Working with Professional Employer Organizations (PEOs) About Workers’ Compensation

Jun 22, 2023 | Affiliates

Companies often turn to professional employer organizations (PEOs) to acquire contract workers for various business needs. For example, seasonal periods, significant contracts, or contract-to-hire positions. However, employers must understand the responsibilities of each party involved and the importance of negotiating contracts for these services. Employers should be aware that, depending on the contract terms, they may be liable for workers’ compensation claims arising from contract workers who become ill or injured while working at their facilities. Therefore, it is essential to carefully review and consider the contract terms when engaging with PEOs. Follow the guidance below to ensure a clear understanding when establishing a working relationship with a PEO.

What are PEOs (Professional Employer Organizations)?

A PEO offers worker placement services to its clients. Employers needing additional assistance to complete projects or tasks can contract with PEOs to obtain the required workforce. The primary advantage of using PEOs is that they help reduce administrative costs by providing additional workers in challenging situations. PEOs charge a fee for placing employees with client companies in addition to the wages paid to the employees for their work.

What is a Contract Worker?

Companies obtain temporary employees as contract employees through PEOs. They are hired to complete projects or tasks like a client company’s regular employees. However, contract workers are not considered employees of the client companies but are technically employed by the associated PEOs. Contract workers are typically utilized by employers facing peak seasons or increased work volumes that require prompt completion. Industries such as construction and manufacturing commonly rely on contract workers.

professional employer organizations

Contracting with Professional Employer Organizations

When collaborating with PEOs, both parties should clearly understand their respective contractual responsibilities. It is crucial not to assume any duties without explicitly stating them in the contract. Any situations not covered in the contract should be discussed and agreed upon by both parties before being included in the contractual terms.

Two important aspects to address when working with contract employees are:

  1. Responsibility for workers’ compensation coverage. Establishing who is responsible for providing workers’ compensation coverage for contract workers in the event of illnesses or injuries is crucial. Compliance with state laws related to contract work and workers’ compensation is necessary, as requirements may vary. In some states, PEOs manage the workers’ compensation coverage for contract workers, while in others, client companies assume this responsibility. Contracts can also specify whether PEOs or client companies are accountable for handling workers’ ailments. Generally, PEOs carry workers’ compensation insurance for their contract workers since the PEOs technically employ them. If the contract specifies that the PEO provides workers’ compensation coverage, they will handle any ill or injured contract workers. However, if the contract stipulates that the client company must provide coverage, the company will manage workers’ illnesses or injuries. The client company should request a certificate of insurance from the PEO to ensure workers’ compensation coverage is in place.
  1. Provision of light-duty tasks for recovering contract workers. Another important consideration is the availability of light-duty work options for contract workers recovering from illnesses or injuries. Suppose a contract worker becomes ill or injured at the client company’s premises, and the PEO is responsible for providing workers’ compensation coverage. In that case, it is crucial to determine who will be responsible for offering practical light-duty tasks. Addressing this issue before commencing the working arrangement ensures a smooth and safe return to work for contract workers.

Moving Forward

Employers should not hesitate to work with PEOs but approach the relationship cautiously and establish contracts to mitigate potential issues. Discussions regarding workers’ compensation and general liability coverage should be part of the contractual considerations in case any problems arise. 

Employers should incorporate these workers into their existing safety programs. This minimizes the potential for contract workers to experience illness or injuries while on the job. By integrating contract workers into safety initiatives, employers can effectively communicate and reinforce company safety policies and procedures, ensuring a safer work environment for all personnel involved.

It is highly recommended that employers proactively engage with their insurance broker and carrier to discuss relevant concerns and seek clarification on contractual and liability matters related to contract workers. By consulting with experts in the field, such as legal counsel specializing in employment law, employers can gain valuable insights and guidance to navigate potential complexities associated with contracts and the associated liabilities for contract workers.

We encourage you to contact our team today for further assistance and comprehensive resources about workers’ compensation. Our dedicated professionals are well-versed in the intricacies of workers’ compensation and can provide the support and information you need to manage this aspect of your business effectively.

By prioritizing safety programs and seeking expert advice, employers can promote a secure work environment and safeguard the well-being of both their permanent and contract workers. Talk to one of our licensed agents at Advantage Insurance Solutions by calling 1-877-658-2472

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