LOPER BRIGHT’S DOUBLE-EDGED SWORD: PEO REGULATION IN A POST-CHEVRON WORLD

While the Supreme Court’s 2024 term produced many decisions of immense import, Loper Bright Enterprises v. Raimondo may be the one that changed the law the most by overruling the landmark 1984 Chevron decision. Loper Bright will impact virtually every area of law including how PEOs are regulated.

In Chevron the Court said that if a federal statute is ambiguous and the agency administering it has rulemaking authority, courts generally must defer to the agency’s interpretation as long as it is a permissible one. This gave administrative agencies a powerful tool; in theory (not always in practice) all they had to show to survive legal challenges was that their reading of an ambiguous statute was plausible. In Loper Bright the Court flipped the Chevron script holding that if a federal statute is ambiguous, absent statutory delegation of interpretation to an agency it is the job of the courts to say what the best interpretation is even if the agency’s interpretation could also fit with the statutory language. Under Loper Bright, while a court might (or might not) accord respect to an agency’s interpretation under the circumstances of a particular case, it is not entitled to deference.

Loper Bright’s impact is already being felt. Agencies are backing away from some controversial rules and both new and pending challenges to agency positions have been bolstered as courts begin to apply the new framework. While to be sure Loper Bright is coming up in high profile cases, it has also already become a factor in innumerable workaday disputes involving federal administrative agencies, whether being explicitly cited in briefs or considered in litigants’ tactical decisions. Given its broad scope Loper Bright will inform PEOs’ regulatory landscape, including issues at the heart of the co-employment relationship. Some examples in the areas of liability, tax, and benefits follow.

Though the NLRB did not explicitly say so, the withdrawal of its appeal of a decision striking its 2023 joint employer rule soon after the release of Loper Bright does not seem coincidental. This rule, which had been high on the NLRB’s policy agenda throughout the Biden presidency but that very much relied on its interpretive discretion, would have greatly increased the probability that PEOs could be deemed joint employers under the National Labor Relations Act. Other agencies such as the DOL and EEOC were poised to follow the NLRB’s lead (after all their respective statutes in theory refer to the same common law definition of employer) and now may back off similar rulemaking, a welcome development for PEOs.

The status of PEOs for federal employment tax purposes used to be hotly debated. The CPEO program gave some PEOs comfort by establishing a voluntary statutory employer status. Outside of the CPEO context the IRS has long deemed PEOs “third party payors” and promulgates regulations and other guidance around that concept relating to subjects like the ability of PEOs to report under their own FEINs, allocation of liability between PEOs and their clients (recently the industry keenly felt the IRS’s assertion that PEOs are co-liable for clients’ ERTC issues which partially relied on an interpretation of a statute that PEOs believe required the opposite result), and PEOs’ ability to succeed to clients’ wage bases for purposes of FICA and FUTA cutoffs. Whereas the IRS’s third party payor concept represents a balancing of interests (leaving aside whether one agrees with where the balance was struck) and provides some measure of predictability, it could become a zero-sum game under Loper Bright; a court could simply decide whether PEOs are employers for federal employment tax purposes and rule that the notion of a third party payor is a suboptimal reading of applicable statutes. Interestingly, in two federal cases from a few years ago courts found the PEOs involved to be statutory employers for employment tax purposes under IRC 3401(d). The IRS announced that it did not “acquiesce,” in other words it thought the courts got it wrong and did not intend to follow those decisions more than it was strictly required to. Its ability to take such positions appears much reduced following Loper Bright.

A 2019 DOL final rule said that what it described as “bona fide PEOs” could be ERISA employers (under a definition of “employer” that includes someone acting in the interest of another employer) with respect to defined contribution plans such as 401(k) plans but refused to extend the same reasoning to welfare plans citing what are essentially policy considerations rather than clear statutory mandates. This was always questionable; ERISA’s definition of “employer” does not distinguish between 401(k) and welfare plans. Under Loper Bright the distinction might be indefensible. PEOs generally view the 2019 guidance favorably since it supports employer status at least to some degree and suggests a strong argument that if the DOL recognizes PEOs can be ERISA employers in one context it should do so in others. But Loper Bright could make it easier for a court to find that the DOL was wrong to say PEOs could ever be employers because the best interpretation of ERISA would be to the contrary.

Loper Bright is a double-edged sword. It pared back federal agencies’ ability to assert they were entitled to controlling deference which sometimes led to heavy-handed results and might seem ideologically questionable. Businesses now have more opportunities to challenge agency interpretations and agencies may be less inclined to take aggressive positions absent clear statutory support (agencies will likely push for deferential provisions in new legislation which could allow them to avoid Loper Bright and give them even stronger deference than under Chevron). But by the same token agencies may be less willing to issue favorable guidance if they think they will be challenged. While PEOs now have more leverage to contest unfavorable federal agency positions, opponents of the industry have the same expanded ability to challenge favorable ones. Such challenges, whether friendly or hostile, may invite courts to take bright-line positions on issues where PEOs may prefer regulatory compromise. Judges’ subjective views on policy will inevitably make outcomes more dependent on forum than they already are and increase the likelihood of patchwork rulings across circuits. For better or worse, or more accurately for better and worse, Loper Bright has greatly increased regulatory uncertainty for PEOs.

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs.