Not a PEO
Happy National PEO week! Taking a stroll down memory lane, it has been quite a ride since I first began focusing on the industry in 1992. Only four states at that time had licensing or registration and what a PEO was and was not a subject of many debates. The National Council on Compensation Insurance (NCCI), the National Association of Insurance Commissioners and various State Departments of Insurance were scrambling to understand this new phenomenon which started in California as a way to administratively manage medical offices to Florida where it spread like wildfire in the late ‘80’s and 90’s. The industry has come a long way in regulation, formality, and recognition for the wonderful job it does in the support of American business. Unfortunately, though, it is still a misunderstood business model to some and that confusion seems to be back on the rise which we can’t allow. There has been too much fought for.
It has been a Spring of many conferences and speaking engagements in the PEO and insurance realms. I was kindly asked to speak at the Fisher and Phillips PeopleLaw Conference in Los Angeles in February and NAPEO’s Risk Management Conference in Charlotte in April. Both presentations at least in part involved an old and very much tired topic; the confusion between coemployment and everything else that involves the act of being an “Employer of Record”. Said differently, alternative models that supply many of the same employer-related services as a PEO, but that do not provide them through the coemployment model, and therefore are not a PEO.
Additionally, I attended Target Markets in Boston and NCCI’s Annual Issues Symposium in Orlando this May where I was able to catch up with many friends in the primary and reinsurance community. Even after all this time, there is still much confusion about what is and what is not a PEO, even by those currently in support of the industry. Unfortunately, there is a lack of understanding on what to look for in amongst other places the client service agreement (“CSA”) between the relevant parties to make sure coemployment exists.
Many may wonder, what’s the big deal?
Specifically, the actuarial bureaus, regulators, insurers, lawyers, agents/brokers and other regulated entities and representatives that support the PEO industry. For me as an insurance agent, my biggest concern is the impact on the provision of exclusive remedy to those that require it at any point in time. The “great trade-off” foundation that workers’ compensation is based upon is highly regulated and any type of shared/split labor/special employer is always of consequence as it does not guarantee coverage to all that may require it on any given worksite, nor entities that are not “named insureds”. The actuarial bureaus are concerned about the ability to collect and properly ingest statistical information that drive rate-making, experience modifications and overall data democratization for the workers’ compensation system as a whole. The bureaus track coemployed business regardless of policy format (master or MCP) in the same manner as traditional business due to the inroads made in the early 2010’s between NAPEO and the National Council on Compensation Insurance (“NCCI”). This would not have happened without the lead of NAPEO and many vendor members to include insurance carriers, reinsurers and agents. The states’ insurance departments care because of PEO competition cries of unfair business practices and the inability to collect proper premium taxes due. OSHA cares because high experience mod safety offenders can get lost in the system through non-PEO arrangements (this cannot happen with true coemployement). The attorneys and judges care as there is a litany of definitions and case law are all over the board and challenging to interpret and argue. Here is a recent definition of a PEO as provided by a workers’ compensation Judge in California and one of many stories found with a quick search that mis define PEO:
“What is a PEO or Employee Leasing Company?
A PEO, or professional employer organization, is a business entity that hires out employees to specific companies or clients to perform work at the customer or client location. Think in terms of one company leasing its employees to another company. Employee leasing occurs in many industries where the number of employees fluctuates based on operational demand within those industries. PEOs got their start in the entertainment industry — in movie and television production.”[1]
Ugh.
Over time I have become numb to reading about the various business models that people assimilate with coemployment. In the past, the confusion was generally through models termed:
“Staffing”
“Long-term Staffing”
“Payrolling”
“Staffing on Staffing”
“Professional Employment Organization”
Every one of these arrangements involve one employer transferring labor for some period to another employer. Temporary staffing is generally known as just that, temporary in nature, but temporary is often not defined and thus another ambiguity.
Other employer-centric models also exist where many of the same activities to support employment are provided for a fee, but again, there is no coemployment and therefore not a PEO:
Administrative Services Only (“ASO”)
Business Process Outsourcing (“BPO”)
In recent years, a model known as “Employer of Record” or “EOR” has become a rapid growth model. Unfortunately, this model is also nuanced, without definition and thus often confused with PEO. Some EOR’s, which I will deem “Global EOR’s”, have very “bright-line” value propositions that provide international firms that do not have a US Federal Employer Identification Number (“FEIN”) with the chassis to support employees in the US. This allows the client to use a local expert, in this case in the US, to navigate insurance, HR, compliance etc. The things a PEO does generally for their coemployees. The other model, which I will deem a domestic EOR, provides workers to someone that already has a US FEIN. The latter model sometimes is utilized with part of an employer’s staff or all of it, which raises the eyebrows of the regulators and creates insurance concerns surrounding “split risks”. While either EOR model is not temporary staffing as we would historically understand it and it is not PEO as there is no coemployment. So what is it? Let’s start with what they do per a recent EOR:
We take care of your employees' onboarding, payroll, taxes, visa, sponsorship applications, benefits, and insurance.
Mitigate risk and manage compliance, taxes, benefits, and payroll…
Manage payroll, benefits, risk mitigation, compliance, and ongoing supported employee support…
Takes care of all compliance aspects of employment, including payroll, taxes, statutory benefits, employment contracts and more…
Dealing with payroll processing and employment laws for employees in multiple states…
Hmmm. Well, that could be a PEO, a staffing company or?
States like Florida and their Joint Underwriting Association have taken a different tact and simply combined PEO and Staffing arrangements as one due to this confusion:
Employee Leasing and Staffing Arrangements
FWCJUA coverage will only be provided to a Employee Leasing Company or Staffing Company on a multiple coordinated policies (MCP) basis. This means that the FWCJUA will issue one policy to the Employee Leasing Company or Staffing Company to cover any and all of its internal or direct employees and one policy to each Client of the Employee Leasing Company or Staffing Company to cover only Leased Workers or Assigned Workers provided to the Client by the Employee Leasing Company or Staffing Company under an Employee Leasing or Staffing Arrangement.[2]
While the services provided as an “Employer of Record” are often the same, the Employer of Record Model, is not PEO. Let’s see why:
I look forward to the next chapter of this debate in Washington, DC this week highlighted with the session on PEO v EOR at 1:45 on Wednesday. I look forward to sharing what is discussed and seeing you in the District!
[1] https://ww3.workcompcentral.com/news/print/id/b925c5255dd21786338cc47fdd8439e0d3f624aa 1/25
[2] https://www.fwcjua.com/#
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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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