Amidst a landscape of ongoing layoffs and frequently shrinking administrative staffs, the Professional Employer Organization (PEO) model should be thriving. In a general sense, PEOs operate in a co-employment model with small- and mid-sized businesses that need assistance with human resources, workers’ compensation, payroll, and other benefit-related tasks and services. Thus, this co-employment model means small and mid-sized businesses’ employees are on the PEOs’ books while still falling under the management of the client company–a match seemingly made in heaven in the current climate.
However, issues begin to arise under this co-employment model when the client company fails to properly onboard its employees with the PEO. Unfortunately, this is a burgeoning issue in the world of workers’ compensation law, and states are continuing to wrestle with how to handle proper coverage. From which employer is the injured worker to seek workers’ compensation benefits?
Brief PEO Tutorial
Typically, the PEO and client company execute a Client Leasing Agreement, establishing how the client company can properly lease the employees to the PEO. Similarly, the PEO’s insurance policy should provide pertinent limiting language, establishing that the policy provides coverage solely for leased employees and does not satisfy an underlying company’s duty to provide coverage for non-leased workers.
The primary issue arises in claims when the injured worker is not covered by the leasing agreement and, accordingly, not covered by the PEO’s insurance policy. Typically, if the client company hires any non-leased employees (and/or wishes to protect itself from the claims of uninsured subcontractors working for it), the client company must purchase a separate workers’ compensation policy to cover the employees not leased on their contract with the PEO.
While these general principles of the PEO co-employment model are seen nationwide, the actual handling of proper coverage is particularly nuanced from state to state. Generally speaking, the co-employment model results in courts declaring both the PEO and the client company as employers for the purposes of workers’ compensation coverage. Courts in any state will favor finding workers’ compensation coverage when such a policy exists, as is the case with PEOs. For example, in New York, the popular reiterated language in each case states that “a PEO does not avoid its statutory obligation merely by contracting it away…[and] would still be responsible if the client does not obtain a policy.”
Crafting a Defense
Given the courts’ propensity to find workers’ compensation coverage, PEOs must operate in a hyper-mechanical fashion to protect themselves against workers’ compensation claims. While the rules vary state by state, the determination will always begin with the language of the insurance policy, as well as the language of the Client Leasing/Service Agreement.
One of the crucial pillars of statutory interpretation law is that vagueness and ambiguity will be construed against the drafter, and the same is true in the case of these vital documents. As previously mentioned, courts will always favor finding workers’ compensation coverage given the opportunity, so any attempt to limit this coverage in the PEO setting must be clear and unambiguous. At a minimum, this leasing contract must make clear which employees it will cover for purposes of workers’ benefits, how these employees are hired, and what work activities will fall under the leasing contract.
Along these same lines, given the client leasing agreement should make clear that employees not properly leased are not covered for any benefits, it stands to reason that the PEO should also keep a comprehensive list of properly onboarded employees. This list of covered employees should be updated as often as possible and be readily available in a defense against these claims.
More recently, there has also been a push to require PEOs to advise their client companies that they must purchase separate workers’ compensation coverage for any individuals not specifically listed on their leasing agreement. For example, toward the end of 2022, New York’s Workers’ Compensation Board tightened the standard against PEOs. The board laid out the new analysis relevant to the issue of proper workers’ compensation carrier pursuant to a client leasing agreement as follows:
- The client company is obligated to provide separate coverage for its non-leased employees.
- The PEO and its carrier (for the client’s leased employees) must ensure that the client did indeed obtain and provide coverage to its non-leased employees, and must document which employees are leased to the client at any given point in time.
- The employee will be found to be a leased employee who is covered by the PEO’s carrier unless the PEO and its carrier provide that the claimant is a non-leased employee.
Hyper-Mechanical Document Production
PEOs need to continue leaving no stone unturned the conception of claims where an issue of an unleased claimant is present. Again, while each state has its own unique considerations, a good general practice for PEOs at the outset of these claims is to provide:
- A copy of the PEO’s workers’ compensation policy (including an exclusion for non-leased employees therein).
- A copy of the Client Leasing Agreement which clearly excludes non-leased employees.
- A list of covered employees (updated as often as possible).
- An affidavit and/or testimony from the PEO establishing that the list was comprehensive and limited the scope of the PEO’s workers’ compensation policy.
- Evidence that the PEO and its Carrier demanded proof of coverage from the client company for its non-leased employees.
Without providing precisely the evidence required–including drawing out the necessary additional facts and testimony through trial–the courts will continue to pin these claims on PEOs.