Industry Leaders Meet With NCCI | Chief Economist Provides Positive Update on the PEO Industry
Unfortunately, there is still sensationalist journalism when it comes to the Professional Employer Organization ("PEO") industry. Although there have been multiple white papers and reports, to include three in the last year and a half by the National Council of Compensation Insurance ("NCCI"), many continue to speculate on the purpose, impact and performance of the PEO industry. Note that all three of these NCCI reports as well as other information and news on the PEO industry is available at www.peocompass.com, or the NCCI website. My post regarding this study that came out this past August summarizes what Mr. Shuford found after further investigation to the speculation regarding the PEO industry:"On Tuesday of last week, Chief Economist of the NCCI, Harry Shuford, presented the latest study on the PEO Industry at this past week’s WCI Conference. He was joined by Mona Carter on stage to present the study as well as to discuss the PEO industry from a historical perspective. The crowd burst into laughter when Harry related PEOs helping their somewhat historically tarnished reputations of the past as “as easy as getting chewing gum out of one’s hair”. Mona spoke to the fact that the “mystical image of the PEO is 20+ years old”.Bottom line from Mr. Shuford’s Presentation – by the numbers:
Master policy clients of a PEO average 9.7 employees, while multiple coordinated policy clients average 6.7 employees. By contrast, the average number of employees for non-PEO policies is 19.4.
PEOs represent 1-2% of all payroll
In Florida, it is 6% of the market
Five PEOs make up 48.8% of the overall PEO market
PEO loss development is less for PEO’s then standard market. For large deductible clients, 1.278 at 42 months versus 1.41 for the non-PEO business
Approximately 90% of PEO client companies are not large enough to promulgate an experience modification
And my favorite, PEOs have had comparable or lower loss ratios… For large deductibles and over the last six years, the industry has — 4 wins, a tie and a loss… Nicely done!
The NCCI has now published 3 PEO industry studies over the last 14 months. These are the very first studies comparing the workers’ compensation results of PEO versus the traditional workers’ compensation market. These are groundbreaking events for a much maligned industry in our opinion. The industry allows its clients to grow their operations by allowing PEOs to focus on things like safety and other risk management services. Download the previous NCCI PEO studies here:
August 20, 2013: NCCI Update on PEO Performance
May 16, 2013: Don’t Just Speculate, Investigate! The Story Behind the PEO Study
June 19, 2012: Professional Employer Organizations and Workers Compensation
Before we investigate further into the most recent media driven "speculations", it should be known that I have a tremendous amount of respect for National Underwriter and their various publications. In the past and am sure in the future, NU has been been very fair to PEO industry matters and allowed the industry and its proponents to address matters of interest in a professional manner. I am hopeful this rebuttal will allow a formal retraction, or at least addition, to much of this article based on the credible facts available on this historically maligned industry.That said, the PEO industry does not deserve this type of attack and have worked extremely hard over a long period of time to create regulation of its business model. I am formally requesting this article to be redacted or at least edited to what is the credible reality versus….PEOs: A New Potential for Workers’ Comp Fraud?
Taking a closer look at Professional Employer Organizations
By ANTHONY NATALE III October 1, 2013
Workers’ Compensation fraud has reached epidemic proportions within the United States, costing legitimate employers, employees and healthcare providers millions of dollars per year. The landscape of this fraud is ever-changing; no longer is it limited to employees exaggerating workplace injuries or working for cash while collecting workers’ compensation benefits. More recent schemes involve employers under-reporting payrolls to receive lower workers’ compensation premiums, or incorrectly classifying employees to save insurance costs. Throw in unscrupulous medical providers billing for services they never performed, and it’s no wonder that healthcare and medical care costs are so egregious.The result of these and other fraudulent activities is that businesses and much-needed jobs are often forced out of regions that operate under high workers’ compensation costs. In some cases, in an effort to offset these costs, businesses may be forced to increase the price of goods and services, thus impacting local economies. These activities also serve to create an environment that results in unnecessary delays in the processing of legitimate claims that can affect an injured worker’s ability to obtain crucial medical treatment for true workplace injuries.To effectively compete in this new business world, employers are attempting to shift the burden of workers’ compensation costs to entities known as Professional Employer Organizations (PEOs). According to the National Association of Professional Employer Organizations (NAPEO) there are an estimated 700 PEOs in operation throughout the 50 states. Per NAPEO stats of 2013, there are 1,026 PEOs countrywide. While PEOs undoubtedly have rescued employers from the high costs associated with the administration of workers’ compensation programs, their very existence has also set the stage for the emergence of PEO-related workers’ compensation fraud. Really? Please see NCCI studies above and industry white paper.With acknowledgement to the fact that the overwhelming majority of PEOs are legitimate, law abiding companies, the emergence of fraud in this arena should put employers on alert when contemplating entering into the PEO arrangement. It is exactly the opposite. Fraud was evident before regulation commenced in this industry over 20 years ago, but the NCCI and others have proven out that PEO's over-report claims, are more compliant and credible vehicles to properly deploy workers' compensation to small businesses countrywide.
WHAT IS A PEO?
A PEO is an entity that contractually assumes various employer rights and human resources responsibilities through the undertaking of an “employer relationship” with workers either assigned PEO's NEVER "assign employees" – there is never a "transfer of labor/assignment to or hired by its clients (employers). In short, the PEO and the employer/client share an employment relationship that allows the PEO to handle and manage employee-related matters such as payroll, benefits, tax matters and, in many cases, workers’ compensation programs, thus allowing the employer to concentrate on the operation and revenue producing aspects of its business. This relationship has become so commonplace that various states actually recognize PEOs and their clients as “co-employers.” 44 states now have licensure or specific rules regarding the operation of the PEO model.This co-employment relationship has been summarized by NAPEO, in part, as a contractual relationship whereby the PEO:
Co-employs workers at the client locations and assumes responsibility as an employer for specified purposes;
Reserves a right to direct and control these employees;
Pays wages and employment taxes of the employee out of its own accounts;
Reports, collects and deposits employment taxes with the state and federal authorities;
Establishes and maintains an employment relationship with its employees that is intended to be long-term and not temporary; and
Retains the right to hire, re-assign and fire the employees.
Recognizing the potential for fraud that could arise from the co-employer shared relationship, some states have enacted legislation that further defines a PEO relationship and undertakes management protocols for these entities. The majority of states, however, have failed to enact or enforce legislation that would protect employers from PEO fraud or misrepresentation.
POTENTIAL FRAUD ISSUES 1 When an employer outsources its workers’ compensation coverage responsibility to a PEO, it is entrusting that all insurance requirements will be fulfilled by the PEO (As mentioned above, that is not always the case. In addition, a PEO dose not usually have ANY involvement in non-employment related insurance placements (i.e. General liability/property). This means that the PEO will be responsible for classifying employees (insurance underwriters of the "carrier of record" determine classifications and their auditors verify such in the normal course of business), communicating payroll to insurers, selecting appropriate coverage (This is not the job of a PEO, it is the role of their licensed insurance representative as it would be in any insurance transaction requiring a license) and paying premiums. This also presupposes that the PEO is familiar with the local workers’ compensation statutes and regulations Again, they have licensed representatives and be assured PEO's are some of the most sophisticated buyers of insurance. Their average client size per a recent NCCI study is nine employees, therefore PEO's provide much greater expertise in all non-operational areas then an average small business owner. Unknowingly (There is a formal client service agreement that spells out the roles and responsibilities in great detail of the PEO and co-employed business. Much of this is statutory and strictly governed), some employers may willingly (Unknowing or willingly?) shift this burden to the PEO without securing contractual evidence of the PEO’s rights and duties (Never the case). What’s worse, these same employers may rely on an ambiguous contract drafted by the PEO which does nothing to protect the employer’s interests (Please check state statute and licensing guidance in almost all states – not true). Unfortunately, the lack of a clearly defined, written contract between the PEO and employer can not only lead to fraud or misrepresentation (really? Can ONLY lead to fraud?) by the PEO, but also can negate the existence of a valid PEO relationship in states that require a written PEO contract. When an employer is contracted with a PEO and a workers’ compensation claim is filed, questions often arise as to whether appropriate insurance has been maintained, if there is documentary evidence available to support the PEO’s responsibility to defend the workers’ compensation claim and even, sometimes, whether the PEO is fiscally solvent (Most states have strict governance surrounding both PEO insurance requirements as well as fiscal solvency and character). There have been cases where a “fly by night” (such as? examples?) PEO is saddled with liability by a workers' compensation judge and simply fails to pay benefits (A PEO is not an insurer and therefore has NO ability to EVER deny benefits. This can ONLY be the role of a licensed and admitted insurer by a licensed claims adjuster). Under such circumstances the employer would likely be liable for the injury and could be put into a situation where no insurance exists, thus exposing employers to criminal liability in certain states. (What? Not a chance?) The fact that the PEO and its employer-client are viewed as co-employers in the workers’ compensation system has a perceived advantage. From a theoretical standpoint, an employer can farm out its workers’ compensation coverage while keeping the protection of tort immunity. It follows that in the PEO relationship, where the PEO and the employer both share the right to control the employee, both technically possess the right to assert tort immunity. However, this has not stopped a number of lawsuits naming the employer as a third party tortfeasor after a workers’ compensation injury, which has led some states to create specific statutes related to workers’ compensation that govern PEO contracts and tort immunity (I have never heard of this type of a lawsuit EVER happening and have underwritten/brokered over a billion and a half dollars of PEO workers' compensation premiums over the last decade. Simply not the case. If an employer is unaware of these statutes and if the PEO does not strictly adhere to the provisions of the statute, the alleged “PEO relationship” may not be binding and the employer could face expensive litigation to prove that tort immunity applies or that a PEO co-employer relationship even exists.PROACTIVE RISK MANAGEMENT The emergence of incidents of PEO fraud in relation to workers’ compensation matters provides a cautionary tale for employers considering entering into the PEO arrangement (This is not factual and in fact has been proven out to be just the opposite as noted in the studies above). Employers should be aware of statutes in certain states that require a PEO to define its contractual obligations and the protocols by which the PEO is to be managed through a “Professional Employer Agreement.” For employers operating in states without such legislation , it is important to insist on a written contractual agreement with the PEO, drafted in unambiguous language that is understood and agreed upon by both parties at the start of the co-employment relationship. Within this contract, a provision as to the allocation of workers’ compensation coverage must be included. Further, the employer must have the contractual ability to request and secure proof of workers’ compensation coverage from the PEO. The contract should also provide employers with access to the loss history and total wages paid for covered employees. (what?)… So the client company gets the PEO loss runs as part of their contract? Really? Operating in this fashion will ensure that the employer is engaging in an environment that is free from potential PEO fraud. http://www.propertycasualty360.com/2013/10/01/peos-a-new-potential-for-workers-comp-fraud_
The PEO industry helps small business grow. The model is accretive to American employments as has most recently beeb proven out by the following study… I am hopeful that NU will consider an article on that which is credible versus this which is suspect at best. http://www.napeo.org/docs/McBassi_keyfindings.pdf
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The PEO Compass is a friendly convergence of professionals and friends in the PEO industry sharing insights, ideas and intelligence to make us all better. All writers specialize in Professional Employer Organization (PEO) business services such as Workers Compensation, Mergers & Acquisitions, Data Management, Employment Practices Liability (EPLI), Cyber Liability Insurance, Health Insurance, Occupational Accident Insurance, Business Insurance, Client Company, Casualty Insurance, Disability Insurance and more.
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