Since the 1980s, using the services of any or all workers of a Professional Employer Organization (PEO), also known as an employee leasing company, for a fee has become increasingly popular for small employers. PEO/Employee Leasing arrangements provide employers with an alternative to the traditional management and administration of the employee workforce.
PEO/Employee Leasing arrangements, however, can cause problems related to the proper determination of workers compensation premium. This occurs when confusion exists as to which party, client or vendor is the employer. Other issues include:
- Proper classification
- Payroll determination
- Experience modification application
To address the impact of these arrangements on workers compensation data collection, policy forms, and experience rating plans, the National Association of Insurance Commissioners (NAIC) issued the Model Employee Leasing Act in 1991. It supports the concept of multiple coordinated policies, whereby separate policies, classifications, and experience modifications are maintained for each client employer. In addition, the act allows for the writing of master policies in the voluntary insurance market. In recent years, the growth of the PEO industry and the enactment of state laws have changed the way PEO/Employee Leasing arrangements operate. To comply with state laws or regulations, state-specific policy issuance and experience rating rules were filed.
The following provides information on the three most common policy models for PEO/Employee Leasing arrangements. They include Multiple Coordinated Policies, Multiple PEO Policies, and the Master Policy. Before addressing the common models, however, the definitions of a PEO and PEO/Employee Leasing arrangement are provided.
What Is a Professional Employer Organization (PEO)?
A PEO is an entity or group of entities that provides the services of its workers to its client(s) through a PEO arrangement for a fee pursuant to an agreement, written or otherwise. Without limitation, a PEO may also be referred to as a labor contractor, employee leasing company, lessor, or other similarly administered arrangement.
What Is a PEO/Employee Leasing Arrangement?
A PEO/Employee Leasing arrangement involves one entity obtaining or leasing any or all of its workers from another entity under contract or agreement, written or otherwise. PEO/Employee Leasing arrangements include, but are not limited to:
- Full-service PEO arrangements
- Long-term temporary arrangements
- Any other arrangement that involves the allocation of employment responsibilities among two or more entities (e.g., a coemployment relationship)
- An arrangement whereby a PEO contractually agrees to perform specified employer responsibilities with regard to leased workers, including the securing of workers compensation insurance
- Any arrangement whereby one entity pays wages for workers on behalf of another entity for a fee including, but not limited to, a relationship in which the contract or other agreement with a client:
- Requires that the entity (e.g., Administrative Services Organization or other similarly established entity) obtains the workers compensation coverage, and
- Completes the withholding and reporting of payroll-related taxes for the leased workers (i.e., W-2 forms)
PEO/Employee Leasing Policy Models
The three common policy models for PEO/Employee Leasing arrangements being used today are:
- Multiple Coordinated Policies
- Multiple PEO Policies
- Master Policy
The model and the type of policy issued depend on the statutes, regulations, or manual rules of each state. In some states, there are no specific rules or regulation. This absence allows the insurer or common law to determine the type of policy that is issued.
Multiple Coordinated Policy Model
The Multiple Coordinated Policy model uses separate policies issued to the PEO and each of its client companies.
Learn more about the Multiple Coordinated Policy Model (PDF)
Multiple PEO Policies Model
The Multiple PEO Policies model includes multiple and separate PEO policies for each client. Each separate PEO policy is issued in the PEO’s name making reference to each client.
Learn more about the Multiple PEO Policy Model (PDF)
Master Policy Model
With the Master Policy Model, a single standard policy for the PEO and all of its clients is issued in the name of the PEO.
Learn more about the Master Policy Model (PDF)