Outsourced Workers and Employee Leasing

A Professional Employer Organization (PEO) is an outsourcing company that offers various employment-related services. Employers contract with PEOs to outsource functions such as hiring and firing workers, administering benefits, and purchasing workers compensation coverage.

History of Employment Services Outsourcing

Employment services outsourcing began about fifty years ago and was initially provided by employee leasing firms. An employer would contract with a leasing company, terminate its employees, and then lease back the workers from the leasing firm. This arrangement enabled employers to cut costs and transfer many employment-related risks to the leasing company. However, it also created problems.

First, leasing generated confusion as to who was responsible for purchasing workers compensation insurance, the employer or the leasing firm. Secondly, some employers used leasing to manipulate the experience rating system. Employers with a poor loss history would contract with a leasing firm so that the leasing firm's (lower) experience modifier would be applied to the worker's compensation policy covering the leased workers.

States addressed these problems by enacting legislation. Laws were passed to reduce fraud and to clarify which party (employer or leasing firm) was responsible for purchasing workers compensation insurance. Nowadays, most providers of employment services are PEOs rather than employee leasing companies.

PEO Versus Leasing Company

A PEO differs from a leasing company in several important ways. First, a PEO provides employment services, not individual workers. A leasing company (also called a staffing firm or temporary agency) assigns individual employees to work at clients' business locations.

Secondly, a PEO shares employment-related duties with the employer (called the client) so that both become co-employers. A staffing firm remains the employer of the workers it assigns to temporary jobs. Thirdly, a PEO provides services on a long-term basis. A staffing firm provides workers for a limited period of time. A "temp" worker is typically assigned to work for the duration of a project or until a permanent worker returns from leave.

Services Provided By a PEO

PEOs offer a wide variety of services. Here are some examples:

• Employment. Recruiting, screening, hiring, onboarding, and training of employees
• Payroll. Administering payroll, including tax and reporting functions
• Employee Benefits. Providing and administering employee benefits
• Workers Compensation. Administering workers compensation insurance. In some states, the PEO may purchase the policy.
• Compliance. Helping the employer comply with national and state employment laws
• Professional Expertise. Providing professional advice in areas like human resource management

Pros and Cons of Using a PEO

For employers, the use of a PEO offers several advantages.

• Cost Savings on HR. By contracting with a PEO, a small company can avoid the cost of hiring a human resources professional.
• Time Savings. Because a PEO handles many routine administrative tasks, the business owner has more time to focus on running the company.
• Cheaper Benefits and Insurance. PEOs purchase benefits and workers compensation coverage for large numbers of workers, so they can obtain bulk discounts.
• Employment Expertise. A PEO can help ensure a company complies with state and federal employment laws.

Here are some disadvantages of using a PEO.

• Cost. The PEO's services may cost more than the business owner wants to pay.
• Loss of Control. The employer cedes control over the functions performed by the PEO.
• Employee Relationships. If the PEO is performing most employment-related functions, the employer and its employees may feel disconnected from each other.

Workers Compensation Coverage

Numerous states (including many NCCI states) have enacted laws that stipulate how workers compensation coverage may be provided to workers leased under a PEO arrangement. The laws vary from state to state. Many states allow (or require) leased workers to be insured under one or more of the following types of policies.

• Master Policy. Purchased by, and in the name of, the PEO. Covers all leased workers of the PEO's clients. Also covers the PEO's direct employees.
• Multiple Coordinated Policies. Separate policies (purchased by the PEO) are issued for the PEO and for each of its clients.
• Multiple PEO Policies. Separate policies purchased by the PEO for each client. Typically, each policy is written in the name of the PEO as the leasing company for the workers leased to the client.
• Client-Purchased Policies. Separate policies purchased by individual clients. Each policy covers the client's leased workers and its direct employees.

When a master policy is issued, the policy is usually (but not always) subject to the PEO's experience modifier. When a separate policy is issued for every client, each policy is subject to the individual client's experience modifier.

Leased Workers and General Liability Coverage

Under the standard general liability policy, a leased worker qualifies as an employee. The term leased worker means person leased to you (the named insured) by a labor leasing firm under an agreement between you and the labor leasing firm, to perform duties related to the conduct of your business. Presumably, a worker hired by a PEO under a contract with you qualifies as a leased worker. 

Note that the term leased worker does not include a temporary worker. A temporary worker is someone who is furnished to you as a substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions.

Employees are insureds under the liability policy. Because leased workers are considered employees, they also qualify as insureds. Temporary workers are not employees, so they are not considered insureds.