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Department of Talent & Economic Development v. AMBS Message Center, Inc.

Court of Appeals of Michigan

September 12, 2019

DEPARTMENT OF TALENT & ECONOMIC DEVELOPMENT/UNEMPLOYMENT INSURANCE AGENCY, Appellant,
v.
AMBS MESSAGE CENTER, INC., Claimant-Appellee. DEPARTMENT OF TALENT & ECONOMIC DEVELOPMENT/UNEMPLOYMENT INSURANCE AGENCY, Appellant,
v.
GREAT OAKS COUNTRY CLUB, INC., Defendant-Appellee. DEPARTMENT OF TALENT & ECONOMIC DEVELOPMENT/UNEMPLOYMENT INSURANCE AGENCY, Appellant,
v.
NBC TRUCK EQUIPMENT, INC., Claimant-Appellee.

          Jackson Circuit Court LC No. 17-003129-AE

          Oakland Circuit Court LC No. 2017-162608-AE

          Macomb Circuit Court LC No. 2017-000132-AE

          Before: Murray, C.J., and Meter and Fort Hood, JJ.

          PER CURIAM.

         In these consolidated appeals, appellant, Department of Talent and Economic Growth/Unemployment Insurance Agency (the Agency), appeals by leave granted the circuit courts' determinations that claimants, Ambs Message Center, Inc., Great Oaks Country Club, Inc., and NBC Truck Equipment, Inc., were entitled to claim the new employer unemployment insurance tax rate under the Michigan Employment Security Act (MESA). We conclude that the claimants were not entitled to the new employer rate. Therefore, we reverse and remand in each docket.

         I. BACKGROUND

         A. ALTERING THE PROFESSIONAL EMPLOYER ORGANIZATION ARRANGEMENT

         The claimants are employers subject to MESA's reporting and contribution requirements. See MCL 421.13(1); MCL 421.19. When calculating the tax rate applicable to an employer's payroll, the Agency generally uses a formula that takes into consideration the amount of benefits distributed to the employer's employees over a specified period. See MCL 421.19(a). The formula is altered, however, for new employers whose base tax is a set rate of 2.7%. See MCL 421.19(a)(1)(i). The Agency thereafter incorporates a portion of the employer's employees' actual use of unemployment compensation benefits using the applicable formula until a certain number of years pass, after which the full formula applies (sometimes referred to as the experienced employer formula). See MCL 421.19(a)(1); MCL 421.19(a)(2). For that reason, new employers usually pay a lower tax rate on their payroll than experienced employers.

         An employer can cease to be an employer liable to pay the unemployment insurance tax-in relevant part-by transferring its "entire rating account" to another employer, see MCL 421.24(b), or after the "conclusion of 12 or more consecutive calendar quarters during which the employer has not had workers in covered employment," MCL 421.19(a)(1)(i). If an employer again becomes liable for contributions to the unemployment insurance system after ceasing to be liable, the Agency must treat the employer as a new employer. MCL 421.19(a)(1)(i).

         An employer can also cease to be liable to pay unemployment insurance contributions as a contributing employer by entering into a service agreement with a professional employer organization (sometimes referred to as a PEO). Under a typical service agreement, a business transfers its employees to the professional employer organization, which then leases the employees back to the business. The leased employees are treated as the employees of the professional employer organization even though the original employer (now considered the client employer) maintains day-to-day control over the employees. The professional employer organization normally handles all of the human resource matters involving the employees, which includes paying the unemployment insurance obligations related to the payroll of the client employer. See Adamo Demolition Co. v. Dep't of Treasury, 303 Mich.App. 356, 359-360; 844 N.W.2d 143 (2013).

          Because the professional employer organization was the employer of the employees transferred to it, the professional employer organization historically paid the unemployment insurance contributions required under MESA using its own account and the Agency calculated the tax on the basis of the professional employer organization's use of benefits. The client employer, by contrast, was treated as having no employees and no payroll during the term of the agreement with the professional employer organization.

         The Legislature, however, addressed this arrangement with the enactment of the Michigan Professional Employer Organization Regulatory Act, MCL 338.3721 et seq., see 2010 PA 370, and the corresponding changes to MESA, see 2010 PA 383. With the enactment of MCL 421.13m, the Legislature required professional employer organizations to file reports and pay contributions for its client employers by using the account information for the client employer. See MCL 421.13m(2)(a). In other words, for the purpose of calculating the tax rate, the professional employer organization is taken out of the picture, and the rate is calculated based on the number of years the employer has employed a staff-either personally or through the professional employer organization. Although the professional employer organization is still liable to the agency for the tax, the rate is calculated as if the employees remained with the client employer.

         Acknowledging the impact of these changes on the client employer/professional employer organization's relationship, the amendment provided that a professional employer organization that was liable for unemployment insurance contributions before January 1, 2011, could choose to use the reporting method stated under MCL 421.13m(2)(a) before January 1, 2014, but was not required to use the reporting method stated under MCL 421.13m(2)(a) until January 1, 2014. See MCL 421.13m(2)(b). Accordingly, by January 1, 2014, the Agency was required to calculate the unemployment insurance tax rate by reference to the client employer's prior account and experience rather than by reference to the professional employer organization's prior ...


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