Of the (PEO)ple, by the (PEO)ple, for the (PEO)ple

In recent years, professional employer organizations (PEOs) have become a burgeoning means for small to medium-sized businesses to receive comprehensive HR services when they might be otherwise ill-suited to sustain a comprehensive HR department in-house. These PEOs typically offer an amalgamation of services, including employee recruitment and retention, payroll, tax administration, and—often most notably—workers’ compensation insurance.

In essence, the PEO and underlying company become co-employers, with the PEO leasing employees to the underlying company. As one can imagine, issues begin to arise when employees inevitably suffer an injury arising out of the course of their employment. The biggest question being, from which employer do they seek benefits?

PEOs 101

Typically, in places like New York, there is a client leasing agreement between the PEO and underlying company, establishing how the underlying company can properly lease the employee. Similarly, a New York Optional Labor Contractor Endorsement in the PEO’s insurance policy should provide the 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.

Where things get murky, then, is in claims where the injured worker is not covered by the leasing agreement and, accordingly, not covered by the PEO’s insurance policy. Pursuant to the Employers’ Handbook issued by the New York State Workers’ Compensation Board, if the underlying company hires any non-leased employees (and/or wishes to protect itself from the claims of uninsured subcontractors working for it), the underlying company must purchase a separate workers’ compensation policy to cover the employees not leased on their contract with the PEO. Similar language has been disseminated by the New York Compensation Insurance Ratings Board, as well.

Rules…or Suggestions?

Much to the chagrin of PEOs statewide, the Board largely ignored these rules and implemented a framework of its own. In New York, once an injured employee files a workers’ compensation claim, the state’s Workers’ Compensation Board typically performs a coverage search. Due to the current state of the Board’s coverage search capabilities and—perhaps a more apt descriptor—limitations, these searches typically produce the underlying company as the proper employer, along with the insurance carrier contracted by the PEOs. 

For the past several years, the Board consistently found the PEO and its insurance carrier responsible, regardless of the employee’s leased/unleased status. Specifically, the Board reiterated the same language in nearly every case: “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.” Of course, this places an immense and unnecessary burden on PEOs statewide. PEOs suddenly become responsible for a litany of unleased employees, which could ultimately render the PEO landscape financially infeasible if allowed to continue over time.

A Glimmer of Hope

Fortunately, it appears New York has finally constructed a path allowing for the proper application of a PEO’s coverage. In 2021, the Third Department ultimately affirmed multiple cases in which the claimant was unleased, the underlying employer had no workers’ compensation coverage, and the PEO and its carrier were found responsible for covering the claimant.

Most notably, the Third Department affirmed coverage in Matter of Gaylord v. Buffalo Transportation, finding that the PEO in that case did not meet its burden of establishing that the claimant was not a leased employee. However, in doing so, the court left the door cracked open just enough to allow for future PEO arguments, essentially determining that if a PEO could indisputably prove its list of leased employees on the date of accident was exhaustive, it may avoid covering the unleased claimant under the labor law.

At long last, on Jan. 19, 2022, the New York Workers’ Compensation Board rendered a long-awaited victory on the side of PEOs in the state. Once again, at the trial level, the law judge referenced the prior decisions on PEO files and found that the precedent was crystal clear on this issue. As such, the PEO and its carrier were found responsible for an unleased employee’s injury.

In reversing the law judge’s decision made at trial, the Board Panel opined that the PEO had established the claimant was an unleased employee and, therefore, not covered by its carrier’s workers’ compensation policy. This was accomplished by following the new guidelines set forth by the Third Department and providing:

1. A copy of the PEO’s workers’ compensation insurance policy.
2. The client leasing agreement between the PEO and underlying company.
3. A list of leased employees on the date of accident.
4. Testimony from a PEO representative to establish that the list was indeed exhaustive and identified all employees leased to the underlying employer for all of its projects.

Ultimately, as the PEO was able to indisputably establish the injured worker was not a leased employee at the time of the accident, the PEO and its carrier were discharged and removed from notice entirely.

While this is certainly a step in the right direction, New York PEOs still face an uphill battle to avoid coverage over unleased employees. Moving forward and applying these most recent cases, PEOs and their defense counsel need to be more diligent than ever at the conception of claims where an issue of an unleased claimant is present. This includes not only providing all necessary documentation at the outset of the claim, but also drawing out the necessary additional facts and testimony through trial.