There are many reasons to consider a PEO, and there are some great PEO providers out there.
PEO’s can create tremendous savings and eliminate a great deal of headache related to workers’ compensation insurance, particularly for companies with less-than-ideal claims experience.
It’s also nice that payroll, and HR tasks, materials, and compliance are often packaged in with the deal, so you can outsource those tasks in addition to having lower workers’ comp insurance premiums.
Just be sure you have the full picture before you see savings and take the plunge. Here are two risk management tips for any business that is considering using or thinking of leaving a PEO.
First, there are often FUTA/SUTA tax implications associated with making such a move. You may end up paying a considerable sum in payroll tax liabilities that could offset potential savings on work comp premiums and/or payroll services.
For those who would be joining on with the PEO, there may also be fees tied to your gross payroll. What looks like a great deal now may look far less attractive as your business grows or you decide to give raises to your employees and those fees go up.
Further, if you’re considering leaving the PEO you should also consider what the payroll tax liabilities and other fees may be in so doing.
Again, a PEO may well be your best available solution. Just be certain you have all the numbers present and correctly assembled in front of you so there are no surprises. This will allow you to make the most well-educated and beneficial decision possible.
Second, consider the nature of workers’ compensation coverage. In particular, pay special attention to the “employer’s liability” or “Side A” coverage. This is, in my opinion, the most important consideration of all.
I’m sure you know workers’ compensation is the sole remedy for employees who are injured on the job. Now there is no need for an employee who is injured in the course of their duties to sue their employer in order to get benefits paid for the costs associated with their injury.
They can simply file a claim on workers’ compensation insurance, and a fair amount of their expenses will be paid.
But what about when an employer is accused of gross, willful, wanton negligence or intentional injury to an employee? Enter workers comp A or “employer’s liability” coverage.
This is an oft misunderstood and rarely-discussed part of workers’ compensation coverage. Take, for example, the article found at https://www.nationwide.com/what-is-workers-compensation-insurance.jsp. It does not even mention employer’s liability when answering the question, “what is workers’ compensation insurance?” and this was published by one of the largest and most capable insurers in the world.
So here’s the skinny: If you buy your own workers comp and you are sued by an employee for being exceedingly or willfully negligent as an employer, you have the limits of coverage A (usually somewhere between $100,000 and $1,000,000) or “employer’s liability” for such a claim.
Further, your commercial excess/umbrella provider will likely extend your umbrella liability limits over your employer’s liability limits to provide additional cushion for such a lawsuit. The umbrella insurer may or may not be willing to do that if your workers’ compensation coverage is provided by a PEO, so you may forfeit the opportunity to have millions more in available limits for pennies on the dollar.
If you choose to use the services of a PEO you either need a minimum premium work comp policy with you as the named insured, or you need to get an agreement in writing from the PEO and the PEO’s work comp insurer that they will pay employer’s liability claims for you just the same as if you bought workers’ compensation coverage independently.
Otherwise, when an employer’s liability claim (which are almost always big numbers because they have to believe there’s a case for the courts to override the sole remedy, so you’re often dealing with permanent and fairly severe injuries) comes down the pike the PEO and their workers’ compensation insurer can simply walk away and say, “hey, we didn’t put that guy on that saw knowing the guard on the blade was bad. That was all the business owner’s fault. We had nothing to do with that, and we are not paying that claim.”
In short, you’re “co-employers” until there’s a big employer’s liability claim on the table and then the PEO’s lawyers get involved and you will be on your own. That’s why you want the minimum premium work comp policy where your business is the named insured or the written agreement mentioned before.
My guess is you’ll have some success with the former, and probably little or none with the latter. If you are successful in getting a minimum premium workers compensation policy through your PEO, be sure your umbrella liability insurer extends coverage over your employer’s liability.
Again, let me stress PEOs can be a great option in the right circumstances if they are willing to provide favorable terms, fees, and coverage. I have worked with some terrific PEOs in the past, and they did a fantastic job for some clients who were in quite a tough position.
This is by no means an exhaustive article on this subject. I know folks who know a great deal more than I do about this, but these are my thoughts from experience.
My best advice is to be aware of the potential pitfalls, and stay vigilant to make sure you have all the accurate information you need before you make your decision.
To Your Success,