The Financial Downside of Employee Leasing / PEOs

May 2020

PEO’s (Professional Employer Organizations) are companies that provide Employee Benefits (including Workers’ Compensation) and HR services as an outsourced alternative for employers. Your workers become their employees but continue to work at your company. These programs are very popular in Florida, Texas, and Southern California where the Workers’ Compensation system is in great distress and therefore they are a necessary alternative for some employers. PEO’s do have significant shortcomings and in our opinion, they put the employer into a potentially perilous position as follows:
  • You have to pay the unnecessary 2-5% Administration Fee.
  • You lose any potential past and future workers compensation workplace safety dividends – this could be 25-50% of your annual Workers’ Compensation Premium.
  • You cannot procure a 5% Drug-Free Workplace and 2% Workplace Safety Credit for your Workers Compensation Insurance per your annual Workers’ Compensation Premium.
  • The worker is no longer your employee and therefore can litigate against your company in addition to collecting Workers’ Compensation benefits. In a traditional situation, employees can only litigate against employers in special situations where employer negligence is proven.
  • You are no longer an “insured” which means:
    • You do not have protection from the State Insurance Department
    • You do not have legal rights against the insurance company in a dispute
    • You are typically not entitled to Loss Runs
    • You are not entitled to receive a Notice of Cancellation of coverage should the PEO lose their Workers’ Compensation
  • You lose your experience modification (MOD) and no longer receive discounted rates based on your company’s loss experience.
  • Workers’ Compensation coverage does not extend to uninsured subcontractors should an uninsured subcontractor be injured on your job or in your business
  • A large percentage of PEO’s have gone out of business, sometimes providing little or no notice and no loss runs.
  • There is adverse selection in favor of poorer risks because those who have a debit modification rating have a greater incentive to join.
  • The salespeople are generally NOT licensed insurance professionals or trained in Insurance.
  • Because of the exposure, PEO’s are not covered by the insurance agent’s errors and omissions policies for the liability of insolvency.
Although Waller Insurance offers PEO to some clients as an absolute “last resort”, we do not recommend them for most clients. Our job is to reduce, transfer, or eliminate risk at the lowest cost; we believe PEO’s are only a place of last resort. Robert James Waller, IV, Principal