Businesses often seek external support to manage their workforce through professional employer organizations (PEOs) or temporary staffing agencies. Both models provide valuable services to employers, but differ significantly in their structure, employment relationships and insurance needs.

RPS Area President Dino Fabrizio provides an overview of PEOs and staffing agencies, focusing on how each operates and the key insurance considerations for agents who work with these organizations.

What Is a PEO?

A PEO helps small and medium-sized businesses manage their administrative burdens by handling payroll, human resources, employee benefits, Workers' Compensation and risk management.

"In a PEO arrangement, there is a co-employment relationship," explains Fabrizio. "The PEO and the client business share responsibilities for the employees. The employer retains control over hiring, firing and day-to-day operations. At the same time, the PEO assumes responsibility for administrative tasks and compliance issues, including managing payroll under the PEO's federal employer ID number."

PEOs can also provide access to better insurance rates due to their larger buying power. For example, they may negotiate competitive Workers' Compensation coverage or offer comprehensive health insurance packages through insurer partnerships.

"Small businesses benefit from these economies of scale that they otherwise would not have access to individually," says Fabrizio.

What Is a Temporary Staffing Agency?

On the other hand, temporary staffing agencies operate on a different model. These agencies hire, train and outsource employees to other businesses. Unlike a PEO, a temporary staffing firm retains control over the employees' employment while they work at the client's site.

"In this arrangement, the staffing agency is the primary employer, holding full control over the employee's work assignments, pay and performance evaluations. The staffing agency manages payroll, taxes and benefits while temporarily directing employees to work for other companies," says Fabrizio. "Temporary staffing is commonly used to meet short-term labor needs, fill seasonal positions or provide specialized skills on demand."

Insurance Needs for PEOs and Staffing Agencies

Because PEOs and staffing agencies manage their workforces differently, they have their own unique insurance needs and risks. Understanding these insurance nuances is critical for agents and brokers placing coverage for these organizations.

Workers' Compensation Insurance

Workers' Compensation insurance is one of the most critical coverages for both PEOs and staffing agencies.

"In a temporary staffing environment, the agency is responsible for covering Workers' Compensation claims, as the staffing firm remains the primary employer," says Fabrizio. The staffing agency pays the premiums, which are calculated based on its payroll and the types of work its employees are performing. The staffing agency is also responsible for handling workplace claims.

In a PEO arrangement, Workers' Compensation coverage is handled differently. Since the PEO shares employment responsibilities with the client company, the PEO must cover all employees listed in the client service agreement. As a result, the PEO must be notified of any new hires to ensure they're added to the Workers' Compensation policy. If the proper notification and paperwork aren't completed, coverage could be denied in the event of an injury. The client pays the premium, which is typically included in the PEO's overall service fees. Claims are processed through the PEO's policy.

Policy Types for PEOs

PEOs may use are several policy types to manage their coverage for co-employers:

Master policy: This single policy covers all the PEO's clients and their employees. The PEO negotiates the rate for the entire group, and all co-employers are covered under this one policy. However, this model has faced challenges due to the risk of "mod washing," where high-risk employers benefit from the PEO's lower experience modification rate (mod).

Multi-coordinated policy (MCP): Some states require that each co-employer be underwritten individually, and their mod applies to their coverage. This policy type ensures that higher-risk employers aren't benefiting unfairly from the PEO's lower mod.

Administrative services only (ASO): In this model, the PEO provides only administrative support, such as payroll processing, without offering Workers' Compensation or other insurance coverage. The client is responsible for securing its own coverage.

Employment Practices Liability Insurance

PEOs and staffing agencies also need Employment Practices Liability Insurance (EPLI) to protect against claims such as wrongful termination, discrimination or harassment. EPLI coverage is crucial for PEOs, as they manage many HR functions and can be held liable for employment-related claims arising from their co-employment relationship.

In the staffing world, the staffing agency may also face employment-related claims since it's the direct employer. For both models, EPLI covers legal costs and settlements related to violations of employment practices.

Risk Management and Loss Control

Risk management and loss control are essential in both PEO and temporary staffing arrangements.

"The PEO may offer clients additional services like safety training, compliance monitoring and loss control to help reduce the likelihood of workplace injuries and claims. However, it's important to note that the PEO does not control the day-to-day work activities at the client's site, which adds complexity to risk management," says Fabrizio.

Loss control can be more straightforward for staffing agencies, as they may have more direct oversight over what their outsourced employees do daily.

"Staffing firms should ensure they monitor the working conditions at client sites for safety standard compliance, especially in high-risk industries like manufacturing and construction," advises Fabrizio.

PEOs and staffing agencies play crucial roles in helping businesses manage their workforce and reduce administrative burdens. However, each model comes with its exposures and insurance requirements. Understanding the differences between PEOs and staffing firms, particularly in how they manage Workers' Compensation and employment-related risks, is essential for agents and brokers working with these organizations.

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