Kentucky Recognizes and Organizes PEOs

By: Marianna J. Michael

On March 29, 2022, Governor Beshear signed HB 506, which creates new sections of KRS Chapter 336 to underscore the valuable service to commerce that professional employer organizations, staffing companies, and staff leasing companies (collectively, “PEOs”) provide. As a result, the Act was created to properly recognize and regulate PEOs. PEOs’ services have risen to prominence in light of the challenges employers face due to the Great Resignation, COVID, and other factors.

HB 506 is a comprehensive piece of legislation establishing the licensing and regulation of PEOs. The Act specifically defines PEOs, creates requirements PEOs must follow to be recognized in Kentucky, and sets the parameters of their relationships with employers. The Act limits PEOs’ actions to the provisions delineated in Sections 1 to 11 and anything specifically agreed upon in their agreements with employers. PEOs are required to complete initial registration no later than 180 days after the effective date of the Act and will be required to pay a $500 registration fee. Companies are not permitted to advertise their services as PEOs unless they are recognized by the state. The Act indicates that every professional employment agreement shall: (i) include the allocations of rights, duties, and obligations as set forth in the Act; (ii) provide that the PEOs shall have the responsibility to pay wages to the employees, withhold taxes, and pay employee benefits; (iii) provide that the PEO shall have a right to discipline the employees as necessary to fulfill its responsibilities; and (iv) identify whether the PEO or the employer will carry workers’ compensation coverage.

Employers find protections under the Act. For example, employers are permitted to exercise all rights and are obligated to perform all duties that are otherwise applicable in a traditional employer-employee relationship. The employer is given the opportunity to train and supervise the employees with respect to the employer’s business activities. Further, the Act limits the employers’ liability in relation to the PEOs’ actions or omissions or that of the employees acting under the PEOs’ direction. Despite these protections, the Act seemingly encourages the use of PEOs and states that employers who are certified as small, minority-owned, disadvantaged, or woman-owned business enterprises will not be negatively affected in bidding on government contracts if they employ the services of a PEO. Due to the comprehensive nature of the Act and its impact on existing agreements between PEOs and employers, we recommend that employers review each of their PEO agreements. The Act is expected to go into effect in mid- to late summer. Contact a member of Wyatt’s Labor and Employment team for additional information and assistance.