Although the insurance marketplace for staffing firms has softened somewhat over the past two years, keep in mind that it can still be merciless. Sometimes, in order to obtain affordable workers compensation insurance, staffing firms with a niche in high-risk class codes, such as construction, have been known to turn to Professional Employer Organizations (PEOs) for coverage. This is especially true if the staffing firm has had significant claims over the past five years.
There are a few states - such as Florida and California - in which it is very difficult to obtain coverage from the State Fund or Underwriting Alliance. If, and when coverage is acquired, the rates and high premiums squeeze the profits right out of the mark-ups.
So, before jumping into a PEO relationship, be aware of the pros and cons and take the time to do your "due diligence."
Realizing that the insurance marketplace for staffing is terrible, you will be aghast at the fate that PEOs have suffered since the year 2000. They have endured one of the most brutal markets ever! Other than a handful of large, well-capitalized PEOs being fortunate enough to use "A-rated" carriers, most have been forced to accept unrated insurance carriers for their workers compensation. Worse yet, some, out of desperation, have been tempted into programs that, at the end of the day, were proved to be nothing but scams. As a result, everybody has suffered.
If you're contemplating turning over your payroll processing, tax payment and workers compensation to a PEO, here are some considerations:
• Policy Cancellation Notification: The First Named Insured is the only party entitled to be notified by the insurance carrier of policy cancellation. This means that, in a Master Policy situation, the PEO is notified, and that's it!
• Client Service Agreement Add-On: Be sure to have language added into the client service agreement mandating that you be informed immediately upon notice of cancellation by an insurer. While the PEO works to find replacement coverage for its company, this knowledge will afford you the opportunity to do the same for yours. Actually, your job might be easier.
• Due Diligence: Heed the old adage, "If it sounds too good to be true...." There have been several notable instances in which a PEO unwittingly purchased what they thought was properly authorized coverage. Verify the legitimacy of the insurance program before signing on the dotted line. To the detriment of all, unscrupulous insurance brokers have taken advantage of this desperate market by selling sugar-coated, cheap promises, dressed up as coverage. In some cases, carriers have been placed at risk with neither their knowledge nor their permission. For example, a PEO extended coverage to one of its clients in a state other than the state of the PEO's initial coverage with that carrier. The problem became apparent when it was noted that the insurance carrier was not licensed in the additional state.
PRUDENT DUE DILIGENCE
Following are some suggestions to help you along your way in achieving the best coverage possible when working with a PEO:
1. Ask the PEO for the carrier's contact information. If there is reluctance, STOP! Perhaps, you should consider working with a different PEO.
2. Contact the insurance company and speak directly with the underwriter.
3. Confirm the coverage, and that the premiums are paid to date.
4. Verify that you, the client of the PEO, are not responsible for the taxes that might not be paid by the PEO - especially if it should go out of business.
5. Ask the PEO's accountant to verify payment of taxes, and that there are no tax liens. An accountant will not sign-off on a statement unless it has been confirmed.
6. Seek an accredited PEO. There is an accreditation program for PEOs, provided by Employer Services Assurance Corporation. It provides member PEOs with financial assurance for covered clients and employees, through surety bonds held in trust by Regions Bank - in the unlikely event of the failure of an accredited PEO.
7. Additionally, a fast 24/7 online verification service is available - www.esacorp.org - to verify that your PEO is financially stable and in compliance with important state and federal employment laws and PEO regulations.
ADVANTAGES OF WORKING WITH A PEO
Here are some of the advantages to working with a PEO:
• Cash Flow: everything is paid as you go as with payroll, and processed on one invoice, thus eliminating work comp deposits.
• Work Comp Audit: will become the PEO's responsibility.
• Employer Administrative Duties: are transferred to the PEO, thus freeing some of your time to focus on marketing.
• Savings: you can often save money to help defray the cost of doing business with a PEO.
Just go slowly and tread wisely. Good luck!
Bob Barrow CIC, CWCA is the President of Barrow Group, LLC, specializing in the captive industry and leading the way for the staffing industry in insurance products. He may be contacted at 800.874.4798, or by email bbarrow@barrowgroup.com, or visit www.barrowgroup.com.
