One way of determining whether a business is small, for purposes of federal contracting and small business contracting programs, is by looking at the number of employees the business and its affiliates have. In addition, questions regarding who a business' employees are come up in the context of compliance with labor and employment laws/regulations. We are frequently asked whether federal contractors can utilize a Professional Employer Organization (PEO) and if so, employees under a PEO arrangement are considered employees of the business.
When a company enters into a PEO relationship with a PEO, the employees will receive their W-2 from the PEO and not the company. From the Company's perspective and for federal contracting purposes, it can be confusing as to: (1) whether federal contractors are permitted to enter into a PEO relationship; (2) whether the company reports that they have no employees; and (3) whether the company and the PEO are considered affiliates such that the company would have to report that all of the PEO's employees are their employees.
Based on SBA's regulations, it is clear that federal contractors ARE permitted to enter into PEO relationships and that the employees the federal contractor brings to the relationship are still considered the employees of the contractor. Thus, for reporting purposes such as on the EEO-1 or VETS-4212, the company would still have to report on those employees that it brought/brings to the PEO relationship. In addition, SBA regulations make clear that the company and a PEO will not be considered to be affiliates based solely on the PEO agreement; thus, the company would not have report all of the PEO's employees as its own.
For more information on applicable regulations, please see 13 CFR 121.103 and 13 CFR 121.106. In addition, if you have questions regarding PEOs and whether this arrangement might be appropriate for your business, please feel free to contact us at firstname.lastname@example.org.