Using Outsourced Workers

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

Employment services outsourcing began in the 1970s. Employers purchased these services from employee leasing companies.

Employee leasing enabled employers to cut costs and to transfer many employment-related risks and responsibilities to the leasing firm. After contracting with a leasing company, an employer would terminate all of its employees. The workers would subsequently be hired by the leasing firm, which would lease them back to the employer. Because the leasing firm had hired the workers, it assumed the role of employer.

By the early 1990s employee leasing was plagued with problems. For one thing, some employers were using leasing to game the experience rating system. An employer with a poor loss history could lease its workforce so that the leasing firm's (lower) experience modifier would be applied to the workers compensation policy covering the leased workers. This tactic enabled the employer to save money on workers compensation insurance. Another issue was unscrupulous leasing firms that intentionally misclassified workers or understated payrolls to obtain a lower workers compensation premium.

In the 1990s PEOs began to replace employee leasing companies. Currently, most companies that outsource employment services are PEOs. Unlike a leasing company, a PEO shares employment-related duties with the employer (called the client). The PEO and the client become co-employers. The PEO assumes responsibility for certain administrative tasks.

The client retains responsibility for the day-to-day safety and supervision of the employees at the workplace.

Services Provided By a PEO

Here are some of the services a PEO may provide:

  •  Employment Recruiting, screening, hiring and training of employees.
  • Payroll Administering payroll, including tax and reporting functions.
  • Employee Benefits Providing and administering employee benefits. Because PEOs purchase benefits for large numbers of workers, they can obtain bulk discounts. Compared to a small employer, a PEO can provide a broader range of benefits at a cheaper price.
  • Workers Compensation Administering workers compensation insurance. In some states the PEO may purchase the policy. Depending on the type of policy required, a PEO may obtain the coverage at a discount.
  • Professional Expertise Providing professional advice in areas like employment law and human resource management.

State Laws

Since the 1990s, many states have enacted laws applicable to employee leasing companies or PEOs (some laws use both terms). These laws vary from state to state. Some require PEOs to register with the state. Many laws dictate the type of policy that must be issued when a PEO oversees a client's workers compensation program.

The law may also specify who must purchase the policy. In some states a PEO may issue a single master policy covering all employees of the PEO's clients. In other states, each client must purchase its own policy. State laws may also specify whose experience modifier (the client's or the PEO's) must be applied to the policy.

PEO Versus "Temp" Agency

PEOs differ from temporary staffing companies. For one thing, PEOs do not supply workers to job sites. They act as co-employers of the client's employees. Staffing agencies employ workers whom they assign to clients' work sites. Secondly, PEOs provide services on a long-term basis. Staffing agencies provide workers temporarily. A "temp" worker is typically assigned to a short-term project or to fill in for a permanent worker who is on leave.

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. This term means someone who is furnished to you as a substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions.

Because employees are insureds under the policy, a leased worker is an insured. Temporary workers are not employees, so they do not qualify as insureds.