PEOs: how they service the system

PEOs: how they service the system – Workers’ Comp

Donald T. DeCarlo

A professional employers organization arrangement establishes a co-employment relationship through which both the “work-site employer” and the PEO have legal rights and obligations with respect to the same group of employees.

In such an arrangement, the employer supervises and directs the day-to-day activities, controls working conditions at the work-site and determines the actual length of the individual employees’ assignments.

The PEO, meanwhile, is responsible for paying employees, withholding and paying any appropriate taxes from payroll, maintaining workers’ comp coverage, providing for the group employee benefit program, hearing and acting upon employee complaints and, ultimately, the hiring and firing of workers.

While the PEO may make insurance more affordable for the business owner, it may also play an important role in the area of workers’ comp loss control and premium collection. By joining a PEO that accepts responsibility for the furnishing and management of workers’ comp benefits, small employers can take advantage of certain economies of scale and make these resources affordable and available.

For many, PEOs represent a unique opportunity to bring small employers into the loss-control fold. Instances have arisen where employee leasing arrangements served merely to obfuscate employer payroll and job classifications and, as a result, minimize the amount of workers’ comp premium owed to the insurer. Under a properly constructed and regulated PEO, the workers’ comp system may actually be served through these arrangements.

Some ways in which the PEO may serve the system include:

Improving the underlying risk. By accepting the risk of being the policyholder for workers’ comp coverage, the PEO has the inherent incentive to introduce risk management practices into the client workplace. A PEO improves the underlying risk to itself, its employees and the client carrier by introducing improved hiring practices, loss control and safety procedures, safety training, management of workplace injuries, employee assistance programs and return-to-work programs.

Providing the incentive to reduce costs. The PEO contracts with employers to provide employees and services for a defined price and thus incurs the business risk of profit or loss based upon its ability to deliver services at a cost less than the price charged for its services. A PEO that accepts the responsibilities of being a co-employer and accepts the risk of a policyholder for workers’ compensation coverage has both the financial incentive to control comp costs and the ability to commit appropriate resources to achieve a cost savings.

Improving the determination of appropriate premium. While there are employees at each client employer’s business site, in effect the employees of a number of small businesses are aggregated under a single large employer umbrella. Information is maintained on a consolidated basis that is necessary for proper premium determination. Through the expertise and resources of the PEO, better accuracy is achieved in the proper classification of workers and the proper reporting of payroll dollars on which premiums are based.

Providing greater responsiveness to workplace safety. Insurers have the ability, through the PEO, to furnish loss-prevention services to those employers–generally those smaller in size–that are traditionally overlooked in the implementation of cost-containment procedures.

While there are many potentially positive features associated with PEO arrangements and their application in the workers’ comp arena, questions arise as to who the employer of record is and which employer is eligible for the “exclusive remedy” that stems from coverage under state workers’ comp laws.

Should the employer be the one that furnishes the worker or should it be the entity that receives the services of the worker–or both? This question remains one of the “great unknowns” in any number of states, as PEO arrangements continue to expand in the marketplace.

Donald T. DeCarlo is a partner in the law firm of Lord, Bissell & Brook in New York. He can be reached at

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