PEOs: What to Ask and Think About – Matthew Davis

Written by on 8/24/2011 9:15 PM . It has 0 Comments.


Preferred Employer Organizations (PEOs) gained popularity through the 1990s and continue to be a popular alternative to many employers.  The idea behind a PEO is that small businesses can essentially pool themselves together to benefit from economies of scale usually reserved for much larger organizations (i.e. Payroll Services, Lower Cost Health and Workers’ Compensation Insurance, HR Support, etc.). 

PEOs hire the workforce from the smaller, client businesses and then lease the employees back to those same employers.  Payroll, taxes, insurance, etc. related to the employees is then taken care of by the PEO. 


 There are many benefits to joining a PEO, but there are also a number of potential pitfalls as well.  Since the Pros are fairly self explanatory, I will focus on the Cons from my perspective. 

  • Loss of Freedom of Choice – The PEO retains the right to chose what plans and benefits to offer and can change them at their, and not the client/employer’s discretion.
  • Loss of Tax and Regulatory Exemptions – Such as FMLA, COBRA, ADA, ADEA, etc. and other exceptions for small business owners are no longer applicable when utilizing a PEO as the PEO is the employer in the eyes of the regulatory agencies and not the small business owner.
  • Loss of Track Record & History – Once assimilated in to the PEO for Workers’ Compensation, the business owner is then subject to the rates and Experience Modification Factor (X-Mod) associated with the PEO as a whole.  If the PEO does not control their X-Mod, then the business owner may lose the cost benefit they originally planned for.  When leaving the PEO, the business will not retain its X-Mod that it had prior to entering; this can become a point of frustration when the business benefitted from a X-Mod of less than 1.0, or what is known as a Credit X-Mod. 
  • The Buyer MUST Beware – Business owners that are part of a PEO, or are considering a PEO option, MUST inform themselves.  In a recent court decision in favor of the California State Compensation Insurance Fund (SCIF), it came to light that a large PEO was found guilty of materially misrepresenting themselves and their clients to SCIF.  Although the business owners contracting with the PEO should not be found liable for the judgment, the issue arises that employees who were misrepresented could have had workers' compensation coverage for them cease and claims would NOT have been paid.  (Click Here for a Link to the Article)


GDI Insurance recommends that all of our customers and acquaintances make themselves as informed as possible regarding anything they buy, especially when it comes to products and services that are used to secure the health and safety of you and your employees.

For more information regarding the PROs and CONs associated with PEOs and the potential implications to your insurance program, Ask The Experts at GDI Insurance in Turlock, CA by calling us at 888-991-2929.

Matthew Davis MBA, AAI


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