PEOPEO Update Update

2005 AASCIF Legal Workshop2005 AASCIF Legal Workshop

George M. Parham George M. Parham Chief Legal Counsel Chief Legal Counsel Idaho State Insurance FundIdaho State Insurance Fund

PEO FAQsPEO FAQs

What is a Professional Employer Organization ?What is a Professional Employer Organization ?

– PEO and a client Company enter into a co-employer PEO and a client Company enter into a co-employer arrangement to share and allocate long term responsibilities and arrangement to share and allocate long term responsibilities and liabilities regarding the client company’s employeesliabilities regarding the client company’s employees

– Client company generally oversees the on-site business Client company generally oversees the on-site business activities of the company and its employeesactivities of the company and its employees

– PEO usually assumes much of the client company’s employment PEO usually assumes much of the client company’s employment related responsibilities, such as risk management, human related responsibilities, such as risk management, human resource management, payroll and employee tax compliance, resource management, payroll and employee tax compliance, and workers compensation insurance and workers compensation insurance

PEO FAQsPEO FAQsWhat is the difference between a PEO, an Employee What is the difference between a PEO, an Employee Leasing Company or a Temporary Staffing Agency?Leasing Company or a Temporary Staffing Agency?

– Employee leasing companies and temporary help agencies Employee leasing companies and temporary help agencies generally supply new or short term employees to the client generally supply new or short term employees to the client companycompany

– The PEO takes on the role of The PEO takes on the role of co-employerco-employer for the client for the client company’s existing employeescompany’s existing employees

– There is overlap in the operations of the different types of There is overlap in the operations of the different types of organizations and PEOS and employee leasing companies are organizations and PEOS and employee leasing companies are now sometimes referred to as “Employee Service Entities” or now sometimes referred to as “Employee Service Entities” or “ESEs” “ESEs”

PEO FAQs PEO FAQs

What is the role of the PEO in today’s business climate?What is the role of the PEO in today’s business climate?

– Employee leasing industry began in 1970s

– PEOs employ 2 to 3 million employees in the U.S.PEOs employ 2 to 3 million employees in the U.S.

– PEOs operate in all 50 statesPEOs operate in all 50 states

– the PEO industry grosses approximately $42 billion a yearthe PEO industry grosses approximately $42 billion a year

– PEO growth rate estimated to be 20 to 30% PEO growth rate estimated to be 20 to 30%

– complexity of human resource issues fuels the increasing reliance complexity of human resource issues fuels the increasing reliance on PEOson PEOs

– 21 states have PEO licensing requirements

PEO FAQsPEO FAQs

Why use a PEO?Why use a PEO?

– PEOs relieve employers of burdensome employee administration, such as payroll and employment tax compliance and record keeping

– PEOs relieve employers of human resource responsibilities such as risk management, workers compensation insurance, medical insurance and pensions

– PEOs can use group purchasing power to obtain employee benefits such as medical insurance, pensions, and etc.

PEO FAQsPEO FAQs

What is a PEO master policy?What is a PEO master policy?

– A master policy allows an insurer to write one policy to a PEO A master policy allows an insurer to write one policy to a PEO that covers all of the PEO’s client companies (not allowed in all that covers all of the PEO’s client companies (not allowed in all jurisdictions) as opposed to issuing multiple coordinated policies jurisdictions) as opposed to issuing multiple coordinated policies to each of the client companies which are then coordinated by to each of the client companies which are then coordinated by the PEO the PEO

Which employer, the PEO or client company suffers the Which employer, the PEO or client company suffers the effects of an adverse experience modifier? effects of an adverse experience modifier?

– It depends on the jurisdiction and/or the insurer as to whether th It depends on the jurisdiction and/or the insurer as to whether th PEO or client company will be charged with the claim losses on PEO or client company will be charged with the claim losses on the policythe policy

PEO FAQsPEO FAQsWhat are some of the issues that arise when insuring PEOs for workers compensation insurance?

– A PEO’s inability to insure in the private market may result in having to insure in the residual market which in many cases means the state fund

– Underestimation of payrolls & misclassification of workers

– Underpayment of premium due to rate shopping by PEOs placing coverage in another state with lower rates

PEO FAQsPEO FAQs

– Dissolution of a PEO company when the experience modifier gets too high

– Experience modifier avoidance by setting up multiple entities

– Difficulties in determining who is actually employed by the PEO

– PEO’s active role in claims management to reduce experience modifier

NAIC PEO Workers Compensation NAIC PEO Workers Compensation Coverage Model ActCoverage Model Act

The National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) has been attempting to draft a model act to (NAIC) has been attempting to draft a model act to address workers compensation coverage for PEOsaddress workers compensation coverage for PEOs

Revised model regulation was promulgated July 27, Revised model regulation was promulgated July 27, 20052005

Purpose of the Model ActPurpose of the Model Act

– To ensure that PEOs and their clients obtain workers compensation To ensure that PEOs and their clients obtain workers compensation insurance for all their employeesinsurance for all their employees

– To ensure that proper premium is paid in relation to the riskTo ensure that proper premium is paid in relation to the risk

– To ensure that the proper procedural framework is in place for the To ensure that the proper procedural framework is in place for the inception, continuation and termination of coverage inception, continuation and termination of coverage

PEO Model Act ProvisionsPEO Model Act Provisions

Defines relevant termsDefines relevant terms

Sets forth how the PEO and the client company shall fulfill its Sets forth how the PEO and the client company shall fulfill its obligations to secure workers compensation coverageobligations to secure workers compensation coverage

Addresses the authority of a PEO to enter into a PEO/Client Addresses the authority of a PEO to enter into a PEO/Client relationship and their respective duties to each other and the insurerrelationship and their respective duties to each other and the insurer– Addresses the formation of the PEO/Client relationshipAddresses the formation of the PEO/Client relationship– Sets forth the duties of the PEO and Client to the insurer Sets forth the duties of the PEO and Client to the insurer

regarding the existence and termination of the PEO/Client regarding the existence and termination of the PEO/Client relationshiprelationship

Addresses the procedure for offering coverage under a multiple Addresses the procedure for offering coverage under a multiple coordinated policy agreementcoordinated policy agreement

PEO Model Act ProvisionsPEO Model Act Provisions

Sets forth how coverage will be provided by the residual market or Sets forth how coverage will be provided by the residual market or carrier of last resortcarrier of last resort

Sets forth how the insurer will issue the policy and the duties of the Sets forth how the insurer will issue the policy and the duties of the insurer towards the PEO, the client company and the employeesinsurer towards the PEO, the client company and the employees

Addresses issues related to the payment and collection of premiumAddresses issues related to the payment and collection of premium

Addresses issues related to the verification of classifications and Addresses issues related to the verification of classifications and payrollpayroll

Sets forth the grounds and procedure for cancellation and non Sets forth the grounds and procedure for cancellation and non renewal of a policyrenewal of a policy

PEO Model Act ProvisionsPEO Model Act Provisions

Addresses the issue of interstate coverage for Addresses the issue of interstate coverage for PEOs operating outside the jurisdictionPEOs operating outside the jurisdiction

Addresses confidentiality of recordsAddresses confidentiality of records

Addresses the basis and manner by which Addresses the basis and manner by which experience ratings will be establishedexperience ratings will be established

Sets forth the remedies for non-compliance with Sets forth the remedies for non-compliance with the regulationsthe regulations

Final ThoughtsFinal ThoughtsModel Act is very detailed & broad in scopeModel Act is very detailed & broad in scope– Major legislationMajor legislation– May conflict with existing lawMay conflict with existing law

Issues addressed by the Model ActIssues addressed by the Model Act– ProceduresProcedures– Coverage of claimsCoverage of claims– Addresses responsibilities of the respective parties to each otherAddresses responsibilities of the respective parties to each other– Residual marketResidual market

Issues not addressed by the Model ActIssues not addressed by the Model Act– Under-reporting and/or misclassification of payrollUnder-reporting and/or misclassification of payroll– Rate shopping in other statesRate shopping in other states– E-mod avoidanceE-mod avoidance– PEO dissolutions and multiple PEO companiesPEO dissolutions and multiple PEO companies– PEO claims management problems PEO claims management problems