PEO Update 2005 AASCIF Legal Workshop George M. Parham Chief Legal Counsel Idaho State Insurance Fund

PEO FAQs What is a Professional Employer Organization ? –PEO and a client Company enter into a co-employer arrangement to share and allocate long term responsibilities and liabilities regarding the client company’s employees –Client company generally oversees the on-site business activities of the company and its employees –PEO usually assumes much of the client company’s employment related responsibilities, such as risk management, human resource management, payroll and employee tax compliance, and workers compensation insurance

PEO FAQs What is the difference between a PEO, an Employee Leasing Company or a Temporary Staffing Agency? –Employee leasing companies and temporary help agencies generally supply new or short term employees to the client company –The PEO takes on the role of co-employer for the client company’s existing employees –There is overlap in the operations of the different types of organizations and PEOS and employee leasing companies are now sometimes referred to as “Employee Service Entities” or “ESEs”

PEO FAQs What is the role of the PEO in today’s business climate? – – Employee leasing industry began in 1970s –PEOs employ 2 to 3 million employees in the U.S. –PEOs operate in all 50 states – the PEO industry grosses approximately $42 billion a year –PEO growth rate estimated to be 20 to 30% –complexity of human resource issues fuels the increasing reliance on PEOs – – 21 states have PEO licensing requirements

PEO FAQs Why use a PEO? – –PEOs relieve employers of burdensome employee administration, such as payroll and employment tax compliance and record keeping – –PEOs relieve employers of human resource responsibilities such as risk management, workers compensation insurance, medical insurance and pensions – –PEOs can use group purchasing power to obtain employee benefits such as medical insurance, pensions, and etc.

PEO FAQs What is a PEO master policy? –A master policy allows an insurer to write one policy to a PEO that covers all of the PEO’s client companies (not allowed in all jurisdictions) as opposed to issuing multiple coordinated policies to each of the client companies which are then coordinated by the PEO Which employer, the PEO or client company suffers the effects of an adverse experience modifier? –It depends on the jurisdiction and/or the insurer as to whether th PEO or client company will be charged with the claim losses on the policy

PEO FAQs What are some of the issues that arise when insuring PEOs for workers compensation insurance? – –A PEO’s inability to insure in the private market may result in having to insure in the residual market which in many cases means the state fund – –Underestimation of payrolls & misclassification of workers – –Underpayment of premium due to rate shopping by PEOs placing coverage in another state with lower rates

PEO FAQs – –Dissolution of a PEO company when the experience modifier gets too high – –Experience modifier avoidance by setting up multiple entities – –Difficulties in determining who is actually employed by the PEO – –PEO’s active role in claims management to reduce experience modifier

NAIC PEO Workers Compensation Coverage Model Act The National Association of Insurance Commissioners (NAIC) has been attempting to draft a model act to address workers compensation coverage for PEOs Revised model regulation was promulgated July 27, 2005 Purpose of the Model Act –To ensure that PEOs and their clients obtain workers compensation insurance for all their employees –To ensure that proper premium is paid in relation to the risk –To ensure that the proper procedural framework is in place for the inception, continuation and termination of coverage

PEO Model Act Provisions Defines relevant terms Sets forth how the PEO and the client company shall fulfill its obligations to secure workers compensation coverage Addresses the authority of a PEO to enter into a PEO/Client relationship and their respective duties to each other and the insurer –Addresses the formation of the PEO/Client relationship –Sets forth the duties of the PEO and Client to the insurer regarding the existence and termination of the PEO/Client relationship Addresses the procedure for offering coverage under a multiple coordinated policy agreement

PEO Model Act Provisions Sets forth how coverage will be provided by the residual market or carrier of last resort Sets forth how the insurer will issue the policy and the duties of the insurer towards the PEO, the client company and the employees Addresses issues related to the payment and collection of premium Addresses issues related to the verification of classifications and payroll Sets forth the grounds and procedure for cancellation and non renewal of a policy

PEO Model Act Provisions Addresses the issue of interstate coverage for PEOs operating outside the jurisdiction Addresses confidentiality of records Addresses the basis and manner by which experience ratings will be established Sets forth the remedies for non-compliance with the regulations

Final Thoughts Model Act is very detailed & broad in scope –Major legislation –May conflict with existing law Issues addressed by the Model Act –Procedures –Coverage of claims –Addresses responsibilities of the respective parties to each other –Residual market Issues not addressed by the Model Act –Under-reporting and/or misclassification of payroll –Rate shopping in other states –E-mod avoidance –PEO dissolutions and multiple PEO companies –PEO claims management problems