(December 2020)
The first Professional Employer Organization (PEO) opened for business in California in 1972. There are now more than 700 PEOs operating in all fifty states affecting between two and three million workers.
PEOs are service providers. They utilize a business relationship that permits small-to-medium size companies to outsource their human resources management, employee benefits, payroll, and workers compensation. These companies usually cannot afford (or do not have, need, or want) a dedicated human resources department. This arrangement enables them to focus on their core competencies to maintain and grow their bottom line.
In such arrangements, the client business places all or most of its work force on the payroll of a staffing firm (PEO). The PEO then assumes responsibility for the human resources functions of those employees. The client company still retains essential management control over the work the employees perform. The PEO provides an integrated and cost-effective approach to human resources management and administration by contractually assuming substantial employer responsibilities and risks. It establishes and maintains a co-employer relationship with the client company's employees.
Some business owners confuse PEOs with temporary help services, but the two are very different. In general, temporary help companies recruit employees and assign them to client businesses to help with short-term work overloads or special projects on an "as-needed" basis. With a PEO, the client business turns over all of its human resources or personnel functions to an outside company for some or all of the client’s employees. The PEO then administers those functions and leases those employees back to the client company.
PEOs usually hire some or all of a company's current employees and become their employer of record for tax and insurance purposes. It then leases the employees back to the original employer (now the PEO client company) under a co-employment contract that establishes each party's powers, responsibilities, and liabilities. This practice is sometimes referred to as employee leasing or staff leasing. The PEO assumes responsibility for all payroll obligations and tax filings. Health benefits, welfare, and retirement benefits plans are optional additional services that can also be contracted, along with the associated administrative paperwork.
The PEO specifically establishes a contractual relationship with the client company where it does all of the following:
States and industries vary in how they accept these co-employment arrangements. In addition to assisting their client companies with state regulatory compliance, PEOs have also traditionally provided workers compensation and employers liability insurance coverage.
When a client company enters into a formal joint employment relationship with a PEO, the PEO arranges for the workers compensation insurance coverage and handles subsequent worker injuries, claims, and claims administration on the client's behalf. The cost of workers compensation insurance to the client company that the PEO arranges depends on the risk of loss based on the type of work done, the rates that apply to that work, and the client company's experience modification factor.
The National Council on Compensation Insurance (NCCI) has developed Employee Leasing endorsements since PEOs began. They were first referred to as Labor Contractors, but the term Professional Employer Organization replaced them as their responsibilities, number of functions, and sophistication increased over time. PEOs perform many more functions than Labor Contractors did. The next section examines WC 00 03 20 B–Professional Employer Organization (PEO) Extension Endorsement.
Note: WC 00 03 01 A–Alternate Employer Endorsement should be used when employees are considered temporary instead of leased. It is issued for the PEO, names the client as the alternative employer, but the PEO provides the workers compensation coverage.
Related Article: Alternate Employer Endorsement
This endorsement is used when the named insured is a client company of a Professional Employer Organization (PEO) but agrees to provide workers compensation and employers liability coverage for employees it leases from that PEO. Coverage applies only with respect to bodily injury to leased workers in the state(s) in Item 2. on the endorsement schedule and only to those employees the PEO leases listed on the endorsement schedule.
Note: The employees must be leased. Temporary workers are not covered.
This endorsement defines three key words or phrases:
These are also known as labor contractors, employee leasing companies, lessors, or similar titles. Regardless of the term used, they provide employees to their client companies. The relationship is defined through a contractual arrangement accompanied by a fee.
This is any entity that enters into a contractual relationship to obtain all or some of its workers from a PEO. It may also be known as a lessee.
Note: This client is the named insured on the policy.
This is a worker furnished to a business for a definite period of time. The following are some examples of tasks that temporary workers perform:
Note: This phrase is defined, but the endorsement does not use it. It uses a similar phrase “workers provided to you on a temporary basis,” but that phrase is not defined.
The PEO is added to Part One–Workers Compensation Insurance and Part Two–Employers Liability Insurance as an insured. If there is any contract or project listed under item 3. on the endorsement schedule, only work the named insured performs under the listed contract or project is covered. Some states may not permit benefit payments to the PEO employees under this endorsement. In those cases, the insurance company reimburses the named PEO for any such benefits it paid to the injured person(s) entitled to them.
The insurance coverage this endorsement provides is not meant to satisfy the PEO's duty to secure its own obligations under applicable workers compensation laws. The insurance company does not file evidence of workers compensation coverage on the PEO's behalf with any governmental or regulatory agency. It also does not require any other company that provides coverage for the PEO to share a loss that this endorsement covers.
Premium charges apply to the named insured's leased workers that the PEO provides. The named insured must obtain complete payroll records of all leased employees from the PEO in order to meet the obligations and requirements under Part Five–Premium, Paragraph C.2. The named insured is jointly liable with the PEO for contributions, premiums, forfeitures, or interest that applies to the wages of workers the PEO leases to the named insured.
The insurance company may cancel the policy according to its terms or for violations of the rules that apply to PEO arrangements. However, this is subject to the PEO having been given the opportunity to address and resolve the points that make up the violation. If the policy is to be cancelled, the insurance company sends notice of cancellation to the PEO and also notifies the named insured and addresses the status of its coverage.
Part Four–Your Duties If Injury Occurs applies to both the named insured and the PEO. The PEO is obligated to recognize the insurance company’s rights Under Part One, Part Two, and its right to inspect under Part Six–Conditions.
The PEO name and address must be entered as item 1.
The state(s) where the named insured utilizes workers from the PEO must be entered as item 2.
Any restriction of coverage to only certain contracts or projects must be entered as item 3. Item 3. could be left blank to reflect that all contacts and projects are covered.