Recent Case Highlights Issues Faced in Determining Employer for Payroll Tax Purposes

Sept. 19, 2013

Many employers use third parties to process their payroll. Some employers even outsource their employees to other companies, such as a payroll service company or employee leasing company. In these situations the payroll service company is the employer of record, generally referred to as the statutory employer.

A recent case decided on Sept. 10, 2013, Cencast Services, LP v. United States, highlights what results when the payroll service company does not assume day-to-day control of its employees. The entity that controls the day-to-day activities of the employee is referred to as the common law employer. In Cencast, the court held that the mere transfer of employees to a payroll service company for the administrative convenience of the employer does not result in a change in the existing common law employment relationship.

Cencast is a specialized payroll service provider in the motion picture industry, acting as a payroll service company for multiple independent production companies. Although the production companies contracted with Cencast for payroll services, Cencast had no role in hiring or supervision of the employees. Cencast argued that it was the common law employer of these employees, allowing all wages paid to each employee during the year to be aggregated for purposes of determining the employer’s payroll tax liabilities, even though the employee provided services to multiple production companies.

The court upheld a lower court decision that rejected Cencast’s claim that it was the common law employer of the employees, holding instead that the production companies were the common law employers. The result was a significant payroll tax liability for Cencast and its clients.

The decision in the case is not surprising. Businesses using a payroll service company or employee leasing company should review the impact this decision might have on their payroll tax liabilities.

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David Holets
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Howard Wagner
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