Problems with Professional Employer Organizations

Professional Employer Organizations (PEO’s) are staffing companies used to group employees to offer benefits such as workers’ compensation, health insurance, and an outsourced HR and payroll service. Businesses enter into a co-employment contract with a PEO, where the PEO becomes the employer of record for tax and insurance purposes and the business leases the employees from the PEO. That is why PEO’s are sometimes called Employee Leasing Companies. This relationship may save businesses money in the short run and be especially helpful for small businesses in high risk industries that are unable to find insurance coverage. On the other hand, PEO’s may be very expensive for businesses.

• The primary problem with Professional Employer Organizations is that they are unregulated. Because they offer additional services, they may add administrative charges during the course of the contract and may even charge for the administrative services as a percentage of the total payroll. This can be much more expensive than simply using an outsourced payroll and human resources company.
• Due to the unregulated nature of PEO’s, they are under no obligation to give a 30 or 45 day notice before cancellation like an insurance carrier. They are able to cancel insurance coverage and payroll services without a warning. And if the PEO files for bankruptcy, then it leaves the contracted businesses in a sticky situation. They are usually behind on payroll and other insurance claim issues that need to be resolved.
• Many insurance carriers do not like to offer workers’ compensation insurance to PEO’s and they often end up with lower rated workers compensation carriers. The financial rating of the insurance carrier is important for some contracts and may affect the policyholder’s umbrella or excess liability coverage. Policyholders of a PEO also have no influence over the workers compensation carrier that the PEO selects.
• The workers compensation policy is in the name of the PEO and not the policyholder. This causes a large problem for the policyholder because the policy will only cover the leased employees. There will not be any coverage for policyholder’s temporary labor, uninsured subcontractors, independent contractors (1099s), casual labor, or volunteers.
• Businesses contracted with a PEO will also lose other premium savings advantages of having a separate workers compensation policy. These include exemptions, control of their experience modification, premium credits such as the 2% safety credit, 5%drug-free credit, FCCPAP, and premium discounts. They also lose access to other programs that can reduce the net cost of workers’ comp such as loss sensitive dividends, flat dividends, and others. The PEO may not also offer the current workers’ compensation rates offered by the state and could base the rate for premiums on a higher previous rate.
• In addition to those other points, how good is the service a business receives from contracting with a Professional Employer Organization? How effectively are workers compensation claims handled? Is productivity lost through an injury and is there a return to work program available to minimize those claim costs? Are there loss prevention services? How many accidents could have been prevented? How accurate is the payroll and accounting service provided by the PEO and is it competitive with a typical payroll company?