LABOR AND EMPLOYMENT LAW LANDSCAPE FOR PEOS APPROACHING 2027

The midterm elections are right around the corner, and Republicans are hoping to maintain control of both the House and Senate while Democrats are banking on regaining control of one or both chambers to flip the power dynamic. But, whatever the outcome, the “winners” will only hold a razor-thin margin, and it is probably safe to assume that Congress will remain largely divided and unable to pass any significant labor and employment legislation at the federal level. Thus, PEOs should expect to see the drive for legislative changes pursued at the state or local level to continue for the foreseeable future. The hodgepodge of local labor and employment policies that vary from jurisdiction to jurisdiction will continue to pose compliance challenges for PEOs that operate across state lines. No matter the outcome of the midterms, here’s what we forecast as the labor and employment policy landscape for PEOs as 2026 ends and 2027 begins.

1. INCREASED IMMIGRATION ENFORCEMENT WILL CONTINUE

It has been a tumultuous year when it comes to immigration, and we don’t expect things to slow down anytime soon. We predict a continued focus on employment eligibility verification, which means that I-9 compliance will remain crucial. PEOs take various approaches to I-9 compliance, from completely allocating compliance to the customer, to facilitating it with compliance support. Regardless of your approach, liability will likely depend on the extent to which the PEO was involved in preparing, collecting and/or reviewing I-9’s. Thus, clear contractual language that delineates I-9 responsibilities between PEOs and clients will remain a key component in determining PEO’s potential liability.

Additionally, there is speculation that legislation could make E-Verify participation compulsory for more employers in 2027. All PEOs should consider how they will respond if large numbers of customers become subject to a mandatory E-Verify rule.

2. DEVELOPING AI POLICY – AT ALL LEVELS – SHOULD BE CLOSELY MONITORED

From hiring to performance management, from resume review to video interviews, AI is increasingly relied upon by employers to help with a wide spectrum of tasks – and lawmakers are taking notice.

At the federal level, the two political parties are still pursuing very different visions of what AI legislation should look like, but it appears that both sides believe they can pass something…eventually. PEOs are urged to continue tracking federal legislative progress to determine if/how any developing Congressional AI policy will impact the industry.

And, in the meantime, it will be even more important for PEOs to pay attention to state laws as the primary source of AI compliance for the foreseeable future. Regulation at the state level has a particular impact on PEOs and their vendors, and PEOs should continue to adjust compliance activities, especially in states leading the charge like Colorado, California, and Illinois.

PEOs in these states must ensure their clients and their own operations have robust policies and practices for workplace compliance and investigations, especially those involving AI-driven decisions. Savvy PEOs will also work closely with vendors to limit liability arising from third-party products utilized by the PEO.

Colorado’s new AI law will take effect on January 1, 2027, and, although the state Attorney General’s office has indicated that it will not enforce it until rulemaking is complete, PEOs should not wait on compliance efforts.

3. STATE LAW REMAINS THE WILDCARD WITH JOINT EMPLOYER RULE

DOL’s proposed joint employer rule would establish a uniform federal standard for enforcement under the FLSA, FMLA, and MSPA, which is a welcome upgrade from the current patchwork of circuit-by-circuit tests. But PEOs must remember that the federal proposal does not preempt state law. California, New York, and several other states apply broader joint employer standards, and PEOs with worksite employees in those jurisdictions will need to continue navigating state-specific analysis.

4. LABOR BOARD NOW HAS THE VOTES TO START REVERSING COURSE

The National Labor Relations Board finally gained enough votes in August to start reversing a slew of Biden-era policies that impact all employers, not just unionized ones, and PEOs should take notice. We should expect the agency to spend much of late 2026 and 2027 revisiting rulings on captive audience meetings, workplace handbook rules, employee discipline standards, severance agreement provisions, and union election procedures. Several of these issues carry outsized significance for PEOs given the co-employment relationship: workplace rules and severance agreement language are areas where PEOs and their clients frequently share exposure, so any loosening of the current restrictive standards would ease compliance burdens across the board. Be ready to update client-facing templates and guidance as the new Board issues decisions.

5. EEO DEMOGRAPHIC REPORTING REQUIREMENTS REMAIN UNCERTAIN

Over the summer, the US Equal Employment Opportunity Commission (EEOC) issued a proposed rule that would officially eliminate the EEO-1 reporting requirement. This is welcome news for PEOs as EEO demographic reporting — specifically the annual EEO-1 Component 1 filing — has a particularly thorny impact on PEOs because of the co-employment structure. But, while there is some reason to celebrate at the federal level, PEOs must remember that state reporting rules are unaffected.

Deregulation at the federal level has no impact on state demographic and pay data reporting laws. In fact, Colorado recently enacted a law that will soon require state-level EEO-1 data reporting, even if the federal obligation is scrapped. Thus, PEOs should work with counsel to determine whether any state laws apply and to ensure continued compliance.

6. THE CHATGPT PLAINTIFF WILL REMAIN A PROBLEM

The rise of the ChatGPT plaintiff reflects a permanent shift in the competence and confidence of pro se plaintiffs. And this will only continue to evolve as AI becomes more capable and more widely used. For PEOs, the co-employment structure that creates so much value for clients also creates shared exposure to this emerging litigation reality. The PEOs that get ahead of it – through smarter contracts, better documentation practices, and proactive client education – will be better positioned than those that treat it as someone else’s problem.

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.