allocated in

the professional employer agreement to either the client or the PEO. If such responsibility is

allocated to the PEO under any such agreement, such agreement shall require that the PEO

maintain and provide to client, at the termination of the agreement if requested by the client,

records regarding the loss experience related to workers' compensation insurance provided to

covered employees pursuant to such agreement.

(b) Workers' compensation. Both client and the PEO shall be considered the employer

for the purpose of coverage under the workers’ compensation act and both the PEO and its client

shall be entitled to protection of the exclusive remedy provision of the workers' compensation act

irrespective of which co-employer obtains such workers' compensation coverage.

5-75-10. Unemployment compensation insurance. - - (a) For purposes of chapters 39-

41 (Rhode Island Temporary Disability Insurance Act) and chapters 42-44 (Employment Security

Act) of title 28 only, the client company shall be considered to be an employer of its covered

employees under any agreement with a professional employer organization established under this

chapter; provided, that the professional employer organization shall report and pay all required

unemployment contributions using the client company’s state employer account number at the

client company’s experience rate as determined under section 28-43-8, or at the new employer

rate established under section 28-43-8.3 if the client company does not qualify for an experience

rate under section 28-43-8.

(b) The client company and PEO shall be jointly and severally liable for all contributions,

fines, interest, penalties and withholdings due to the department of labor and training under

chapters 39-44, of title 28.

5-75-11. Severability. – The provisions of this chapter are severable. If any provision of

this chapter, or application thereof to any person or circumstance, is held invalid, such invalidity

shall not affect other provisions or applications of this chapter which can be given effect without

the invalid provision or application.

SECTION 2. This act shall take effect upon passage.

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LC01702/SUB A

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