FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C 20463 

iTqnuary 15, 2013 

MEMORANDUM 

TO: 

FROM: 

Thomas Hintermister 

Assistant Staff Director 

Audit Division 

Lisa J. Stevenson 

Deputy General Counsel - Law^ ^ 

Lorenzo Holloway 

Assistant General Counsel 

For Public Finance and Audit Advice 

Margaret J. Forman (\ 

Attorney ^ 

SUBJECT: Proposed Interim Audit Report on Republican Patty of Orange County (LRA 909) 

I. INTRODUCTION 

The Office of the General Counsel, has reviewed the proposed Interim Audit Report 

("lAR") for the Rq3ublican Party of Orange County ("RPOC" or "die Committee"). The 

proposed lAR as submitted to us contained three findings: Misstatement of Financial Activity 

(Finding 1); Reporting of Debts and Obligations (Finding 2); and Use of Levin Fund Transfers 

(Findings). We concur with these three findings. 

The Audit Division, however, did not include a finding pertaining to Recordkeeping for 

Salary and Wages due to a misunderstanding as to whether certain individuals engaged in work 

for the Committee should be considered employees for the puiposes of 11 C.F.R. § 106.7(d)(1). 

We discussed this issue with the Audit Division, and we understand that the Audit Division will 

include a Recordkeeping finding on this issue in the proposed lAR as submitted to the 

Commission. We concur with this approach because we believe that a finding on this issue is 

warranted. If you have any questions, please contact Margaret J. Forman, the attorney assigned 

to this audit. 
Memorandum to Thomas Hintermister 

Proposed lAR to RPOC - Comments - LRA 909 

Page 2 of3 

n. THE MONTHLY LOG RECORDKEEPING REQUHIEMENT APPLIES TO THE 

COMMITTEE'S "LEASED EMPLOYEES" 

Section 106.7 requires state party committees to keep a monthly log of the percentage of 

time each employee spends in connection with a Federal election." 11 C.F.R. § 106.7(d)(1). To 

determine if a state party conunittee must allocate the salary, wages, and benefits of its 

employees, it must examine the percentage of time that its employees spent on federal election 

activity ("FEA") or activity in connection with federal elections. Salaries and benefits for 

employees who spend more than 25% of their compensated time on FEA or activities in 

connection with a federal election in a given month must be paid only fix)m a federal account. 2 

U.S.C. § 431(20)(A)(iv); 11 C.F.R. § 106.7(d)(l)(ii); see 2 U.S.C. § 441i(b)(2). Employees who 

spend less than 25% of their time on FEA or activities in connection with a federal election may 

be allocated as administrative costs or paid from the federal account. 11 C.F.R. § 106.7(d)(l)(i). 

Employees who spend none of their compensated time on FEA or activities in connection with a 

federal election may be paid entirely with funds that comply with state law. 11 C.F.R. 

§§106.7(c)(l)and(d)(l)(iii). 

During an audit of the RPOC, the Audit Division determined that the Committee did not 

maintain a monthly log or any other supporting documentation for any of the individuals 

engaged in work on behalf of the Committee. All of these individuals were hired by the 

Committee, received compensation for their work, and their wages were processed through a 

payroll processing company for state and federal payroll tax purposes. According to the Audit 

Division, all of these individuals* salaries were allocated between federal and non-federal 

accounts. The total payroll paid by RPOC's federal and non-federal accounts during the audit 

period was S331,498. Of this amount, $189,962 was paid from the federal account, and 

$141,536 was paid from the non-federal account. 

The RPOC described these individuals as "leased employees" on its disclosure reports. 

This characterization of the employees' status is ambiguous as to whether an entity other than 

RPOC employed the individuals. The question, therefore, is whether these individuals were the 

employees of RPOC. We conclude that these "leased employees" are RPOC employees for the 

purposes of n C.F.R. § 106.7(dKl)-

First, an agreement between RPOC and Employers Resource, a payroll processing 

company, suggests that RPOC employed the individusds. The Audit Division provided us with a 

"Client Service Aseement" between the RPOC and Employer Resources pertaining to these 

leased employees. The Client Service Agreement specifies that Employers Resource will 

provide payroll and related services for these "employees," as they are referenced in the 

Agreement, on behalf of RPOC. The Agreement further provides that Employers Resource and 

RPOC are each "co-employers" of the employees. The Agreement draws a distinction between 

' The Client Service Agreement refers to the "Client" as the "Republican Central Conunittee of Orange County," 

and we understand from the Audit Division that the "Republican Central Committee of Orange County is the RPOC. 

We recommend that the Audit Division provide a copy of the Client Services Agreement to the Commission when 

submitting the lAR. 
Memorandum to Thomas Hintermister 

Proposed lAR to RPOC - Comments - LRA 909 

Page 3 of3 

independent contractors and employees, providing that RPOC will not hire any individuals other 

than "employees" hired in conjunction with Employers Resource during the term of the 

Agreement, "other than as indq>endent contractors." 

Under the Agreement, RPOC has the following authority and responsibilities: 

- Recruits and selects the employees 

- Supervises, directs, and controls the employees 

- Hires, disciplines, and terminates the employees 

- Funds pay and benefits 

- Warrants that all employees except independent contractors will have payroll processed 

by Employers Resource. 

- Complies with all applicable Federal, state and local laws governing the employment 

relationship. 

Given these facts, RPOC clearly hires, fires, and directs and controls the activities of the 

employees. This kind and degree of authority strongly suggests that RPOC employs the 

individuals. 

Second, RPOC appears to recognize that these leased employees are employees subject to 

11 C.F.R. § 106.7(d)(1). In its FEC disclosure reports, the RPOC included amended language: 

"Amendment to update column B: Payments for Payroll and Fringe Benefits is for leased 

employees who spend less than 25 percent of their time on FEA, [jic] these payments are made 

to Employers Resource for leased employees. The Committee uses Volunteers and employees. 

The Committee tracks employee time spent on federal election activity and federal campaigns on 

a monthly basis per Federal Election Commission regulation. No employee of the committee 

spent 25% or more of his or her compensated time on federal election activity." See RPOC 2009 

April Amended Report, filed Nov. 17,2009, Image #29935454703, F3XA. 

For these reasons, we conclude the "leased employees" are employees of RPOC for the 

purposes of 11 C.F.R. § 106.7(d)(1). RPOC, therefore, was required to "keep a monthly log of 

the percentage of time each employee spends in connection wi^ a Federal election." 11 C.F.R. 

§ 106.7(d)(l).^ 

' In the Dallas County Republican Party audit, the Conimission split 3-3 on the question of whether "contract 

laborers," whom the Committee asserted were independent contractors, should be treated as "employees" for 

purposes of the monthly log requirement under 11 C.F.R. § 106.7(d)(1). Dallas County Republican Party (LRA 

#903) (Motion on Request for Commission Directive 69 Guidance involving the Dallas County Republican Party, 

considered in Executive Session October 16,2012). Unlike in the Dallas County Republican Party audit, here the 

Conunittee, on its amended disclosure reports, characterizes the staff at issue as employees. Additionally, the terms 

of the Client Services Agreement make it clear that the individuals are employees, rather than independent 

contractors, of RPOC.