Watch Out for the Pitfalls of PEOs

Professional employer organizations (PEOs) are a way for small business owners to outsource human resources, payroll, workers’ compensation and employee benefits for a fraction of the cost associated with hiring the same staff in-house. However, there are some pitfalls associated with PEOs to keep in mind. For example:

Workers’ Compensation Conflicts: When an employee is injured on the job, workers’ compensation coverage typically will provide medical benefits. However, determining whether the PEO or company is responsible isn’t quite so straightforward. Savvy small business owners should read the fine print and understand the limits of protection as well as possible areas of additional liability should an injury or accident take place.

Ratings: Most PEOs carry a master policy that then provides coverage for the PEO-leased workers. Experience modifiers, a way for the policy to rate the risk associated with each policy, can alter the rates fairly dramatically. Small business owners should do their due diligence to understand the experience modifier of the PEO company as well as the manner in which they are able to pass along savings to the small business owner.

Understand Obligations: A PEO can provide valuable services, but if the PEO fails to do its job correctly, that can also have ramifications for your business. A small business owner remains liable for injuries, ambiguities and other damages that arise from the hiring of a PEO, even if the PEO is at fault. Always verify that the PEO is paying payroll taxes and that it is audited annually and retains all state and federal requirements in place at all times. More important, speak with your insurance agent about the best way to structure the relationship.