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By: Thomas Farrell

In this article, PEO Services 102, we will review  one major service offered by Professional Employer Organizations; Workers Comp Insurance. If you have not read PEO Services 101, check it out as it contains information about Employee Benefits, Payroll, and Tax Administration.

Like many other articles we've produced regarding Professional Employer Organizations, we take a general standpoint. Every PEO is arranged differently, and therefore how they deliver service varies. To learn more, check out Differences in PEOs.

We also will point out how each service we cover pertains to coemployment, since this is the main concept that differentiates PEOs from all other HR Outsourcing providers.

Workers Compensation Insurance

Workers Comp Insurance is pretty cut and dry, when you have W-2 employees, you need workers comp insurance. PEOs capitalize on the law of large numbers, and can most likely provide workers comp at a discount for 9 out of 10 small businesses.

Another facet about workers comp provided by PEOs is the “pay as you go” system, which means the PEO calculates the exact amount of workers comp premium necessary for each individual payroll. Why is this good? It helps companies, especially those with a huge workers comp bill, improve their cash flow. It is a stark improvement from how a company purchases worker's comp insurance through status quo means, namely, the deposit and audit system. 

Coemployment Factor: The underlying concept we covered in PEO Services 101, namely how coemployment effects a company’s state unemployment rate also applies to how workers comp behaves through a Professional Employer Organization. Remember our fun anecdote about the rock in the bathtub? It works here too. Basically, when operating with a PEO you’re operating under the PEO’s workers comp policy, so if a claim is filed by an employee, the claim hits the PEO’s policy, not yours. This means that it is not only the PEO’s job, it is financially in their best interest to manage all claims efficiently, and more importantly, to instill best practices and perform risk management procedures at your place of business. If you have a factory, or employ any moderately risky classification codes, a responsible PEO will perform a safety inspection at your facility to make sure you’re doing everything possible to prevent workforce injuries; because if somebody gets hurt and files a claim, it’s the PEO’s problem.

Another facet worth mentioning is that all Professional Employer Organizations have specific industries they target. Some focus primarily on white collar business, and will not accept a riskier profession into their pool, pretty wild, a PEO will actually turn you down if you don't fit their parameters. Conversely, some PEOs focus on grey, or blue collar businesses. It all ties into the concept of coemployment, and how the risk of each client a PEO has is shared with the entire group. It doesn't make sense to put a roofing company, known for high workers comp claims, into a pool primarily consisting of white collar professionals that barely make a claim. So when performing your PEO due diligence, ask about what other clients the PEO has.

For companies with a big worker’s comp bill, PEO’s sometimes offer an incentive program whereby if you have a good year with no claims, they return some of the premium back to you at the end of the year, we’ve seen this check equal up to 30% of the entire year’s premium, you do the math!

To learn more about the Human Resources services offered by Professional Employer Organizations, check out the next article PEO Services 103.

For help considering whether a PEO is right for your business, or whether you're getting the best deal with your current vendors, contact PEO Spectrum for a free vendor comparison and labor cost analysis.