Solutions:  Professional Employer Organizations (PEO's):

Professional Employer Organizations (PEO's) have been around for about 30 years.  These for-profit firms are formed for the purpose of providing human resource services and insurance products to employers for a fee.  Some of the services and products that the PEO provides are:

 

• Payroll Processing and the Payroll-Related Tax Accounting / Reporting

• Group Health and Life Insurance

• 401(k) Retirement Programs and Tax-Advantage Medical Savings Accounts

• Workers' Compensation

• Human Resource Programs

 

In a co-employment relationship, the client company continues to direct their employees’ in their day-to-day duties and responsibilities.  However, the PEO contractually assumes certain rights, responsibilities and risks, and is the employer of record on an employee’s W-2.

 

Pro's:

• Reduced Administrative Burden:  Firms are able to focus their energies on their core business operations without having to oversee administrative tasks for employees.

• Better Benefit Programs:  Firms may be able to gain access to better employee benefit programs than they were able to secure as an individual employer.

• Dedicated Human Resources:  PEO provide services such as employee handbooks, forms, policies and procedures that a small employer may not have the time or energy to produce and oversee.

• Workers' Compensation:  Depending on your loss history, a PEO may provide cost savings for workers' compensation.  For example, if you have had unfavorable loss history and as a result have an experience modification greater than 1.00, a PEO may have a lower experience modification and thus, may be able to offer a lower overall premium.

 

Con's

 

• Loss of Cash Flow:  All payroll and administrative fees have to be paid immediately at the time of expense. 

• Additional Fees:  There are many fees associated with PEO's.  Some of the fees are upfront and easily seen.  Others may be hidden in the program costs.  For example:

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Administrative Fee:  This is the upfront fee for their servicing of your account.

 

Collateral Deposit:  Most PEO's require a upfront collateral deposit to guarantee your ability to pay future expenses.  The amount of the deposit is negotiable.

 

Workers Compensation Deductible:  If you purchase workers' compensation in the voluntary market, there is no deductible associated, unless you choose to take one on for a credit on your premium.  With most PEO's, there is a deductible ranging from $1,000. to $5,000. per claim associated with the workers' compensation.  This alone can dramatically increase the cost of your workers' compensation.

 

Workers' Compensation Minimum Charges Per Employee: Most PEO's will have a minimum charge per employee per week in your governing class code.  This charge is usually equal to your original estimated payroll costs, but many times it is in excess of the estimate.  This sets up a "minimum premium" that is much larger than what is identified within workers' compensation by the NCCI.

 

Workers' Compensation - Problems with Experience Modification:  Once you agree to contract with a PEO, it can be difficult to come out of the arrangement.  The experience generated during the time with the PEO is traditionally reported on their experience, depending on whether the PEO is under a master policy.  While they are able and normally willing to quickly provide loss runs, it is their choice as to whether they will provide the necessary premium/claims information to NCCI for the calculation of your updated experience modification until after you leave the contract arrangement.  The only problem is, that you may be trying gain coverage in the voluntary market with your "old" experience modification.  That can make trying to obtain coverage more difficult.  It is sort of a chicken and egg situation.  You need the experience modification updated so that you can get coverage, but are unable to get the new mod until such time as you leave the PEO arrangement. 

 

• Workers' Compensation - No Coverage for Casual Labor/Subcontractors:  One of the most important aspects provided by coverage under workers' compensation purchased as a stand-alone policy, is that it is in essence an umbrella policy for your employees, casual laborers and subcontractors.  Should one of them become injured in an on-the-job-accident, coverage would be afforded, under most situations, to all of them.  Coverage for workers' compensation under a PEO arrangement is only for employees that are listed and paid by the PEO, at the time of injury.  So, no coverage for casual labor.  No coverage for subcontractors.  Should one of them become injured, they would have the ability to sue the employer/contractor directly in the open tort system, where defenses for injuries are very limited.  The employer would become directly responsible for the medical and disability costs and could also become open to damages for "pain and suffering", something not afforded under workers' compensation.