Coverage Concerns for PEOs

Professional employer organizations (PEOs) often employ thousands of people to contract out to different companies that need to address a particular set of services. They’re able to infuse a large number of employees to help owners lower the cost of health insurance and the unemployment taxes they have to pay. PEOs provide these services for a fee that is commonly based on a percentage of the company’s gross payroll.

Professional employer organizations can bring a lot of value to a company through increased payroll accuracy and lowered health and legal costs as well as in other areas that are quite significant, like lowered absenteeism and increased employee morale. By taking on these duties they also inherit the risks and exposures inherent in these types of responsibilities. Your clients that enlist these services will benefit from having peo insurance to address anything from employment practice liabilities (EPL), to errors and omissions (E&O) that may occur during the dispensing of their services.

Responsibility and liability issues

Then there is the question of who is the employer of record for the employees? Is it the client company, the PEO (or leasing firm), or both? Often there is co-employer liability, meaning the client company may still have liability even if its workers are considered employees of the PEO, so addressing the EPL coverage for the client company is extremely important. Many EPL policies include language to cover “leased employees” on the client company policy.

PEO and staffing firm policies should include full prior acts coverage, but it’s imperative to carefully review how liability from prior acts has been handled for employees before they became the responsibility of the PEO. For example, you may encounter prior acts coverage on one specific page of the policy, but it may only provide for acts of those employees while under the control of the PEO.

You must also consider how prior and former employees are handled, as well as their prior acts, and how your policy responds. Moving employees to a PEO/staffing firm may not cover prior acts and related exposures for client company employees that retired, quit or were terminated prior to the use of the PEO. Former employees may not be covered under the PEO/staffing policy, so dropping the client company policy often leaves a gap.

These are conditions and situations that should be carefully evaluated to ensure that your client’s peo insurance will provide them with coverage for any conditions that may arise.