Author: Chris Boggs

Professional Employer Organizations (PEOs) share an employment relationship with its clients and their employees. The National Association of Professional Employer Organizations (NAPEO) explains that, "The PEO relationship involves a contractual allocation and sharing of certain employer responsibilities between the PEO and the client, as delineated in a contract typically called a client service agreement (CSA)."

Initially known and referred to as employee leasing, now an outdated term, the model has evolved into one of shared employment and is now regarded in a much broader context. NAPEO's industry statistics reveal that the 780 to 980 PEOs operating in the US now represent a $136 to $156 billion gross revenue industry. PEOs serve an estimated 156,000 to 180,000 small and mid-sized businesses collectively employing between 2.7 and 3.4 million people. The PEO's role is far broader than what the early employee leasing nomenclature might suggest.

The PEO's Role

In simplest terms, a PEO serves as its client's HR department. PEOs assist their clients in navigating the HR landscape including wage and hour laws, health care reform legislation, fair employment practice and equal employment opportunity rules and regulations, workers' compensation, mandatory sick leave, paid family leave and other areas of workplace legislation.

PEOs also handle such tasks as payroll and taxes, employee benefits design and administration, HR compliance and administration, and training and development.

Within the payroll and tax area, the PEO prepares payroll checks, manages health insurance and benefit deductions, oversees 401k and other retirement plan deductions, makes IRS and state tax deposits along with payroll direct deposits, tracks employee time and attendance, and manages all related reporting.

Administratively, PEOs assist with employee relations, policy development, employee handbook development, employee training, and leave of absence administration.

PEOs also provide and manage its clients' employee benefit programs, inclusive of medical, dental and vision coverage; life insurance; short- and long-term disability; retirement plans; and ancillary benefits such as employee assistance programs (EAPs). Other employee perks managed include transportation, shopping, travel and entertainment benefits, and wellness programs may also be managed by the PEO.

From a compliance perspective, PEOs administer:

• Continuation coverage under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA");
  
• State continuation of coverage programs;
  
• Unemployment administration; and
  
• Disability and workers' compensation administration and claims management. 
  

Some clients see these services and the "expertise" provided by the PEO as beneficial, especially if the client can't afford to hire an employee or employees to provide the same services and knowledge.
 
Workers' Compensation and the PEO

PEOs often manage their clients' workers' compensation requirements, but rules vary from state to state. In some states the work comp policy lists both the PEO and the client; and some states require a Master Workers Compensation Policy and the attachment of specific endorsements. Available endorsements in NCCI and NCCI-based states include:

• Professional Employer Organization Extension Endorsement (WC 00 03 20 B): This endorsement is attached to the PEO policy and extends workers' compensation and employers' liability exclusively from the PEO's policy.
  
• Employee Leasing Client Exclusion Endorsement (WC 00 03 22): This endorsement is attached to the client's workers' compensation policy to exclude coverage to the employees covered by the PEO.

One important note regarding workers' compensation when a PEO is involved! Even though the PEO is providing work comp, the client should still carry its own work comp policy because there may be situations where employee/employer status could exist outside the PEO relationship. Examples include uninsured subcontractors or temporary employees hired outside the PEO arrangement. If a client decides to use a PEO, discuss this reality with them (and put it in writing).

Work Comp Loss Experience

A client's workers' compensation loss experience goes with the client - even if the client enters into a PEO relationship. In many states when businesses engage a PEO, their experience rating stays with them. If a business ends its relationship with a PEO, the rating and experience gained within the PEO leaves with them.

Reputable PEOs operate this way to eliminate "modification shopping" and prevent companies from using a PEO relationship to circumvent the system or "wash their mod."

Further, a reputable PEO reviews the prospect's workers' compensation loss history. If the loss history is poor and conveys habitual unsafe practices, the PEO working to remain operational for the long term avoids signing that client.

Because the PEO is a co-employer and owner of the workers' comp policy, it has a vested interest in the loss experience. A prospect with a high experience mod attempting to enter a PEO should expect to be reviewed very closely by that PEO. The PEO should want to know all the facts to determine if the mod is based on one or a few incidents or the result of poor habits.

A responsible PEO wants clients that have the mindset of doing the right thing regarding workplace safety.

Your Client is Moving to a PEO

If one of your clients is considering a PEO, they should choose carefully. Some questions your client should ask include: 

• Does the PEO hold the E.S.A.C accreditation as provided by the Employer Services Assurance Corporation (www.accessesac.org)?
• Does the PEO have the CPEO Certification (Certified Professional Employer Organization)? This is an Internal Revenue Service (IRS) certification attesting to the PEO's financial stability. 
  
• Are the PEO employees experienced, credentialed professionals? Do they hold Human Resource, Payroll and Safety designations?
  
• Does the PEO have specific experience in the industry in which the client works?
  
• Does the PEO 0perate in the states where the client has offices/facilities?
  
• Does the PEO take a lead role in managing workers' compensation claims? 
  
• Does the PEO provide safety management service? This is not limited to simple safety inspections, do they provide or make arrangements for needed training (lifting, forklift, etc.)?
  

Although no agent wants to lose a workers' compensation account to a PEO, it happens. If/when a client mentions contracting with a PEO, be prepared to explain the workers' compensation issues with them and give them insight (not advice) regarding how to select the best PEO.

Last Recommendation – To You and Your Client

Because the relationship between the PEO and the client is a contractual relationship, the insured should not enter into the relationship until it reads and fully understands ALL the responsibilities placed on it and the PEO by the contract. Further, all the charges and fees, including potential additional fees, should be known up front.

The contract should be reviewed thoroughly by the client, its lawyer and maybe its accountant. But the insurance agent should not review the contract – unless there is a lawyer on staff. The extent of the agent's involvement is to advise on the workers' comp issues and give the client some questions to ask. Don't help them make the decision regarding which PEO to choose – your E&O carrier will appreciate it.

Last Updated: April 14, 2017