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Aug 16, 2010

Employee Leasing Arrangements

Workers Compensation and The Myths About Employee Leasing Arrangements

With rising worker's compensation rates, and increases in many employer's experience mods, it is likely that the rise of employee leasing arrangements will gain strength once again. The various promises made by leasing companies are simple, we'll provide your workers compensation, human resources functions, and payroll services. In return, you lease your employees from them. Sounds simple enough.

Let's examine the practical application of this concept and when it makes sense, and when it doesn't.

The definition of employee leasing - The client company leases employees from another company (the PEO/AES) which assumes human resource functions on the clients behalf. This can include HR functions, providing payroll services, providing safety reviews, workers compensation, and payroll services.

The primary function of a leasing company is to provide workers compensation to the injured workers of a PEO's client along with ancillary products such as payroll, HR, etc. Many leasing companies will purchase a workers compensation policy and provide coverage for their clients under the policy. The Workers Compensation Insurance Rating Bureau (WCIRB) requires all insurers insuring this type of arrangement to keep track of the client's own loss and payroll data, and in theory the client will maintain its experience modification.

It is a common arrangement for companies that have very high experience modifications to be targets of employee leasing companies. The leasing companies can provide a significant alternative to the traditional method of workers compensation when managed properly, as long as they follow the rules established by the Department of Insurance, and WCIRB. However, leasing arrangement can go horribly wrong when the rules are not followed, or are intentionally misrepresented to the PEO's client.

Many leasing companies purchase workers compensation just like any other employer. Some elect to be self insured, and seek qualification as a self insured employer with the Department of Industrial Relations. Some elect to have deductible options, and some have retrospective rating plans. (You can verify a PEO's self insured status by checking with the DIR'S website,) If the PEO is fully insured, you can also request a certificate of insurance. (I recommend you seek the certificate directly from the insurance company and not the broker). You should make certain you are a named insured under the PEO's policy.

The leasing company will charge you a rate slightly above the rate they are paying their own insurer. When you perform better than they expect, they profit from the difference. In theory, they are incentivized to improve your safety culture.

Some PEO's have the client's best interest at heart, and some don't. Here's a few things to consider.

What is the leasing companies own ex mod?-A PEO with a poor mod begs to the question, how is their safety culture with their client companies?

What is the historical ex mod of the leasing company's own personnel?

How many clients do they have? Can you contact them?

Do you maintain your experience modification after you become a client?

What is the average experience mod of all of the client's combined in the PEO?

What is the average experience modification of a client that moves into a leasing arrangement with the PEO?

What is the average experience modification of a client that leaves the PEO? (Has the mod moved up, or down since the inception of the relationship? A lower mod after inception is a good indicator that if the leasing company is fully insured, they have made safety a priority, and stand to profit from it-something which is beneficial to you.) If the client is truly self insured, they are not required to maintain your ex mod.

Do they keep your individual payroll and loss data separate from their other clients?-If you leave a PEO, most insurers will demand your loss history in order to get back into the market. Some PEO's did not not keep track of this documentation and as a result their client's couldn't procure insurance in the standard marketplace after leaving the PEO.

What is the primary target market of the PEO (Clerical, manufacturing, distribution, warehousing, etc.) Does it fit with your company profile?

Who is the insurer? Can you call and talk to them to verify the arrangement they have with the leasing company?

Secure a copy of the certificate of insurance. Look for evidence that the PEO is a co-insured under another PEO's policy. Often times, less than reputable PEO's will piggyback off another PEO's insurer, and even send payroll through another source to avoid paying their own workers compensation premium. Many insurers consider this fraud and can cancel a policy for the leasing company if this is discovered.

Spend some time on Google to see what other people are saying about the PEO and it's owners. Check the owner's background's, check to see what companies they have been involved with, and what their current financial condition is. Check with the local EDD office to see if there are any liens against the PEO for unpaid payroll taxes. If the leasing company fails with your last payroll in their hands, you are still liable for payroll taxes even though you may have made them to the PEO already.

Leasing companies can have a seat at the table when the client's experience modification is out of control and the client is in a bet the business situation with work comp, but doing your due diligence should not simply be a function of listening and agreeing to the sales person's pitch.

When executed properly, organizations can save thousands of dollars in workers compensation expense by utilizing a PEO. It is however up to the buyer to be aware of the potential pitfalls and act prudently when making the buying decision.

If I can help you evaluate any PEO or it's equivalent, let me know. I can be reached at 661-332-0382, or via email to