Why to Say NO to the PEO

1. EMPLOYEE LEASING - A REVIEW OF THE CONCEPT
The employee leasing industry has enjoyed marked growth in the last few years, based
upon the assumptions that a business owner could pass some of the regulatory
responsibilities, and employer liabilities to a “professional employer organization” (PEO)
trained in human resource management.
Additionally, the logic of volume buying power presents a strong argument for the
potential savings a business owner might enjoy under this type of relationship. This is
employee leasing “in theory”.
In practice, the employee leasing industry is not always what it appears to be.
ASSUMPTION OF EMPLOYER LIABILITIES
The employee leasing industry portrays that they assume various employment practice
liabilities from the client. Read the contract. Most have an indemnification clause in
favor of the leasing company, leaving the client responsible for these issues.
Additionally, many court cases are finding the client company the employer of record for
these issues.
Many smaller client companies may be subjecting their operations to more regulations
than would apply outside of the employee-leasing environment. ADA applies at 15
employees, Family and Medical Leave Act applies at 50 employees, etc.
Under employee leasing, if the employer is the leasing company, they certainly have
more than the limited number of employees and are subject to all employment
regulations. This could add costs and financial hardship to some smaller employers
trying to comply with some of these regulations.
WORKERS’ COMPENSATION OVERCHARGES
Most employee leasing companies charge the Administrative Fee, inclusive of the costs
of workers’ compensation, on 100% of payroll. This means that the client will pay more
WC premium if 100% of the overtime and other “Excluded Remuneration” are included.
Owners/Officers pay is not subject to the payroll limitations and will be charged on their
entire payroll.
Owners/Officers cannot opt to exclude themselves from coverages and premiums if
they opt to lease themselves.
©2004 Institute of WorkComp Advisors

2. PAYROLL ADMINISTRATION OVERCHARGES-TAX LIMITATIONS
The client may be subject to a bundled rate, that is, a consistent Administrative Fee
from the employee leasing company that does not adjust downward after the various
payroll tax limitations or caps are reached. The Administrative Fee is charged on 100%
of payroll throughout the entire year!
PAYROLL TAX DUPLICATION
The client may be subject to payroll tax duplication. When changing “employers” as
with employee leasing, the payroll tax begins again. The client will be charged payroll
taxes as if it were the first of the year starting over. This could be a significant cost
increase to an employer.
Companies that pay bonuses may have the Administrative Fee charged on the bonus
payroll as well which may result in significant cost increases.
PAYROLL TAX LIABILITIES
If the employee leasing company fails to pay the payroll and withholding taxes on the
wages of the leased workers, the IRS may hold the client company joint and severally
liable for the taxes.
PAYROLL TAX REDUCTIONS UNDER SECTION 125/CAFETERIA PROGRAMS
Under the Section 125 of the IRS code, an employee’s wages may be reduced by the
premiums for certain employee benefit health and dependent maintenance type
programs. The employee pays for these benefits with 100% pre-tax dollars. The
employer should save under this program since the payroll taxes are calculated after
the payroll has been reduced by the premiums.
However, most employee leasing companies charge the Administrative Fee on 100% of
payroll, meaning that the client company does not receive the tax savings under Section
125. Most clients are unaware of this “overcharge” or loss of savings.
LIABILITY EXPOSURE
A significant exposure the business owner inherits in the PEO environment is that a loss
of coverage for the non-leased worker, independent contractor, incidental labor, etc.
©2004 Institute of WorkComp Advisors

3. The employee leasing company’s workers’ compensation policy offers coverage for only
the reported leased workers and the policy is not written with the client company as an
additional insured. Most client companies cancel the policy in their own business name,
leasing them unprotected from this potential claim situation.
THE PEO SALE
The typical PEO sale is presented as a comparison between “Your Cost” (the
employer’s) and “Our Cost.” (the PEO’s ) Frequently, the employer’s cost is overstated
and the PEO’s cost is understated.
A proposal may look like this:
Comparative Leasing Rate Components Your Cost Our Cost
(Employer) (PEO)
PAYROLL TAXES (rates per $100 of payroll)
FICA* (Social Security & Medicare) 7.65% Included
FUTA* (Federal Unemployment Tax) 0.80% Included
SUTA* (Your State Unemployment Rate) Included
WORKERS' COMPENSATION NET RATES
8380 - Auto Service & Repair Included
8393 - Body Shop Included
8748 - Auto Sales Included
8810 - Clerical Included
ADMINISTRATION FEE 4.00%
Total % By W.C. Code
8380 - Auto Service & Repair 14.62%
8393 - Body Shop 13.71%
8748 - Auto Sales 11.26%
8810 - Clerical 10.59%
*Payroll Tax Limitations
You have to recast the employer’s cost in the real world, including:
©2004 Institute of WorkComp Advisors

4. Adjusting for State and Federal Tax payroll limitations,
Adjusting for Officer’s excess or exclusions,
Adjusting for “Excluded Remuneration” on Workers’ Compensation,
Adjusting for Section 125 tax savings.
Calculate your Workers’ Compensation “Net Rate.” That is your rate by class code after
all discounts and the Experience Mod. Sometimes you will see the PEO use the
Manual Rate which is usually higher.
Plus, you need to add to the PEOs cost, the premium for the Minimum Premium
Workers’ Compensation Policy.
THE ADMINISTRATION FEE
Be careful with the Administration Fee comparison. Many PEOs will charge 4% or 5%
of payroll and present it as a “savings.” They allege that it costs the employer 7% and
claim a 3% savings.
Which employees will not be needed any longer when the employer goes into a PEO
relationship? Where is the savings?
Instead, take the Administration Fee and “go shopping.” Compare what the services
they offer would cost from outside vendors. You will often find that they have huge
profits or buried expenses in their Administration Fee.
THE EXIT STRATEGY
What happens if an employer wants to leave the PEO relationship? What will their
State Unemployment Tax be when they leave? Will they be able to get loss runs so
they can purchase insurance? Will the PEO act like Roach Motel where you can check
in, but not check out?
THE INSOLVENCY ISSUE
What happens if the PEO goes insolvent? Who is responsible for all unpaid claims and
taxes? Never enter into a relationship without reviewing Audited Financial Statements.
©2004 Institute of WorkComp Advisors

5. CONTRACTUAL RELATIONSHIP VS INSURANCE RELATIONSHIP
Even though insurance is a key part of the PEO relationship, the employer is in a
contractual relationship with the PEO. Many of the insurance industry regulations will
not protect the employer because they do not own the policy.
If the PEO denies a Workers’ Compensation claim, the employer cannot find a remedy
with the State Department of Insurance as they could outside the PEO. They would
have to sue the PEO, which could take years to settle. In the meantime who pays for
the injured employee’s expenses?
SUMMARY
Entering into a relationship with a PEO is a decision with serious implications and
consequences. Read the contract. Recast the financial proposal in the real world.
Examine Audited Financial Statements. Plan and determine an exit strategy.
An old and trite saying may be appropriate, “if it’s too good to be true, it probably isn’t.”
©2004 Institute of WorkComp Advisors

6. Sample Employee Leasing
Contract Excerpts
1. You expressly agree and understand that no employee shall become employed
by us as a Leased Employee, covered by our workers’ compensation insurance
or any other benefit … unless the individual has, prior to commencing work for
us, completed our employment application, W-4 withholding form, and form I-9,
all of which must be delivered to us before the employee commences
employment.
2. You assume full responsibility for workers’ compensation claims of other Parties
hired by or working for you, whether as an employee, independent contractor, or
in any other status.
3. We shall have sufficient authority so as to maintain a right of direction and control
over Leased Employees assigned to you, and shall retain authority to hire,
terminate, discipline, and reassign Leased Employees. You maintain the right to
accept or cancel the assignment of any Leased Employee.
4. You have the sole and exclusive control over the day-to-day duties.
5. We assume responsibility for the payment of wages to the Leased Employees
without regard to payments by you.
6. …if for other reason we reasonably feel insecure about receiving payment from
you, we may, in our sole discretion, immediately terminate the Leased
Employees on the date of notice to them.
7. We shall not be responsible to improper determination of exempt status.
8. We reserve and retain a right of direction and control over the management of
safety, risk and hazard control involving Leased Employees performing work at
©2004 Institute of WorkComp Advisors

7. your worksites. However, you acknowledge and agree that we assume no
liability since compliance with all applicable laws related to such matters is a
responsibility of yours.
9. This agreement in no way alters any of your responsibilities, which arise from
section 768.096, Florida Statutes.
10. Our service charge is determined as a percentage of the Gross Payroll.
11. Either party may terminate this agreement immediately upon written notice of
such termination to other party.
12. Without regard to the fault or negligence of any party, you hereby unconditionally
indemnify, hold harmless, protect and defend us, …from and against any and all
claims …, without limit and without regard to the cause or causes thereof or our
negligence including but not limited to:
All employment-related matters …
Injuries occurring to any individual performing work for you while not performing work as
a Leased Employee
©2004 Institute of WorkComp Advisors