Employer of record in Kentucky: PEO rules, payroll registration and what the client still owns (2026)

As of November 2026, Kentucky regulates employer of record arrangements through its Professional Employer Organization law, KRS 336.230 to 336.250: anyone providing professional employer services must be registered with the Department of Workers' Claims, whatever it calls itself. A registered PEO pays wages and remits payroll and unemployment taxes, and it may report Kentucky unemployment wages under its own account or under a separate account for each client. The client keeps every employer duty the contract does not move, including the duty to have workers' compensation in place and a copy of the certificate in its own files.

This page is for a company outside Kentucky, or a staffing firm, deciding whether to employ a Kentucky worker through an employer of record (EOR) or PEO, or to register itself. The difference between an EOR, a PEO and payrolling is in what is an employer of record and payrolling services explained. The 2000 repeal of employment agency licensing and the PEO fee caps are in staffing agency license in Kentucky, and the full state checklist is in hiring employees in Kentucky. This page adds whose unemployment account is used, who insures the worker and what stays with you.

Kentucky employer of record and PEO rules at a glance

Does Kentucky license employer of record companies or PEOs?

It registers PEOs, and the name on the provider's website does not matter. KRS 336.232(8) defines a professional employer organization as anyone "engaged in the business of providing professional employer services or conducting business as a staff leasing company, registered staff leasing company, employee leasing company, administrative employer, or other similar name." The co-employment must be "intended to be an ongoing relationship rather than a temporary or project-specific relationship," and a covered employee is one who has received written notice of co-employment with the PEO. Under KRS 336.236:

• Who files. A person providing professional employer services "in which all or a majority of the employees of a client are covered employees" had to register by July 15, 2024. After that date, an unregistered person "shall not offer or provide professional employer services in this Commonwealth."
• New entrants. A PEO not operating in Kentucky on July 14, 2022 registers "prior to initiating operations." This is the clause that catches out-of-state EOR clients: if a PEO learns that an existing client based elsewhere has employees in Kentucky, it must decline to serve them or notify the department within five business days and file a limited registration, or a full one if there are more than 50 covered employees.
• What the application holds. Every business name used in the past five years, owners of 25% or more, and an audited GAAP financial statement no older than 13 months, "without qualification as to the going concern status" of the PEO. Renewal is due within 180 days after the end of each fiscal year.
• Penalties. Knowingly operating unregistered can bring denial, revocation, a civil penalty of up to $1,000 per violation or a cease and desist order (KRS 336.250).

The fees in KRS 336.238 are caps ("not to exceed" $500, $250 and $250), and we could not find the amounts actually charged. Filing runs through the department's PEO Registration System, linked from its PEO registration page. The statute says the department "shall maintain a list" of registered PEOs "readily available to the public," but the page we checked offers only the login portal and a phone number, (502) 564-2869. Ask the provider for its registration and confirm it with the department before you sign.

What if the provider calls itself an employer of record but is not a registered PEO?

Ask which exclusion it relies on. KRS 336.232(8)(b) leaves out temporary help services, independent contractor arrangements where the provider controls the work, and employee sharing between commonly owned companies. A temporary help service recruits and hires its own employees, assigns them to support or supplement a client's workforce, and "customarily" tries to reassign them when each assignment ends. A worker you found, chose and will direct indefinitely fits that description poorly.

The practical risk sits in unemployment insurance. The Office of Unemployment Insurance's 2026 employer guide says workers "must be reported by the company for whom they performed services," and adds: "If you lease employees from an entity other than a certified PEO, and these employees perform services in covered employment for your business, you must report them." If your provider is neither a registered PEO nor a genuine temporary help service, plan on opening your own Kentucky unemployment account.

Who pays Kentucky unemployment tax on an EOR or PEO worker?

The PEO files and pays, but Kentucky lets it choose whose account the wages sit in. Under KRS 336.248, which governs reporting from January 1, 2025:

• Option one, the PEO's account. The PEO reports all covered employees' wages "under the reserve account of the professional employer organization."
• Option two, a client account. The PEO notifies the office in writing and reports "under the reserve or reimbursing account of the client." The office then sets each client's rate separately from that client's own contribution and benefit history; a client without enough history gets the new-employer rate, which the guide puts at 2.7% for 2026.
• One change only. A PEO may change its election once, effective the following calendar year.
• When it ends. On termination, or if the PEO fails to report or pay, "the client shall be treated as a new employer without a previous experience record unless that client is otherwise eligible for an experience rating."

Ask which election your PEO made. Under option one your Kentucky experience does not build while the PEO reports; under option two it does, and the account follows you. If you also employ Kentucky workers directly, you need your own account once you pay $1,500 in wages in a quarter or have a worker in 20 different weeks, per the same guide.

Who carries workers' compensation in Kentucky?

The Department of Workers' Claims says "Employers with one or more workers are required to maintain coverage," with no exception for family, temporary or part-time employees, and that out-of-state employers working in Kentucky need Kentucky coverage (security and compliance page). The PEO law places the duty on the client and lets it be delegated. KRS 336.244(2) says a client fulfills its responsibility by buying a standard policy, and "may fulfill that responsibility by contracting with a professional employer organization to secure coverage." Either way, "it shall be the responsibility of the client to maintain in its files, at all times, the certificate of insurance," and the premium uses the client's own exposure and experience.

The professional employer agreement must "specifically" allocate the duty to buy coverage to one party (KRS 336.242(2)(d)). A PEO whose coverage was terminated anywhere in the past five years for using the arrangement to avoid premiums cannot register. If only some of your Kentucky employees are covered employees, you insure the rest yourself.

Which Kentucky registrations, reports and notices still apply?

• Income tax withholding. The agreement must make the PEO responsible to "withhold, collect, report and remit payroll and unemployment taxes" (KRS 336.242(2)(b)). The worker completes the 2026 K-4; the form says all wage earners are taxed at a flat 3.5%. Employers register through MyTaxes, per the Department of Revenue.
• Local occupational license taxes. Many Kentucky cities and counties tax wages, and an employer that fails to withhold is "personally and individually liable to the tax district" under KRS 67.783. Ask whether the provider registers with the district where the worker actually works, including a home office.
• New-hire reporting. Within 20 days, to the Office of the Attorney General, under KRS 405.435.
• Co-employment notice. The PEO gives each covered employee written notice of "the general nature of the co-employment relationship" (KRS 336.242(3)). Until the worker has it, they are not a covered employee.
• Posters. State and federal posters, including the workers' compensation notice, listed by Kentucky Business One Stop. Ask how a remote worker receives them.
• Paid leave programs. We found no Kentucky paid family leave or disability insurance program that needs a separate employer registration.

What does the client company still own in Kentucky?

KRS 336.242(1) is plain: unless the statute or the agreement says otherwise, the client "shall be obligated to perform all duties and responsibilities otherwise applicable to an employer," and keeps "the exclusive right to direct and control the covered employees." It is also "solely responsible for workplace safety" and for directing, supervising, training and retaining the workers (KRS 336.242(4)). In practice:

• Pay beyond base wages. The PEO's wage duty excludes "bonuses, commissions, severance pay, deferred compensation, profit sharing, or vacation, sick, or other paid time off" unless it expressly agreed to pay them. If your offer letter promises any of these, check who owes them.
• Hiring and firing. Both parties have a right to hire, discipline and terminate. You still run the search: Kentucky is one-party consent for recording (see Kentucky recording consent law for interviews), has no private-employer ban-the-box, salary history or pay-range law (see ban the box in Kentucky and Kentucky pay transparency), and background checks and drug tests follow Kentucky background check laws and Kentucky drug testing laws.
• Non-competes. The PEO law does not affect restrictive covenants between the client and the worker, and the PEO takes no responsibility for them unless it agrees in writing (KRS 336.234(1)(b)). See Kentucky non-compete law.
• Licensed workers and incentives. A licensed covered employee "is deemed solely an employee of the client" for the license, and for state tax credits and incentives covered employees count as the client's alone (KRS 336.234(1)(e), (2)).
• Co-employment liability. Both businesses can be named in wage or discrimination claims; see joint employer liability for staffing agencies.
• Federal payroll taxes. The IRS says the client "generally remains responsible" for employment taxes unless the PEO is IRS-certified; check the CPEO public listings.

Changes taking effect in 2027 are tracked in new hiring laws in Kentucky for 2027.

When is registering your own company in Kentucky the better route?

• You plan several Kentucky hires. Your own setup is an unemployment account in the Kentucky Unemployment Insurance Portal, a MyTaxes withholding account, workers' compensation from the first employee, local occupational tax accounts and 20-day new-hire reports. The PEO model assumes it covers all or a majority of your Kentucky workforce or a work unit.
• You want your own experience rating now. Unless the PEO elected client accounts, you start over as a new employer when the contract ends.
• The work is a defined project. A genuine temporary help firm may fit better than a co-employment meant to be ongoing.
• The provider is not registered and cannot name its exclusion. Then the unemployment guide puts the reporting on you anyway.

Questions to ask an employer of record or PEO before signing for Kentucky

1. Are you registered with the Department of Workers' Claims, under a full or limited registration, and when is your renewal due?
2. If not, which exclusion in KRS 336.232(8)(b) do you rely on, and who reports our worker to the Office of Unemployment Insurance?
3. Did you elect to report Kentucky wages under your reserve account or under a client account for us, and what rate will apply?
4. Which party does our agreement make responsible for workers' compensation, and will you send the certificate we must keep on file?
5. Who registers for withholding and with the local occupational license tax district where the worker lives and works?
6. Who files the new-hire report within 20 days, and when does the worker receive the co-employment notice?
7. Do your wage obligations cover the bonus, commission and paid time off in our offer, or do those stay with us?
8. Are you an IRS-certified PEO, and who is liable for federal employment taxes if a deposit is missed?
9. Can we move the worker to our own payroll later, and is there a conversion fee?

Employer of record rules in nearby states: Tennessee, Ohio, Illinois, Virginia and Missouri.