As the owner of a small or medium sized business, you have a significant interest in keeping the costs of your business insurance, particularly workers’ compensation insurance, under control. These costs can prove to be a substantial strain on many companies, and so it may be worth joining a Professional Employer Organization (PEO) to try and reduce the financial burden.
WHAT IS A PEO?
A PEO is an agency that will assume many responsibilities related to managing your workers, including withholding and remitting payroll taxes, issuing checks to employees, and providing workers compensation insurance. The PEO may also manage employee benefit packages, and it can take care of hiring, firing, and training as well.
When you join a PEO, you share employer responsibility with the PEO, and your employees are effectively leased to the agency. This has no impact on their day-to-day function, but it does affect your administrative and legal responsibilities.
PEO AND WORKERS COMPENSATION
There are many benefits to this arrangement for smaller companies, including the ability to procure better workers comp rates. When you acquire workers’ compensation insurance through a PEO, it may be through a Multiple Coordinated Policy (MCP) setup, or it may be coverage extended from a Master Policy.
In the case of the MCP, you will have your own policy with premium rates based on your individual claims history and independently derived ExMod, but you will benefit from the lower negotiated base rate provided by the carrier through agreements with the PEO. There is little difference between this arrangement and obtaining workers comp coverage independent of the PEO aside from the lower rates, making it an attractive and reasonable option for many smaller companies in a variety of industries.
Obtaining PEO workers compensation through a Master Policy, however, means that the carrier issues a single policy to the PEO that covers all the workers in all the member companies. The ExMod used to calculate premiums is then based, not on your company’s individual claims history, but on the history of the entire PEO, and so you will have much less control over the rates you pay.
While the rate for a higher ExMod will still likely be lower than it would if you were to acquire workers comp coverage outside of the PEO, you won’t can lower the ExMod on your own by improving your company’s safety performance. You also may run into complications if you frequently bid on projects and the PEO has an ExMod higher than 1.0.
None of these complications are insurmountable, but having your individual history separated from that of the PEO will require several extra administrative steps and can take extra time as well. Overall, there are many benefits to be derived from membership in a PEO, especially if you’re in a high-risk industry or a relatively new company and are having a hard time obtaining workers comp insurance, but it’s important to understand the potential drawbacks of any agreement you enter as well.
For more information on ways to reduce your workers’ compensation costs, download our eBook on the topic, or contact our office to speak with an expert today.