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Three Problems With Using PEOs In Construction

When an employer hires a professional employer organization or PEO, the PEO acts as a “co-employer,” and the PEO handles a variety of administrative tasks for employers. This includes payroll services, regulatory paperwork, human resources, workers’ compensation insurance, and employee benefit packages – occasionally at a lower cost than if the employer kept those tasks in-house.  However, contractors should be aware of three risks in relying on PEOs for workers’ compensation coverage.

One risk is the exposure to “coverage gap” in the workers’ compensation coverage provided by PEOs. Relying upon a PEO for workers’ compensation coverage can create a “coverage gap” built into the contract between the PEO and its clients. A coverage gap is where employees work for the business without workers’ compensation coverage. The gap arises from a contractual disclaimer in the PEO’s contract with its clients where if the employee is not on the PEO’s payroll at the time of injury, the PEO’s workers’ compensation policy does not cover the injured employee. Essentially, this disclaimer refers to the lapse in time between the business’ hiring of its workers and PEO’s processing of the employment paperwork required for the leased employees. This gap exposes businesses to unnecessary liability. For example, in the event the employee is injured during the coverage gap, the PEO is unlikely to accept the employee’s claim, leaving the employee left with one option – to go after the business to recover medical bills and lost wages.

Additionally, besides delays in the processing of employment documents, the gap is also created when PEOs cancel or terminate their agreements with their clients. The cancellation of the agreement also terminates the workers’ compensation coverage provided by the PEO. This immediate loss of workers’ compensation coverage does not occur when a contractor obtains coverage from an insurance provider. Normally, when a business contracts with an insurance provider, the insurance provider must provide notice prior to ending the workers’ compensation coverage. This notice gives contractors time to obtain alternative coverage as to remain compliant with Florida’s laws. Even though PEOs provide workers compensation coverage, Florida does not treat PEOs as insurance providers. Therefore, PEOs are free to terminate agreements without notice and their clients are left holding the bag on workers’ compensation coverage.

Finally, be wary of the coverage gap when dealing with subcontractors that use PEOs because of problems with the coverage gap compound. With general contractors or prime contractors using PEOs to save on administrative costs, the prime contractors are subjected to the same above-mentioned disclaimer used by PEOs.  As such, in practice, should an injured worker not be on the subcontractor’s PEO’s payroll, liability for the injured worker goes upstream to the prime contractor and the prime contractor’s workers’ compensation carrier. If the prime contractor uses a PEO, and the injured employee is not listed on the subcontractor’s PEO’s employee roster, the prime contractor becomes liable for the costs of the injured employee. This causes the prime contractor to suffer additional costs which the contractor believed the PEO would cover. In effect, the prime contractor ends up paying more – the costs of its PEO and supplemental costs the PEO disclaims.

As a result, if a contractor chooses to use PEOs, then contractors should, first, focus on their business’ hiring practices. Prior to allowing new employees to perform work on your jobs, make certain all new hire paperwork is submitted to your PEO. Secondly, contractors should follow up with their PEOs to ensure the new employee is covered. While these steps may delay a new employee’s start date, failure to do so exposes the contractor, not the PEO, to liability.

When an employer hires a professional employer organization or PEO, the PEO acts as a “co-employer,” and the PEO handles a variety of administrative tasks for employers. This includes payroll services, regulatory paperwork, human resources, workers’ compensation insurance, and employee benefit packages – occasionally at a lower cost than if the employer kept those tasks in-house.  However, contractors should be aware of three risks in relying on PEOs for workers’ compensation coverage.

One risk is the exposure to “coverage gap” in the workers’ compensation coverage provided by PEOs. Relying upon a PEO for workers’ compensation coverage can create a “coverage gap” built into the contract between the PEO and its clients. A coverage gap is where employees work for the business without workers’ compensation coverage. The gap arises from a contractual disclaimer in the PEO’s contract with its clients where if the employee is not on the PEO’s payroll at the time of injury, the PEO’s workers’ compensation policy does not cover the injured employee. Essentially, this disclaimer refers to the lapse in time between the business’ hiring of its workers and PEO’s processing of the employment paperwork required for the leased employees. This gap exposes businesses to unnecessary liability. For example, in the event the employee is injured during the coverage gap, the PEO is unlikely to accept the employee’s claim, leaving the employee left with one option – to go after the business to recover medical bills and lost wages.

Additionally, besides delays in the processing of employment documents, the gap is also created when PEOs cancel or terminate their agreements with their clients. The cancellation of the agreement also terminates the workers’ compensation coverage provided by the PEO. This immediate loss of workers’ compensation coverage does not occur when a contractor obtains coverage from an insurance provider. Normally, when a business contracts with an insurance provider, the insurance provider must provide notice prior to ending the workers’ compensation coverage. This notice gives contractors time to obtain alternative coverage as to remain compliant with Florida’s laws. Even though PEOs provide workers compensation coverage, Florida does not treat PEOs as insurance providers. Therefore, PEOs are free to terminate agreements without notice and their clients are left holding the bag on workers’ compensation coverage.

Finally, be wary of the coverage gap when dealing with subcontractors that use PEOs because of problems with the coverage gap compound. With general contractors or prime contractors using PEOs to save on administrative costs, the prime contractors are subjected to the same above-mentioned disclaimer used by PEOs.  As such, in practice, should an injured worker not be on the subcontractor’s PEO’s payroll, liability for the injured worker goes upstream to the prime contractor and the prime contractor’s workers’ compensation carrier. If the prime contractor uses a PEO, and the injured employee is not listed on the subcontractor’s PEO’s employee roster, the prime contractor becomes liable for the costs of the injured employee. This causes the prime contractor to suffer additional costs which the contractor believed the PEO would cover. In effect, the prime contractor ends up paying more – the costs of its PEO and supplemental costs the PEO disclaims.

As a result, if a contractor chooses to use PEOs, then contractors should, first, focus on their business’ hiring practices. Prior to allowing new employees to perform work on your jobs, make certain all new hire paperwork is submitted to your PEO. Secondly, contractors should follow up with their PEOs to ensure the new employee is covered. While these steps may delay a new employee’s start date, failure to do so exposes the contractor, not the PEO, to liability.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.