8 Pros and Cons of Using a PEO
Companies – no matter the shape and size – can use a Professional Employer Organization (PEO) as a co-employer of the business’ employees. A PEO can solve many issues for businesses, such as outsourcing the human resources function, lessening the administrative burden of running payroll, filing taxes, providing employee benefits, etc.
However, staffing agencies typically turn to PEOs for a single reason – a workers’ compensation solution that might not be available to them in the standard marketplace. Many staffing agencies struggle to find affordable workers’ compensation coverage from an insurance carrier. This can be for a number of reasons:
- The agency is a start-up
- The agency’s claims experience is poor
- The agency places temps in hazardous employments such as construction, trucking, heavy industry, energy, etc.
But before entering into a PEO arrangement, the staffing agency must consider the pros and cons of doing so. Some of those are below:
- Some PEOs will allow staffing agencies to place temps in higher hazard occupations than what’s typically within the appetite of the standard insurance market.
- Small to intermediate deductible options are often available. A PEO may be able to offer a deductible of $5,000-$100,000 per accident or greater. The smallest deductible option typically available in the standard market is $250,000 or greater. Agencies may be willing to assume some risk, but not $250,000 or more.
- PEOs may be willing to cover your workers’ compensation exposure if you’re a smaller agency or start-up.
- For those agencies in high growth mode, the PEO may be an alternative to payroll factoring or funding.
- The PEO may not report your individual payroll and claim history to the particular rating bureau causing a lack of an experience modification to be published in the agency’s name. This can restrict the number of insurance carriers willing to provide quotes if the agency decides to leave the PEO relationship.
- The PEO may not track your individual payroll and claim history. The biggest hurdle to finding workers’ compensation insurance outside of the PEO relationship is having credible loss data from the PEO. In the absence of this information, it’s virtually impossible to find workers’ compensation coverage, and the agency will likely be forced into the state assigned risk pool.
- PEOs often have a difficult time finding their own workers’ compensation coverage. If a PEO runs into their own workers’ compensation coverage issues, they typically don’t give their customers much warning. This might result in an unexpected increase in rates, or worse yet, the PEO going out of business with little to no warning, leaving the staffing agency with no workers’ compensation coverage and little time to react.
- If the PEO does go out of business without paying the agency’s employees and/or payroll taxes, the agency is legally on the hook for the wages and taxes. Since the staffing agency likely has prepaid those to the PEO to some extent, there’s financial risk.
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