With PEOs, Comp Administrators Concerned Workers Sometimes Aren’t Covered

By Stephenie Overman May 22, 2008
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When professional employment organizations (PEOs) manage critical human resource responsibilities for clients, workers’ compensation administrators worry that some employees might not receive coverage, said Elizabeth Crum, deputy secretary for Compensation and Insurance for the Pennsylvania Department of Labor and Industry.

Crum spoke during the National Association for Professional Employment Organizations’ (NAPEO) 2008 Legal & Legislative Conference, held May 19-20 in Arlington, Va.

A PEO delivers services such as employee benefits, payroll and workers’ compensation by establishing and maintaining an employer relationship with the employees at the client's worksite and by contractually assuming certain employer rights, responsibilities and risks.

“Everyone recognizes the benefits of PEOs, especially to small employers that don’t possess the resources to wade through laws and regulations that continue to get more complicated,” she said. In particular, “PEOs can provide risk management strategies that make these companies more competitive.”

But, Crum said, there must be safeguards in place to ensure that the entire workforce is covered by workers’ compensation. To that end, the National Association of Insurance Commissioners (NAIC)—insurance regulators from the 50 states, the District of Columbia and the five U.S. territories—and International Association of Industrial Accidents Boards and Commissions (IAIABC) are working on a paper to advise states on regulating PEOs.

Crum is the current president of the IAIABC, a not-for-profit trade association representing government agencies charged with the administration of workers' compensation systems throughout the United States, Canada and other nations and territories. She said the two organizations hope to ensure “that professional employer organizations and clients properly obtain workers’ compensation insurance coverage for all of their employees, including both direct hire employees and persons employed under PEO agreements; that the premium paid is commensurate with the anticipated claim experiences; and that an appropriate procedural framework is in place for the inception, continuation and termination of coverage.”

Companies contribute to a state fund, a private insurance fund or a combination of both to cover workers who suffer injuries or become ill on the job. Some states allow companies to choose self insurance, but Crum noted that that is not usually an option for small employers.

With PEOs, there generally are three alternatives:

  • A standard workers’ compensation policy.
  • A master policy.
  • A multiple coordinated policy.

A standard workers’ compensation policy, which includes the PEO, is “the most transparent,” Crum said, because the policy covers the entire workforce. Workers’ compensation administrators can see that all employees are covered.

With the master policy concept, a single standard policy for the PEO and all of its clients is issued in the name of the PEO. The PEO is the primary name insured, and each client company is referenced as an additio​​​nal name. For the purpose of proof of coverage, each name and corresponding address of a client company constitutes a separate employer record, according to the National Council on Compensation Insurance, Inc. (NCCI). With a master policy, confusion may exist as to who is covered by the PEO and who is covered by the company, she said.

“Also, if the PEO fails to report additions and removals, it may leave employers without coverage,” she added. As a result, a liability may end up being assessed against a guaranty fund that is “not flush with money anyway.”

The third choice, the multiple coordinated policy, raises fewer concerns than the master policy but “the coverage issue still remains,” Crum said. The multiple PEO policies model “includes multiple and separate PEO policies for each client. Each separate PEO policy is issued in the PEO’s name, making reference to each client,” according to NCCI.

Stephenie Overman is a freelance writer based in Arlington, Va.

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