Argued: September 8, 2014.
For Petitioner: Brian Nugent, Fort Collins, CO.
For Respondent: Arthur Selikoff, Assistant Counsel, Harrisburg.
BEFORE: HONORABLE DAN PELLEGRINI, President Judge, HONORABLE BONNIE BRIGANCE LEADBETTER, Judge, HONORABLE ROBERT SIMPSON, Judge. OPINION BY JUDGE LEADBETTER. Judge Brobson did not participate in the decision in this opinion.
BONNIE BRIGANCE LEADBETTER, Judge
People 2.0 Global, Inc. (People) petitions for review of the order of the Department of Labor and Industry (Department) affirming the assessment of a $10,000 penalty, which was imposed as a result of People's failure to file a quarterly report [commonly referred to as the Professional Employer Organization (PEO) report] pursuant to Section 315(a)(4) of the Unemployment Compensation Law (Law), 43 P.S. § 795(a)(4), for the first quarter of 2010. On appeal, People primarily argues that, because it constitutes an " employer" as that term is defined by the Law, it was not required to file the Section 315(a)(4) report, rendering the assessed penalty improper. After review, we affirm.
In 2004, Congress enacted the SUTA Dumping Prevention Act of 2004 (Prevention Act), 42 U.S.C. § 503(k), to address employers' manipulation of experience rating systems to achieve a lower unemployment compensation tax than their actual unemployment compensation experience would actually allow. See generally Department of Labor, Employment and Training Administration, Workforce Security Programs: Unemployment Insurance Program Letter Interpreting Federal Law, Section 3 (Background) (September 30, 2004), 69 Fed. Reg. 58550-02. According to the Department of Labor, these tax avoidance schemes often included mergers, acquisitions, and restructuring plans involving the transfer of a work force from the payroll of one entity to the payroll of another entity with a lower tax rate. Id.
The California Court of Appeal cogently described SUTA dumping as follows:
In [SUTA] dumping, one employer transfers employees or payroll wages to another employer in order to take advantage of the other employer's lower unemployment insurance tax rate. In essence, the first employer " dumps" payroll with a higher contribution rate into the second employer's unemployment insurance account with a lower rate.
Empl. Dev. Dep't v. Ca. Unempl. Ins. Appeals Bd., 190 Cal.App.4th 178, 118 Cal.Rptr.3d 167, 169-70 (2010). See also Department's website, addressing " 2005 Changes to PA UC law[; including] What is SUTA Dumping:" " The term 'SUTA Dumping' refers to attempts by employers with high UC costs to 'dump' their experience in order to obtain an artificially low contribution rate."  Following enactment of the federal Prevention Act, the Commonwealth's Law was amended to provide for the transfer of unemployment experience in the situations addressed in 42 U.S.C. § 503(k). See Section 301 of the Law, 43 P.S. § 781.
In addition and relevant to the instant appeal, Section 4(j)(2.1) of the Law, 43 P.S. § 753(j)(2.1) (pertaining to the identity of the employer in certain work force transfer arrangements), was added in 2005 to designate the entity deemed to be the employer following a transfer of employees between entities that results in a shared management arrangement. Prior to the enactment of Section 4(j)(2.1), the Department applied a direction and control test to determine which entity was the employer of the transferred workers and, therefore, responsible for the obligations and assessments required by the Law. See Cameron v. Dep't of Labor & Indus., Bur. of Employer Tax Oper., 699 A.2d 843 (Pa. Cmwlth. 1997). However, pursuant to Section 4(j)(2.1) arrangement, the entity which transfers its employees (often referred to as the " client" in a professional employer arrangement) is deemed to be the employer for purposes of the Law.
Specifically, Section 4(j)(2.1) of the Law provides:
An individual or entity that transfers some or all of its work force to the payroll of another individual or entity, directly or indirectly, as part of or resulting
in an arrangement whereby the individual or entity shares employer functions with respect to some or all of its work force with the other individual or entity shall be the employer of the employe or employes covered by the arrangement with the other individual or entity. This paragraph shall include, without limitation, an arrangement known as a professional employer arrangement or employe leasing arrangement. This paragraph does not include a temporary help arrangement in which an individual or entity utilizes one or more workers supplied by another individual or entity to supplement its work force in special, temporary work situations such as absences, skill shortages, seasonal work loads and special assignments.
Thus, when Section 4(j)(2.1) applies, the original employer is deemed to be the employer of the transferred work force for purposes of the Law. Although the transferee entity shares employer functions in a qualifying Section 4(j)(2.1), as a matter of law, it is not the employer for purposes of the unemployment compensation system.
Both the employer (transferor) and transferee are charged with separate reporting obligations under the Law. See Section 304 of the Law, 43 P.S. § 784 (reports by employers); 34 Pa. Code § 63.52 (quarterly reports from employers, which detail, inter alia, name/SS# of each employee paid wages during the quarter, the amount of wages paid to each employee, and the number of credit weeks for each employee); Section 315 of the Law, 43 P.S. § 795 (registration and other reports, including reports by PEOs), 34 Pa. Code § 63.59 (PEO reports). Section 315(a)(4), which requires the report leading to the assessment at issue here, provides:
An individual or entity to whom some or all of a work force is transferred, as part of or resulting in an arrangement described under section 4(j)(2.1) [quoted above], shall file a report with the department for each calendar quarter. The individual or entity may file one report for all such arrangements. . . .
43 P.S. § 795(a)(4). See also 34 Pa. Code § 63.59 (PEO reports). An employer or any other person who " wilfully fails or refuses to make any report required by section 315(a)(4)" shall be assessed a civil penalty. Section 802.1(a)(3), added by the Act of June 15, 2005, P.L. 8, 43 P.S. § 872.1(a)(3).
Turning to the matter before the court, People describes itself as a " national temporary staffing company that provides employees for temporary assignments at third party locations, and operates its business through a network of local, independent companies (each one referred to as an 'Affiliate')." Reproduced Record (R.R.) at 195a (letter from Peoples' counsel to Department). See also Affiliate Agreement, ¶ A; R.R. at 198a. In June 2005, People entered into a business relationship with three business entities owned and operated by Denise and Caleb Hobbie, to wit: CK Hobbie, Inc., Hobbie Personnel Management, Inc. and Hobbie Professional Staff Management, Inc. (collectively, " Hobbie" ). It appears that the Hobbie entities were temporary staffing agencies located in Allentown and providing temporary staffing services primarily in Pennsylvania. The Affiliation Agreement executed by People and Hobbie provided in pertinent part that:
As a People 2.0 Affiliate, [Hobbie] will maintain its identity and legal status for the purposes described herein; however, People 2.0 will employ all Staffing Employees who are deployed to perform services at Client locations. [Hobbie agrees and understands] that notwithstanding the continuing existence of [its] corporate identity and legal status under this Agreement, [Hobbie is] relinquishing [its] direction and control of the Staffing Employees to People 2.0 and that any direction and control exercised by [Hobbie] after the Agreement Date will be solely and exclusively as the agent of People 2.0. [Hobbie] will also operate as the marketing and Client services agent (as described herein) of People 2.0 for all temporary staffing business generated by the ...