Professional Employer Organizations (PEO)

A Professional Employer Organization (PEO) offer employers the opportunity to outsource a variety of services including workers compensation insurance, other types of insurance administration, payroll administration, management of human resources, employee benefits and taxes. The PEO takes over the administration of these employer functions, allowing the employers to focus on their core business. This allows the employer/client to reduce their administrative cost and to provide access to lower cost benefits.
PEOs are utilized by many types of small businesses, but are especially prevalent in industries where there is high risk of workplace injuries, like the construction industry. PEOs are often used by temporary staffing agencies due to the staffing agencys ever changing workforce. PEOs frequently take over the hiring and recruiting of employees for employers. By hiring the employees, the PEO becomes the employer of record for workers compensation purposes and tax purposes. This is often referred to as co-employment as the employee is performing his work functions for the PEOs client, but is an employee of the PEO for insurance and tax purposes. (WCxKit)
A promotional point PEOs use to obtain clients is their ability to obtain workers compensation insurance cheaper than the employer can obtain on their own. The PEO obtains workers compensation coverage for both the PEO itself and and for it employer clients. This is allowed because the PEO is the co-employer of the employees of the client companies. The PEO uses economies of scale to purchase the workers compensation insurance at a lower cost than a small employer would pay for the coverage.   However, the various different types of employee classifications in a PEO can make underwriting of the PEO difficult for the workers compensation insurance company.
PEOs also promote they can improve the clients cash flow by reducing or eliminating the down payments associated with the purchase of workers compensation insurance. Depending on the size of the client employer and the amount of other insurance, employee benefits, taxes, etc that are taken over by the PEO, the client employer may not incur any finance charges for their work comp insurance premiums. In some cases, PEOs will utilize a pay-as-you-go work comp program (monthly work comp premium payments with coverage extended month by month).
As PEOs are in the business of managing the benefits, taxes and insurance for employers, they have the expertise to effectively manage and control workers compensation claims for their clients. PEOs will normally require their client employers to have a return to work program that puts employees back to work on modified duty as soon as the treating physician will allow the employee to do so.
Another PEO benefit that impacts workers compensation is the PEO will provide and verify the safety programs of their clients. While the client company will be responsible for administering the safety program, the PEO will retain the right to perform safety inspections to verify the client employer is complying with the safety program and is providing a safe environment for work. This benefits all employers within the PEO by lowering the number of work comp claims for the PEO. 
Some PEOs will turn down potential new clients if they have a poor claims experience history or if the client has a substandard safety program and is unwilling to accept the safety inspections and safety requirements of the PEO. If the PEO is not protective of their loss experience history, the work comp insurance rates will increase, negatively impacting the PEOs ability to attract new clients.
Employers who are considering the utilization of a PEO to manage their administrative programs, taxes, benefits and workers' compensation insurance, should evaluate the PEO on its:
1.      experience in their industry
2.      its safety program and risk management assistance
3.      its return to work program required of all clients
4.      its financial stability
5.      its workers compensation insurance program cost
6.      its workers compensation insurer (A or higher rating with A.M. Best)
7.      its workers compensation third party administrator (if the claims are not handled by the insurer)
8.      the cost of all of its other administrative functions (WCxKit)
PEOs can reduce the cost of workers compensation and other administrative requirements of the employer. The client employer does give up some control over administrative functions (which can be a good thing). PEOs charge a service fee for handling the workers compensation and other administrative functions which most PEOs will claim is more than offset by the savings they provide on the cost of workers compensation and other employee benefits.

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