Alternative Staffing Arrangements & The PEO Offering

Paul Hughes, Chief Executive Officer, Risk Transfer HoldingsWade Latham, Senior Vice President, Risk Management,

CoAdvantageTorben S. Madson, III, Esq., Partner, Kunkel Miller & Hament

Robert Skrob, Executive Director, FAPEO, Moderator

WHAT ARE WE?

• If we fail to define ourselves others will do the job for us.

CURRENT ISSUES

• FWCIGA labeling staffing as employee leasing.• NCCI concerns about PEOs with Temporary

Staffing clients.• Concerns about Temporary Staffing businesses

operating as PEO.• The use of the term “employee leasing”.

PEO vs. TEMPORARY STAFFING

PEO• Highly regulated. • Efforts underway to

increase regulation at State and Federal levels.

Temporary Staffing• Unregulated• Continuing efforts to remain

unregulated.

Entrepreneur Magazine

• While many business owners confuse PEOs with temporary help businesses, the two organizations are really quite different, explains a spokesperson at the American Staffing Association (ASA). "Generally speaking, temporary help companies recruit employees and assign them to client businesses to help with short-term work overload or special projects on an as-needed basis,"

Michigan says that a PEO is not staffing

• MCL 208.1113(5) states that The main business purpose of a PEO, generally, is to provide a client with human resource and human resource management services. PEOs are also typically responsible for payroll, withholding and remitting employment taxes and benefits management for clients. These PEO/client relationships often involve shared control or co-employer agreements. However, as the MBT recognizes, the PEO must maintain the ultimate control in the relationship to be treated as a PEO under the tax.

Michigan defines staffing companies

• In contrast, staffing companies generally supply temporary employees to supplement a customer's workforce. Staffing companies have nearly complete control of these employees. In the staffing company situation, the recipient of employees generally has no more control over the employee than direction of daily tasks or rejection of the proffered individual.

The Association Definitions

• NAPEO– "A PEO provides integrated services to effectively

manage critical human resource responsibilities and employer risks for clients. A PEO delivers these services by establishing and maintaining an employer relationship with the employees at the client's worksite and by contractually assuming certain employer rights, responsibilities, and risk.”

The Association Definitions

• ASA– Professional Employer Organization (PEO or

Employee Leasing)”A business places all or most of its work force on the payroll of a staffing firm, and the staffing firm assumes responsibility for payroll, benefits, and other human resource functions.”

ASA definition of Temporary Help

• A staffing firm recruits and screens workers and assigns them to support or supplement a client's work force to keep fully staffed during busy times, gain special expertise or staff special projects, or fill temporary vacancies. Workers may be employed by the staffing firm or assigned as independent contractors.

ASA definitions…..

• Temporary to HireA staffing firm employee works for a client for a trial period during which both the employee and the client consider establishing a "permanent" employment relationship.

• PayrollingA staffing firm places on its payroll employees recruited or hired by the client. Payrolling is distinguished from PEO arrangements in that the employees generally are on temporary assignments and make up a small proportion of the client's work force.

ASA

• Long-Term and Contract HelpA staffing firm recruits workers and assigns them to support or supplement a client's work force on longer-term assignments. Workers may be employed by the staffing firm or assigned as independent contractors

Table of Contents

• Historical Overview of the Employee Leasing/PEO Industry from Inception– 1970 - 1992– 1994 – 2004– 2004 – Present

The Sound Bytes“Regulators do not know the difference between PEO’s and staffing companies so they think PEO’s are the problem.” NCCI 2013

“We do not understand how people in an employee leasing relationship all of a sudden lose their mod?” CA Dept of Industrial Relations 2012

“Employee leasing companies are bad for union workers” Teamsters 2013

“If we want good jobs rather than just any jobs, we need to figure out how to preserve what is useful and innovative about temporary employment while jettisoning the anti-worker ideology that has come to accompany it.” New York Times, “The Rise of the Permanent Temporary Economy

The Days Of Employee Leasing 1970 – 1992

• Early 1970’s: Original PEO model (then known as Employee Leasing) is created in Southern California as employees are leased back to doctor’s offices – the concept of cooperatively managing the workers of multiple small businesses is

• 1974: ERISA contains an exemption for Multiple Employer Welfare Arrangements (“MEWA”S”) which provided a loophole for employers with leased employees to claim they were exempt from the ERISA requirements

• 1982: Passage of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) further encouraged employee leasing by providing a tax shelter for employers who contributed a minimum amount to employee plans

• 1984: Staff Leasing Inc. (now known as TriNet/Gevity HR) is formed an targets small contractors in Florida. Workers Compensation begins to be lead service/product of new entrants

• 1985: In an effort to self-govern and unregulated industry, the National Staff Leasing Association is formed

• 1986: More stringent guidelines in the Tax Reform Act of 1986 later eliminated most of the TEFRA incentive

• Late 1990-92: National workers’ compensation market combined ratios average 120% - PEO’s seen as way to more efficiently distribute product

Workers’ Compensation Marketplace for PEOs

Some 'Worker Leasing' Programs Defraud Insurers and EmployersBy BARRY MEIER – New York TimesPublished: March 20, 1992

“The practice is known as "employee leasing." In it, a service company hires the work force of a small business and then leases the workers, with insurance coverage and other benefits, back to their original employer.”

“But now, regulators in several states say a troubling number of employee leasing companies have turned out to be fraudulent. They have stolen millions of dollars and stripped tens of thousands of workers of their benefits, the regulators say. Leading insurers have also charged in court cases that leasing companies cheated them out of tens of millions of dollars in payments.”

"For some people, employee leasing is just a new way of engaging in insurance fraud," said Tim Ryles, the Insurance Commissioner of Georgia.”

"This is just one more factor contributing to the overall meltdown of the workers' compensation system," said Lynn E. Szymoniak, a lawyer with the National Council on Compensation Insurance, an organization that establishes rates for workers' compensation coverage.

"We'd love the industry to survive," Mr. Hinds said. "But we'd love to get the crooks out.”

Employee leasing becomes PEO and NAPEO is born in 1994 in an effort to rebrand a tarnished business model.

Workers’ Compensation Marketplace for PEOs

• 1994: In an effort to rebrand and legitimatize PEO offerings, National Association of Professional Employer Organizations (NAPEO) is formed to replace the National Staff Leasing Association

• 1995: ADP buys Florida PEO

• 1996 Paychex buys Florida PEO

• 1997 – 1999: Darling on Wall street

– High Valuations (10 to 18x) – Distribution puts valuations through the roof– 3,000 PEO’s countrywide

“An Industry Makes the Count”Florida Underwriter, 2003

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2000 – 2004: “In the Toilet”

• WC market hardened due to many high profile carrier insolvencies and withdrawal from PEO marketplace

• 9/11/2001

• NAIC

• Legion, Frontier, Reliance, CGU, Liberty Mutual, AIG and CAN either went insolvent or exited PEO market

• Valuations low (2 to 4x)

• Only 500 PEO’s Left?

Workers’ Compensation Marketplace for PEOs

• 2004: Health care crisis hits boiling point – PEO’s seen as a solution and an issue in system

• 2006-2008: Very profitable workers’ compensation systems in Florida and California help PEO profitability and insurer support

• 2008: HIRE Act allows PEO client companies to claim same advantages even if coemployed

• 2010: New Jersey becomes the 28’th state to formally register PEO’s

Workers’ Compensation Marketplace for Staffing

• No licensure requirements• No background checks – can be a felon• No rules – at all

Employee Leasing circa 1992…

Workers’ Compensation Marketplace for Staffing – The Ugly

• http://www.visalaw.com/05apr3/newsletter.pdf

• "The 26-count indictment alleges that from 1995 to the present, the defendants conspired to provide unauthorized workers, mostly East Europeans who had entered the United States on tourist visas, to American companies with whom the defendants had contracted to provide legally authorized foreign workers. The indictment alleges that more than 550 illegal aliens were brought into the United States by the defendants."

The Federal Definitions US Census Bureau - Cross-References. Establishments primarily engaged in--• Supplying their own employees for limited periods of time to supplement the working

force of a client's business--are classified in Industry 561320, Temporary Help Services; and

• Listing employment vacancies and in referring or placing applicants for employment--are classified in Industry 561310, Employment Placement Agencies

**ALL data regarding PEO and temp staffing roll into the same US Census classifications and therefore the economic indicators used in this realm are false as noone can bifurcate one from the other**

The Federal DefinitionsInternal Revenue Service• "PEOs have similarities to traditional leasing companies, but there are some distinct

differences. For example, with PEOs, the employees usually have had a previous relationship with the employer. Generally, a PEO operates by entering into a service agreement with an employer (known as a client) whereby the client contracts with the PEO to perform certain functions, such as payroll and personnel type functions, for employees who continue to provide the services they had previously provided to the client.”

Not bad…

US Dept of Labor• "In the case of employee leasing, a company leases all or a portion of its

workforce on a fairly permanent basis from a leasing or staffing company. The workers are on the payroll of a leasing company (or PEO, Professional Employment Organization) but their work is typically directed by the client company. Often temporary help agencies also lease workers. "

Awful. Transfer of labor (temp staffing/placement) versus contractual coemployment (PEO/Employee Leasing)… all in one. Yikes!

The Federal Definitions

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The Actuarial Bureau Definitions

NCCI• NCCI generally defines a Professional Employer Organization (PEO) as an entity or

group of entities that provides the services of its workers to its client(s) through a PEO arrangement for a fee pursuant to an agreement, written or otherwise.

• Generally, if an entity provides the services of its workers, by contract and for a fee, to a client and any such services are not provided on a temporary basis, that entity will be considered a PEO.

• Note: Many state laws and/or NCCI state specific rules define PEO, labor contractor, employee leasing company, lessor, or other similarly administered arrangement slightly different than typically defined by NCCI above. Where state law (including but not limited to statutes, regulations, and administrative laws or rules) conflicts with NCCI’s definition (as stated above or state-specific), state law applies

Good! Only issue is that it reverts to statute (as it has to) in many states, and some have one definition of a labor contractor (ie California) and thus further confusion -

Why do “Staffing” v PEO

Application of Experience Rating Modification in California (Client Policy):

If a client is experience rated, the client's experience rating modification must be applied to the separate client policy issued for the client. If a client is not experience rated, no experience rating modification is applied to the client policy. The labor contractor's experience rating modification, if any, does not apply to the client under any circumstances. The purpose of Section V, Rule 4 of the CA Experience Rating Plan is to keep client companies from trying to escape their loss history and further, to keep unscrupulous employee leasing firms from marketing their services as a device to escape a debit experience rating modification. When a client enters into or leaves an employee leasing arrangement, the insurer must apply the client's experience rating modification to the policy that covers workers leased to the client and to policies that cover other operations of the client, if any.

California

Pursuant to Rule 4 in California (passed in 2005), Policy Requirements:

A separate policy must be issued for each client of a labor contractor that leases any of its workers, except temporary workers, whether or not the client is experience rated. The named insured on the client policy may be the labor contractor or the client, but not both.

That’s the “modwashing” loophole…’

Pursuant to Rule 4 in California (passed in 2005), Policy Requirements:

A separate policy must be issued for each client of a labor contractor that leases any of its workers, except temporary workers, whether or not the client is experience rated. The named insured on the client policy may be the labor contractor or the client, but not both.

That’s the “modwashing” loophole…’

California

Workers’ Compensation PEO Performance

Licensing for PEO in 38 states now (2 in 1992)

• - Payrolled employees of PEO are 3-4% of the market, with the highest concentrations in FL, HI, TX and AZ

• - Lost time loss ratio for PEO's in the voluntary market was equal or better then the traditional market

PEO Performance – NCCI Study• Licensing for PEO in 41 states now (4 in 1995)• Payrolled employees of PEO are 3-4% of the market, with the

highest concentrations in FL, HI, TX and AZ• Lost time loss ratio for PEO's in the voluntary market was equal

or better then the traditional market

Workers’ Compensation PEO Performance

• Lost time severity for PEO was markedly lower in both the traditional and residual markets (greater interest/control?)

• Frequency higher for PEO then non-PEO showing no reporting irregularities with PEO

• Comparable loss ratios showing no evidence of inappropriate reporting of premiums or payrolls

ConclusionBy defining both industries we can be the most credible provider of goods and services to each industry sector

By identifying who is doing what in the market for what reasons, we can help to manage our own exposure to the unknowns these classes of business bring

By helping to regulate and provide surplus to the right players for the right reasons, we can be on the cutting edge of the way labor services will be bought in the future