Exclusively from Foa & Son
The past couple of decades have seen businesses turn increasingly to PEOs (professional employer organizations) and staffing agencies to fill both permanent and short term labor needs. From filling temporary staffing needs during busy times, temp to hire strategies or even long term solutions for more permanent needs, there can be many advantages to using these types of services.
As convenient as these arrangements can be, they do create some additional liability risk for any business using them. Enter: PEO workers comp and employment practices liability.
How do Traditional Labor and Employment Laws Apply to PEOs?
Labor and employment laws and regulations are still geared for the most part toward direct employment relationships, i.e., a direct, two party relationship between an employer and an employee. Bring a staffing agency into the mix and you still have a two party employment relationship, but it’s between the staffing agency and the employee.
Bring in a PEO and you now have a three party relationship, you and the PEO as co-employers, and the employee.
Co-employment is a relationship between two or more companies, in which both have rights and obligations as an employer. In the co-employment relationship, a PEO assumes many of your employee related employer responsibilities, while you continue to manage and run your business.
That additional complexity is the root of the insurance problems with this model.
It doesn’t help that there is no uniformity in how PEOs are regulated. While there are numerous federal laws and regulations governing employment, regulation of PEOs resides principally at the state level. Some states regulate them through their insurance departments, others through their labor departments, and some have no regulation at all. While labor industry organizations have been advocating for a national regulatory model, no real national standards currently apply. Nor is there consistent uniformity in business models among PEOs, staffing agencies or ASO (administrative service only) vendors.
As a result, although there may be good reasons for you to consider employing these services, there are some insurance pitfalls you need to understand and be prepared to deal with yourself.
PEO Workers Comp & Employment Practices Liability
Two areas of increased risk, in particular, need to be addressed, workers compensation and employment practices liability. In order:
Each state has workers compensation statutes defining employers’ obligations to their employees in the event of a work related injury. But what if they are not your employees, as with a staffing agency? Or what if you are a co-employer with a PEO in a long term employment arrangement? Both scenarios create unique problems.
The contract between the staffing company and the client business typically will have a provision for workers compensation insurance coverage, and it’s common to find the staffing company assuming the responsibility to provide this insurance.
This creates another problem for you. Consider this scenario: you lease a temporary employee from a staffing company. They are in your building, working for you and with you, directing their activities, but their employer is in fact the staffing company, not you.
Say that leased or temporary employee suffers a work injury. Workers compensation benefits are properly paid by the staffing company’s workers compensation insurance policy. However, the injured worker turns around and files a liability suit against you, alleging it was your negligence that caused or contributed to their injury. Injured workers like to do this when they can, and it’s a no lose situation for them; they get workers compensation benefits, but they also get a shot at a jackpot in the legal lottery.
Your general liability policy won’t respond to this type of claim; it has a standard exclusion for claims arising out of an employment relationship. You will find coverage, though, in the Employers Liability section (coverage part B) of your workers compensation policy. As long as you have a workers compensation policy you are covered for liability claims like these.
While it’s good that coverage exists and you are protected, it’s not good to have to deal with liability suits like these. And it should be avoidable; the whole point of the WC system is to eliminate litigation between employers and employees over workplace injuries. That doesn’t happen in this type of scenario.
With a PEO and a long term employee, the situation is a little different. You are both co-employers, and are both obligated to provide WC benefits. You must have a workers compensation policy. Again, the PEO will usually offer to provide this, with you as additional insured.
There is a problem with relying on WC coverage provided by either of these types of vendors. The policy needs to exist, of course, something which you may or may not be in a position to verify. It also needs to be properly written with the appropriate endorsement to assure you are protected. Even then, though, you still have problems.
Consider some common situations: you have officers or managers not employed through the PEO; you use the services of an uninsured (for WC) contractor; you hire a part time or temp worker separate from your labor contractor. In most cases it’s doubtful the WC policy you buy through the labor contractor would respond to any of these situations.
In order to be properly protected in these situations and others, you still need to buy your own WC policy. That will also need to be properly written, both to assure it properly meshes with the coverage provided in the labor contractor’s policy, and to assure you only pay minimal premium for the residual exposure it covers.
Employment Practices Liability
Here’s another potential problem area when using staffing companies. Again, workers on your premises are working for you, are under your direction and control, but are employed by the staffing company or co-employed by you and the PEO.
These employees are prone to all the same issues and allegations as if they were your own direct employees, including complaints of harassment, discrimination, wrongful termination and many others. Your own employment practices liability policy would respond, if you had one and if they were your own employees, but what if you don’t have that type of insurance? And if you do, does it respond to complaints from non-employees or co-employees?
Again, back to your contract with the staffing company. Does it address employment practices liability? Does the staffing company carry that type of insurance? Are you protected under that policy? And what’s the scope of that protection?
The easy solution, here, too, is to rely on the policy carried by the labor contractor, but that creates other problems. First, EPL policies, as we have pointed out in the past, are non-standard policies; each one is different. What does the offered policy actually cover? What limits does your PEO carry? You want to know what the occurrence limit is, but as important is the aggregate limit for all claims files against that policy; could claims from other PEO clients erode that aggregate and leave you uninsured? What is the deductible or retention? Larger employers (like PEO’S) usually have large retentions; can you handle that?
Next, remember that these are claims made policies, with all the issues and complexities policies of that type entail. What happens if you are hit with a claim for something that happened before you engaged with the PEO? What happens when you end your engagement with the PEO and a claim later comes in? What happens if a claim involves an employee outside your PEO engagement? What happens if the claim arises out of the actions of your co-employer PEO, but you are also sued?
There may be real doubt that the PEO’s policy will respond to situations like these, or others you could easily imagine. It’s pretty certain, though, that there are some pretty significant coverage issues that will arise if you rely solely on your labor contractor for this type of coverage.
If you do not carry EPL insurance these are pretty important questions. Your only protection against EPL complaints will come from whatever coverage the staffing company has. If you do have EPL insurance (and you should), you’ll need to read that policy to be sure you are protected for complaints from leased or temporary workers, and that it meshes with any coverage provided by the labor contractor.
These are all pretty complicated issues, and solutions will depend on the type of labor contractor you use and the nature of the services they provide. If you are currently using a labor contractor, or are contemplating doing so, we’ll need to sit down with you so we can work through these issues and make sure you are properly protected.