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Workers' Comp Insurance – PEOs

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PEO vs. Staffing

Employee ProblemsWhat’s The Difference?

In many ways, a Professional Employer Organization (PEO) and an Employee Staffing (Staffing) company are similar, but in fact they live at opposite ends of the HR spectrum. In this article, John Will Tenney of EmployerNomics and PEO Pros explains the history and formation of PEOs and a little of the differences and similarities between PEOs and Staffing.

A Brief History of Staffing and Employee Leasing Companies (which are now called PEOs)
In the early 80’s, a few enterprising, hi-tech individuals left their large traditional companies and formed their own hi-tech firms, with an emphasis on bidding on large government contracts, including military and other DOD contracts.

These problem solvers saw a way to better control costs by avoiding permanent hires, and hence avoiding the liability of permanent employees, by forming and using hi-tech staffing companies. The staff of these companies were only “employed” when the hiring firms had existing contracts that could cover the costs of the staff. Hence, they were able to bid a fixed cost with lower overhead, these new hi-tech firms were very competitive and won many contracts.

In response, the older, traditional hi-tech companies (who also had some brilliant business minds) put their heads together to come up with an answer to this challenge.

The idea of firing all their employees and hiring long-term staffing employees was not attractive, so they came up with what was called “reverse staffing.” All of their current employees were “transferred” to staffing companies created just for this purpose, maintaining longevity and seniority. These initial “reverse staffing” companies came to be known as Employee Leasing Companies, or ELCs.

In this case, the ELC was the employer of record, and handled all payroll, benefits, insurance and HR needs for the employees. In this way, the employee cost became a line item for the hi-tech firm, which in the accounting world is very desirable for simplification of taxes.

It wasn’t long before the owners and operators of the ELCs discovered that this benefit didn’t need to be restricted to the parent company, but could be shared, or more to the point sold, to third parties.

The construction and security industries were the first to recognize the advantage (hence Wackenhut was one of the first ELCs) but others soon followed. It was convenient and reassuring to place employees with an outsourcing firm that assumed much of the reliability and headaches associated with being an employer.

Currently, it is estimated that about 40% of the Florida workforce is either employed by a staffing company or a PEO (formerly known as an Employee Leasing Company).

So How Are They Alike?
Both entities provide payroll, insurance, benefits and HR services for employees “leased” to other companies. Both have advantages of “master” insurance policies which allows leveraging for better rates. Both can take advantage of professional HR systems and procedures to insure a safer workplace and lower unemployment rates.

OK So How Are They Different?
The easiest way to explain it is that if you don’t have employees yet, but are thinking of adding some staff or labor to your workforce, you may consider a staffing company. Kelly is a famous temp staffing company. There are also many hi-tech staffing companies still around such as Volt Technical. If you already have employees but wish that someone else would take care of the headaches of payroll, the hassles of workers’ comp insurance, the difficulties of large group health plans, the perennial fear of increased unemployment tax rates or even just remove the fear of an employee lawsuit by getting professional HR assistance, you would consider entering into an agreement with a PEO.

So What is Co-Employment and How is it Different than Leasing?
Recently, many states are passing legislation and codes to limit the complete transfer of employment to a PEO, and a new term has emerged, called “co-employment.” In this case both the PEO and the client are considered employers of record, but the duties and responsibilities of each or both are defined in the contract between the client and the PEO, called the Client Service Agreement (or CSA). It is very important to read this CSA thoroughly before entering in to an agreement with a PEO. It will be the governing document in any future employee disputes.

Where Can I Find Out More?
You can consult a labor attorney of course, and you should also consult a competent PEO broker. We became brokers because we could see the need for a third party in the agreement between a client and a PEO, much the same as any company will always need an insurance agent to negotiate with an insurance company.

And of course you can always contact one of us at PEO Pros or EmployerNomics. But remember, we can’t help you if you don’t call.

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Where Things Are Going …

trendsNo matter what the outcome of the elections in November, change is in the air. Obamacare will change one way or the other. Medical costs are rising. Associated legal costs are also rising. This will affect payroll, payroll taxes, workers’ comp premiums, health premiums, HR issues and no doubt increase employer liability.

We heard this quote in a recent PEO services meeting: “No matter who wins in November, things are going to change. While you can’t plan, you can certainly prepare by choosing a professional HR partner.”

Small businesses will need to be prepared. So while it may be impossible to plan for what may happen, since it is such an unknown, there are still ways to prepare for whatever may come.

At PEO Pros, we have prepared by expanding our HR Outsourcing Brokers division, EmployerNomics. Not only have we added staff at our corporate office, we are now adding regional franchises.

We hope to assist small to medium sized employers with outsourcing these services, now more than ever:

  • Payroll and Payroll taxes
  • Workers’ Compensation Insurance
  • Unemployment Insurance rate management and loss control
  • Employment Practices Liability management
  • Other employer’s risk management
  • Employee Benefits
  • Managing risk from employee litigation

We are here if you need us. If you would like to consider joining us, we have several attractive franchise areas still open. But either way, we can’t help you if you don’t call. So call us at 407-490-2468 or use the contact form below.

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EmployerNomics Franchises

EN-brochure_Page_5It took a lot of time, energy and resources, but EmployerNomics is now a nationally available franchise.

With help from Franchise Marketing Systems, we have completed our compliance and due diligence. We are still finishing up the licensing in some states but that should be done very shortly.

Use the contact form below to get more information on franchising.

If you are looking for a low overhead, low maintenance business with long term residual income, we may be the answer for you.

Consider these points:

  • Can be run from home (to start with)
  • No inventory
  • Very low franchise fee
  • Training included and additional training/assistance available
  • Recession proof B2B sales model
  • Proven track record

Go to our EmployerNomics franchise page Franchise Info to get our sales information.

Why Underwriting Standards Change

past-future-700x525“But you accepted this risk last year!”

How often do underwriters hear that? Often, a risk that was accepted last year is declined this year even though it appears nothing is changed. Sometimes the reverse happens. You’ll hear that something they declined from you last year was just accepted this year, and even worse, through another agent or PEO.


Why do underwriting standards change? What causes this?

We’ll discuss several things that can change:

  • Medical expenses
  • Carrier direction
  • Rates
  • Legal expenses
  • Political climate
  • Surplus

Increased Medical Expenses

These are constantly spiraling upward. Rather than reducing them, as originally intended, it is now apparent that the “Affordable Care Act” has nearly doubled the cost of medical care. This comes from numerous sources but seems to be centered around increased paperwork, taxes and administrative cost.

The cost of a cut finger nearly doubled, according to our PEO Pros actuarial staff, going from $300 with a $20,000 reserve up to $550 with a $40,000 reserve. The reserves are set based upon actuarial history of re-opened claims that involve further medical attention, lost wages and of course, (the big one) legal expenses.

Change in Carrier Direction

Carriers will often change direction of work covered due to numerous reasons. Some of those reasons include a change in ownership, change in AM Best rating, and determination of risk management spread. The company actuaries determine the optimum “spread” of risk, often called a “balanced portfolio.” The ideal balance is a mix of high risk (higher premiums), medium risk (moderate premiums) and low risk (very low premiums.) If a company finds itself unbalanced in one particular area it is a good business practice to shift the underwriting back to the proper balance.

Politicians and Rates

The NCCI relies not only on actuarial data but also on pressure from the various state boards that regulate workers’ comp. This can often lead to a negative situation. For example, for years in Florida, small contractors were complaining that they couldn’t get workers’ comp policies. “Fine.” the politicians replied, “We’ll lower the rates.” Unfortunately this has the opposite effect. Lower rates mean more risk and less profitability for comp carriers so they are in fact more likely to decline a small contractor. In fact, raising the rates would increase the possibility of a small contractor getting approved, but no politician wants to be the one who “raised the rates.”

Change in Rates

Many states are “administrative”, which means the rates per code are set by the National Council on Compensation Insurance (NCCI). In other states, the rates are approved by the state workers’ comp board. Getting a rate change in those states can be a long and cumbersome experience.

In either case, a carrier can find themselves in a different balance situation when rates change. Obviously this can affect the appetite for particular codes.

In a code/rate change situation, the powers that be (including the actuaries) of the carrier may be pushing for a change in underwriting standards.

Change in Legal Expenses

Even though great strides have been made to limit how much lawyers can charge in representing an injured employee (including some precedent setting court cases) the expense of legal fees have continued to spiral upwards. Naturally, this can have an effect on underwriting standards.

One particular effect, known in the industry as the “TV effect”, is the attraction of certain kinds of accidents, incidents and injuries to the media (such as anything aviation related, for example), that is causing many carriers to shy away from those lines of employment. The belief is that high profile accidents and injuries attract the media (seeking ratings) which then attract lawyers (seeking improved public awareness of their services), and therefore those relatively safe (from an incidence and occurrence standpoint) codes become classed as high risk, due to the increased likelihood of expensive legal fees.

Different Political Climates

This can be directly related to the above paragraph but there are also situations where certain governmental type institutions will become ineligible to certain carriers. Municipalities, for example, have an unusually high percentage of suspected fraudulent claims. In particular, in the last few decades, there is an alarming trend to treat the workers’ comp insurance as “100% health coverage”, simply by claiming the accident occurred at work. Since an increased experience mod does not directly impact municipal officials (it’s not their money, they just pass the expense on to tax payers) the incentive to reduce fraudulent claims is removed. Legislation has been added to address this but it is self defeating, as after all, who enforces it but the government officials? A dilemma to say the least.

Change in Available Surplus

By far the biggest factor in underwriting guidelines is available surplus capital. All states require a carrier to carry a certain amount of surplus capital to offset catastrophic losses. If surplus is low, underwriters will be directed tighten up the risk window until more surplus can be found. On the other hand, when there is adequate surplus, carriers will be more likely to expand the riskier parts of their balanced portfolio.

These are just six reasons a carrier can change underwriting standards. If there are any we have missed, please use the contact form below to help us improve this article.

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