Professional Employer Organizations (PEOs) and Workers’ Compensation

Companies may need to work with professional employer organizations (PEOs) to obtain contract workers for several reasons—whether it’s to account for their seasonal production periods, fulfill large contracts or secure contract-to-hire positions. Yet, before using a PEO to acquire employees, it is important for employers to understand what the responsibilities are for each party involved and how they can negotiate the contracts for service.

As clients, employers must understand that—depending on what the contract states—they may be liable for any workers’ compensation claims that arise from contract workers if such employees become ill or injured while working at their facilities. That being said, if employers are going to use PEOs, they must take the time to carefully review their contract terms and conditions.

Use this guidance to ensure your company understands what to be aware of when entering into a working relationship with a PEO.

What Is a PEO?

A PEO provides workers to its clients as a service. Employers who require more assistance to complete projects or tasks for their companies can contract with PEOs to obtain that assistance.

The primary benefit of utilizing PEOs is that they can help employers reduce administrative costs by providing extra workers in difficult situations. PEOs will collect a fee for placing employees with their client companies. That is, in addition to what employees will be paid for their labor.

What Is a Contract Worker?

Contract workers are the temporary employees obtained by companies through PEOs. They are hired to complete projects or tasks like client companies’ actual employees, but they are not considered employees of such companies. This is because they are technically employed by their associated PEOs.

Contract workers are generally used by employers who experience peak seasons or increased volumes of work that need to be completed quickly. These workers are commonly utilized in the construction and manufacturing sectors.

Contracting With PEOs

When employers work with PEOs, it is best for both parties to have a clear understanding of each party’s contract responsibilities. The worst (and possibly the costliest) mistake that any party could make is to assume contract responsibilities.

If any situation is not mentioned in the contract, it should be discussed between each party first, and then included within the contract to show what the parties agreed upon.

Two important things that need to be discussed when working with contract employees are:

  1. Who is responsible for providing workers’ compensation coverage?

Both parties need to agree on who is responsible for providing care for contract workers’ illnesses or injuries in the event that these ailments occur. Each party also needs to abide by any applicable state laws related to contract work and workers’ compensation, as requirements may vary.

In some states, PEOs are responsible for managing their contract workers’ illnesses or injuries. In other states, client companies hold this responsibility. Lastly, some states let contracts dictate whether PEOs or client companies are responsible for handling workers’ ailments.

Generally, PEOs will carry workers’ compensation insurance for any employees provided to their client companies. This is because these contract workers are technically employed by their PEOs. As such, if a PEO and their client company contracted for the PEO to carry workers’ compensation insurance, then the PEO will be responsible for providing care for any ill or injured contract workers.

On the other hand, if it was contracted that the client company must provide workers’ compensation coverage for the contract workers, then the company will be responsible for managing workers’ illnesses or injuries.

Both parties should also be aware that if the party in charge of securing workers’ compensation coverage for the contract workers fails to do so, the other party will likely be required to provide the coverage. Either way, the workers will have their illnesses or injuries covered. If applicable, the client company can request a certificate of insurance from the PEO to make sure they have workers’ compensation insurance.

  1. If any contract workers have work restrictions due to illnesses or injuries, who will provide them with light-duty tasks (the employer or PEO)?

Another contract concern to address is light-duty work options for contract workers who are recovering from illnesses or injuries. Specifically, if contract workers become ill or injured at a client company’s place of business and the PEO is required to provide workers’ compensation coverage for these workers, who will be in charge of providing light-duty work tasks? This issue needs to be addressed prior to the beginning of any working arrangements to ensure there is no delay in getting contract workers back to work safely.

Moving Forward

Overall, employers should not shy away from working with PEOs, but both parties should make sure to establish contracts carefully when working with one another to prevent potential issues. Workers’ compensation and general liability coverage should be discussed in case any issues arise. To help reduce the risk of contract workers becoming ill or injured on the job, employers should include such workers within their safety programs. This practice will help contract workers better understand and uphold company safety policies and procedures.

Make sure to reach out to your insurance carrier and consult adequate legal counsel to ask questions about contracts and liabilities for contract workers. Contact us today for additional workers’ compensation resources.

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