Alternative Staffing Arrangements & The PEO Offering

Alternative Staffing Arrangements
& The PEO Offering
Paul Hughes, Chief Executive Officer, Risk Transfer Holdings
Wade Latham, Senior Vice President, Risk Management,
Torben S. Madson, III, Esq., Partner, Kunkel Miller & Hament
Robert Skrob, Executive Director, FAPEO, Moderator
• If we fail to define ourselves others will do the
job for us.
• FWCIGA labeling staffing as employee leasing.
• NCCI concerns about PEOs with Temporary
Staffing clients.
• Concerns about Temporary Staffing businesses
operating as PEO.
• The use of the term “employee leasing”.
• Highly regulated.
• Efforts underway to
increase regulation at State
and Federal levels.
Temporary Staffing
• Unregulated
• Continuing efforts to remain
Entrepreneur Magazine
• While many business owners confuse PEOs with
temporary help businesses, the two
organizations are really quite different, explains
a spokesperson at the American Staffing
Association (ASA). "Generally speaking,
temporary help companies recruit employees
and assign them to client businesses to help
with short-term work overload or special
projects on an as-needed basis,"
Michigan says that a PEO is not
• MCL 208.1113(5) states that The main business
purpose of a PEO, generally, is to provide a client
with human resource and human resource
management services. PEOs are also typically
responsible for payroll, withholding and remitting
employment taxes and benefits management for
clients. These PEO/client relationships often involve
shared control or co-employer agreements.
However, as the MBT recognizes, the PEO must
maintain the ultimate control in the relationship to
be treated as a PEO under the tax.
Michigan defines staffing
• In contrast, staffing companies generally supply
temporary employees to supplement a
customer's workforce. Staffing companies have
nearly complete control of these employees. In
the staffing company situation, the recipient of
employees generally has no more control over
the employee than direction of daily tasks or
rejection of the proffered individual.
The Association Definitions
– "A PEO provides integrated services to effectively
manage critical human resource responsibilities and
employer risks for clients. A PEO delivers these
services by establishing and maintaining an
employer relationship with the employees at the
client's worksite and by contractually assuming
certain employer rights, responsibilities, and risk.”
The Association Definitions
– Professional Employer Organization (PEO or
Employee Leasing) ”A business places all or most of
its work force on the payroll of a staffing firm, and
the staffing firm assumes responsibility for payroll,
benefits, and other human resource functions.”
ASA definition of Temporary Help
• A staffing firm recruits and screens workers and
assigns them to support or supplement a
client's work force to keep fully staffed during
busy times, gain special expertise or staff special
projects, or fill temporary vacancies. Workers
may be employed by the staffing firm or
assigned as independent contractors.
ASA definitions…..
• Temporary to Hire
A staffing firm employee works for a client for a
trial period during which both the employee and
the client consider establishing a "permanent"
employment relationship.
• Payrolling
A staffing firm places on its payroll employees
recruited or hired by the client. Payrolling is
distinguished from PEO arrangements in that the
employees generally are on temporary assignments
and make up a small proportion of the client's work
• Long-Term and Contract Help
A staffing firm recruits workers and assigns
them to support or supplement a client's work
force on longer-term assignments. Workers may
be employed by the staffing firm or assigned as
independent contractors
Table of Contents
• Historical Overview of the Employee
Leasing/PEO Industry from Inception
– 1970 - 1992
– 1994 – 2004
– 2004 – Present
The Sound Bytes
“Regulators do not know the difference between PEO’s and
staffing companies so they think PEO’s are the problem.”
NCCI 2013
“We do not understand how people in an employee leasing
relationship all of a sudden lose their mod?”
CA Dept of Industrial Relations 2012
“Employee leasing companies are bad for union workers” Teamsters 2013
“If we want good jobs rather than just any jobs, we need to figure
out how to preserve what is useful and innovative about
temporary employment while jettisoning the anti-worker ideology
that has come to accompany it.” New York Times, “The Rise of the Permanent Temporary Economy
The Days Of Employee Leasing
1970 – 1992
Early 1970’s: Original PEO model (then known as Employee Leasing) is created in
Southern California as employees are leased back to doctor’s offices – the concept of
cooperatively managing the workers of multiple small businesses is
1974: ERISA contains an exemption for Multiple Employer Welfare Arrangements
(“MEWA”S”) which provided a loophole for employers with leased employees to
claim they were exempt from the ERISA requirements
1982: Passage of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) further
encouraged employee leasing by providing a tax shelter for employers who
contributed a minimum amount to employee plans
1984: Staff Leasing Inc. (now known as TriNet/Gevity HR) is formed an targets small
contractors in Florida. Workers Compensation begins to be lead service/product of
new entrants
1985: In an effort to self-govern and unregulated industry, the National Staff Leasing
Association is formed
1986: More stringent guidelines in the Tax Reform Act of 1986 later eliminated most
of the TEFRA incentive
Late 1990-92: National workers’ compensation market combined ratios average 120%
- PEO’s seen as way to more efficiently distribute product
Workers’ Compensation
Marketplace for PEOs
Some 'Worker Leasing' Programs Defraud Insurers and Employers
By BARRY MEIER – New York Times
Published: March 20, 1992
“The practice is known as "employee leasing." In it, a service company hires the work force of a small business and then leases the
workers, with insurance coverage and other benefits, back to their original employer.”
“But now, regulators in several states say a troubling number of employee leasing companies have turned out to be fraudulent. They
have stolen millions of dollars and stripped tens of thousands of workers of their benefits, the regulators say. Leading insurers have
also charged in court cases that leasing companies cheated them out of tens of millions of dollars in payments.”
"For some people, employee leasing is just a new way of engaging in insurance fraud," said Tim Ryles, the Insurance Commissioner of
"This is just one more factor contributing to the overall meltdown of the workers' compensation system," said Lynn E. Szymoniak, a
lawyer with the National Council on Compensation Insurance, an organization that establishes rates for workers' compensation
"We'd love the industry to survive," Mr. Hinds said. "But we'd love to get the crooks out.”
Employee leasing becomes PEO and NAPEO is born in 1994 in an effort to rebrand a tarnished
business model.
Workers’ Compensation
Marketplace for PEOs
1994: In an effort to rebrand and legitimatize PEO offerings, National Association of
Professional Employer Organizations (NAPEO) is formed to replace the National Staff
Leasing Association
1995: ADP buys Florida PEO
1996 Paychex buys Florida PEO
1997 – 1999: Darling on Wall street
– High Valuations (10 to 18x)
– Distribution puts valuations through the roof
– 3,000 PEO’s countrywide
“An Industry Makes the Count”
Florida Underwriter, 2003
2000 – 2004: “In the Toilet”
• WC market hardened due to many high profile carrier insolvencies
and withdrawal from PEO marketplace
• 9/11/2001
• Legion, Frontier, Reliance, CGU, Liberty Mutual, AIG and CAN either
went insolvent or exited PEO market
• Valuations low (2 to 4x)
• Only 500 PEO’s Left?
Workers’ Compensation
Marketplace for PEOs
• 2004: Health care crisis hits boiling point –
PEO’s seen as a solution and an issue in system
• 2006-2008: Very profitable workers’
compensation systems in Florida and California
help PEO profitability and insurer support
• 2008: HIRE Act allows PEO client companies to
claim same advantages even if coemployed
• 2010: New Jersey becomes the 28’th state to
formally register PEO’s
Workers’ Compensation
Marketplace for Staffing
No licensure requirements
No background checks – can be a felon
No rules – at all
Employee Leasing circa 1992…
Workers’ Compensation
Marketplace for Staffing – The Ugly
• "The 26-count indictment alleges that from 1995 to
the present, the defendants conspired to provide
unauthorized workers, mostly East Europeans who
had entered the United States on tourist visas, to
American companies with whom the defendants
had contracted to provide legally authorized foreign
workers. The indictment alleges that more than 550
illegal aliens were brought into the United States by
the defendants."
The Federal Definitions
US Census Bureau
- Cross-References. Establishments primarily engaged in-• Supplying their own employees for limited periods of time to supplement the working
force of a client's business--are classified in Industry 561320, Temporary Help
Services; and
• Listing employment vacancies and in referring or placing applicants for employment-are classified in Industry 561310, Employment Placement Agencies
**ALL data regarding PEO and temp staffing roll into the same US Census classifications
and therefore the economic indicators used in this realm are false as noone can
bifurcate one from the other**
The Federal Definitions
Internal Revenue Service
• "PEOs have similarities to traditional leasing companies, but there are some distinct
differences. For example, with PEOs, the employees usually have had a previous
relationship with the employer. Generally, a PEO operates by entering into a service
agreement with an employer (known as a client) whereby the client contracts with
the PEO to perform certain functions, such as payroll and personnel type functions,
for employees who continue to provide the services they had previously provided to
the client.”
Not bad…
The Federal Definitions
US Dept of Labor
• "In the case of employee leasing, a company leases all or a portion of its
workforce on a fairly permanent basis from a leasing or staffing company. The
workers are on the payroll of a leasing company (or PEO, Professional Employment
Organization) but their work is typically directed by the client company. Often
temporary help agencies also lease workers. "
Awful. Transfer of labor (temp staffing/placement) versus contractual coemployment
(PEO/Employee Leasing)… all in one. Yikes!
The Actuarial Bureau Definitions
• NCCI generally defines a Professional Employer Organization (PEO) as an entity or
group of entities that provides the services of its workers to its client(s) through a PEO
arrangement for a fee pursuant to an agreement, written or otherwise.
• Generally, if an entity provides the services of its workers, by contract and for a fee, to
a client and any such services are not provided on a temporary basis, that entity will
be considered a PEO.
• Note: Many state laws and/or NCCI state specific rules define PEO, labor contractor,
employee leasing company, lessor, or other similarly administered arrangement
slightly different than typically defined by NCCI above. Where state law (including but
not limited to statutes, regulations, and administrative laws or rules) conflicts with
NCCI’s definition (as stated above or state-specific), state law applies
Good! Only issue is that it reverts to statute (as it has to) in many states, and some have
one definition of a labor contractor (ie California) and thus further confusion -
Why do “Staffing” v PEO
Application of Experience Rating Modification in California (Client Policy):
If a client is experience rated, the client's experience rating modification
must be applied to the separate client policy issued for the client. If a client is
not experience rated, no experience rating modification is applied to the
client policy. The labor contractor's experience rating modification, if any,
does not apply to the client under any circumstances. The purpose of Section
V, Rule 4 of the CA Experience Rating Plan is to keep client companies from
trying to escape their loss history and further, to keep unscrupulous
employee leasing firms from marketing their services as a device to escape a
debit experience rating modification. When a client enters into or leaves an
employee leasing arrangement, the insurer must apply the client's
experience rating modification to the policy that covers workers leased to
the client and to policies that cover other operations of the client, if any.
Pursuant to Rule 4 in California (passed in 2005), Policy Requirements:
A separate policy must be issued for each client of a labor contractor that
leases any of its workers, except temporary workers, whether or not the
client is experience rated. The named insured on the client policy may be the
labor contractor or the client, but not both.
That’s the “modwashing” loophole…’
Pursuant to Rule 4 in California (passed in 2005), Policy Requirements:
A separate policy must be issued for each client of a labor contractor that
leases any of its workers, except temporary workers, whether or not the
client is experience rated. The named insured on the client policy may be
the labor contractor or the client, but not both.
That’s the “modwashing” loophole…’
Workers’ Compensation PEO
Licensing for PEO in 38 states now (2 in 1992)
• - Payrolled employees of PEO are 3-4% of the market, with the
highest concentrations in FL, HI, TX and AZ
• - Lost time loss ratio for PEO's in the voluntary market was equal
or better then the traditional market
PEO Performance – NCCI Study
• Licensing for PEO in 41 states now (4 in 1995)
• Payrolled employees of PEO are 3-4% of the market, with the
highest concentrations in FL, HI, TX and AZ
• Lost time loss ratio for PEO's in the voluntary market was equal
or better then the traditional market
Workers’ Compensation
PEO Performance
• Lost time severity for PEO was markedly lower in both the
traditional and residual markets (greater interest/control?)
• Frequency higher for PEO then non-PEO showing no reporting
irregularities with PEO
• Comparable loss ratios showing no evidence of inappropriate
reporting of premiums or payrolls
By defining both industries we can be the most credible provider of goods and
services to each industry sector
By identifying who is doing what in the market for what reasons, we can help to
manage our own exposure to the unknowns these classes of business bring
By helping to regulate and provide surplus to the right players for the right reasons,
we can be on the cutting edge of the way labor services will be bought in the future

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