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Workers’ Compensation Coverage Gaps When Using PEOs

When an employer hires a professional employer organization or PEO, the PEO acts as a “co-employer” and handles a variety of administrative tasks for the employer. This includes handling of payroll, regulatory paperwork, human resources, workers’ compensation insurance, and employee benefit packages – often at a lower cost than if the employer kept those tasks in-house.  However, contractors should be aware of the risk of “coverage gaps” in workers compensation and delays when using a PEO. 

Exposure to “coverage gap” in the workers’ compensation coverage provided by PEOs is a big risk to take into consideration. 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. 

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. 

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.