A close look at Professional Employer Organizations
Workers’ Compensation fraud has reached epidemic proportions within
the United States, costing legitimate employers, employees and
healthcare providers millions of dollars per year. The landscape of
this fraud is ever-changing; no longer is it limited to employees
exaggerating workplace injuries or working for cash while collecting
workers’ compensation benefits. More recent schemes involve employers
under-reporting payrolls to receive lower workers’ compensation
premiums, or incorrectly classifying employees to save insurance costs.
Throw in unscrupulous medical providers billing for services they never
performed, and it’s no wonder that healthcare and medical care costs
are so egregious.
The result of these and other fraudulent activities is that
businesses and much-needed jobs are often forced out of regions that
operate under high workers’ compensation costs. In some cases, in an
effort to offset these costs, businesses may be forced to increase the
price of goods and services, thus impacting local economies. These
activities also serve to create an environment that results in
unnecessary delays in the processing of legitimate claims that can
affect an injured worker’s ability to obtain crucial medical treatment
for true workplace injuries.
To effectively compete in this new business world, employers are
attempting to shift the burden of workers’ compensation costs to
entities known as Professional Employer Organizations (PEOs).
According
to the National Association of Professional Employer Organizations
(NAPEO) there are an estimated 700 PEOs in operation throughout the 50
states. While PEOs undoubtedly have rescued employers from the high
costs associated with the administration of workers’ compensation
programs, their very existence has also set the stage for the emergence
of PEO-related workers’ compensation fraud. With acknowledgement to the
fact that the overwhelming majority of PEOs are legitimate, law abiding
companies, the emergence of fraud in this arena should put employers on
alert when contemplating entering into the PEO arrangement.
WHAT IS A PEO?
A PEO is an entity that contractually assumes various employer rights
and human resources responsibilities through the undertaking of an
“employer relationship” with workers either assigned to or hired by its
clients (employers). In short, the PEO and the employer/client share an
employment relationship that allows the PEO to handle and manage
employee-related matters such as payroll, benefits, tax matters and, in
many cases, workers’ compensation programs, thus allowing the employer
to concentrate on the operation and revenue producing aspects of its
business. This relationship has become so commonplace that various
states actually recognize PEOs and their clients as “co-employers.”
This co-employment relationship has been summarized by NAPEO, in part, as a contractual relationship whereby the PEO:
- Co-employs workers at the client locations and assumes responsibility as an employer for specified purposes;
- Reserves a right to direct and control these employees;
- Pays wages and employment taxes of the employee out of its own accounts;
- Reports, collects and deposits employment taxes with the state and federal authorities;
- Establishes and maintains an employment relationship with its employees that is intended to be long-term and not temporary; and
- Retains the right to hire, re-assign and fire the employees.
Recognizing the potential for fraud that could arise from the
co-employer shared relationship, some states have enacted legislation
that further defines a PEO relationship and undertakes management
protocols for these entities. The majority of states, however, have
failed to enact or enforce legislation that would protect employers from
PEO fraud or misrepresentation.
POTENTIAL FRAUD ISSUES
When an employer outsources its workers’ compensation coverage
responsibility to a PEO, it is entrusting that all insurance
requirements will be fulfilled by the PEO. This means that the PEO will
be responsible for classifying employees, communicating payroll to
insurers, selecting appropriate coverage and paying premiums. This also
presupposes that the PEO is familiar with the local workers’
compensation statutes and regulations. Unknowingly, some employers may
willingly shift this burden to the PEO without securing contractual
evidence of the PEO’s rights and duties. What’s worse, these same
employers may rely on an ambiguous contract drafted by the PEO which
does nothing to protect the employer’s interests. Unfortunately, the
lack of a clearly defined, written contract between the PEO and employer
can not only lead to fraud or misrepresentation by the PEO, but also
can negate the existence of a valid PEO relationship in states that
require a written PEO contract.
When an employer is contracted with a PEO and a workers’ compensation
claim is filed, questions often arise as to whether appropriate
insurance has been maintained, if there is documentary evidence
available to support the PEO’s responsibility to defend the workers’
compensation claim and even, sometimes, whether the PEO is fiscally
solvent. There have been cases where a “fly by night” PEO is saddled
with liability by a workers' compensation judge and simply fails to pay
benefits. Under such circumstances the employer would likely be liable
for the injury and could be put into a situation where no insurance
exists, thus exposing employers to criminal liability in certain states.
The fact that the PEO and its employer-client are viewed as
co-employers in the workers’ compensation system has a perceived
advantage. From a theoretical standpoint, an employer can farm out its
workers’ compensation coverage while keeping the protection of tort
immunity. It follows that in the PEO relationship, where the PEO and the
employer both share the right to control the employee, both technically
possess the right to assert tort immunity. However, this has not
stopped a number of lawsuits naming the employer as a third party
tortfeasor after a workers’ compensation injury, which has led some
states to create specific statutes related to workers’ compensation that
govern PEO contracts and tort immunity. If an employer is unaware of
these statutes and if the PEO does not strictly adhere to the provisions
of the statute, the alleged “PEO relationship” may not be binding and
the employer could face expensive litigation to prove that tort immunity
applies or that a PEO co-employer relationship even exists.
PROACTIVE RISK MANAGEMENT
The emergence of incidents of PEO fraud in relation to workers’
compensation matters provides a cautionary tale for employers
considering entering into the PEO arrangement. Employers should be aware
of statutes in certain states that require a PEO to define its
contractual obligations and the protocols by which the PEO is to be
managed through a “Professional Employer Agreement.” For employers
operating in states without such legislation, it is important to insist
on a written contractual agreement with the PEO, drafted in unambiguous
language that is understood and agreed upon by both parties at the start
of the co-employment relationship. Within this contract, a provision
as to the allocation of workers’ compensation coverage must be
included. Further, the employer must have the contractual ability to
request and secure proof of workers’ compensation coverage from the PEO.
The contract should also provide employers with access to the loss
history and total wages paid for covered employees. Operating in this
fashion will ensure that the employer is engaging in an environment that
is free from potential PEO fraud
Contact us for all your Insurance needs! (321)725-1620
Bob Lancaster Insurance
Serving Florida since 1964
