Whereas a single employer might have a few dozen or perhaps hundreds of employees, a PEO typically has thousands. This often represents very large workers compensation premiums, thus enticing potential insurers to offer greater discounts than available to employers on their own. Additionally, PEOs may provide more sophisticated safety programs and be able to assume large workers compensation deductibles or “self-insured retentions” that reduce rates. PEOs can pass these savings to their clients.

Unfortunately, some unscrupulous PEO labor contactors (and premium-hungry insurers) have wreaked workers compensation havoc. They have misclassified employees, underreported payroll, commingled segregate data, failed to report all of their clients to the insurer, “piggybacked” upon other PEO’s insurance, and engaged in other questionable if not outright fraudulent activities. Some employers have also entered into employee leasing arrangements in order to avoid their experience modification; this is illegal. Accordingly, employers should thoroughly investigate workers compensation arrangements through PEOs, perhaps including obtaining (and periodically checking) insurance documentation directly from the insurance company.

Workers compensation premium rules and regulations recognize employee leasing arrangements. They also require that the insurers of PEO-labor contractors comply with various procedures to ensure that experience modifications are not evaded. In California, entering an employee leasing arrangement in order to avoid an experience modification is illegal.