Working With PEOs – Employment Law and Workers' Compensation

Working With PEOs – Employment Law and Workers’ Compensation Challenges

Professional employment organisations, or ‘PEOs’, offer many benefits to client companies through the utilisation of its employees’ expertise. However, a PEO’s unique structure often complicates matters when it comes to workers’ compensation.

In this article, a workers’ compensation and employment law attorney, CB Everett, of CBE Law Group, offers his insight and experience into PEOs when it comes to workers’ compensation and employment liability matters.

What is a professional employment organisation, or ‘PEO’?

A professional employment organisation (PEO), also known as an employee leasing company or employer of record, is a third-party organisation that provides comprehensive outsourced human resource (HR) services and other business administration responsibilities for their client companies. The relationship between the PEOs and the client companies is governed contractually, setting forth the co-employment scope as well as the specific responsibilities and functions.

While the breadth of PEO services and the nature of the co-employment relationship can vary among providers depending on the co-employment arrangement, generally the PEO becomes the employer of record for purposes of payroll, benefits administration, and related HR tasks. This means that the PEO is responsible for payroll processing, tax withholding and reporting, employee benefits administration (including health insurance, retirement plans and workers’ compensation coverage) and compliance with employment laws and regulations.

The client company, on the other hand, retains control over its core business operations, such as day-to-day supervision of employees and operational decision-making. The idea is that the PEO adds value by leveraging its expertise and resources to manage the admin functions more efficiently and effectively, leaving the client company to focus on its operations.

How do these companies operate, and what distinguishes them from temporary staffing agencies?

PEOs and temporary staffing agencies are often conflated, mainly because they both deal with similar segments of general labour, light industrial, warehouse and logistics matters. However, what distinguishes PEOs from temporary staffing agencies is the nature of their client relationship and the direction of the ‘flow of employees’ from one organisation to another.

Staffing agencies recruit and hire workers and then they place the temporary workers at their client companies’ operations (such as a warehouse or a factory). In essence, an employee originates at a staffing agency office and is placed to work at a client company’s facility. In some ways, with PEOs, the ‘flow of employees’ is the opposite of staffing agencies. The employees originate at a client company’s operational facility, and the employees are placed onto the employee roster of the PEOs.

Now, the ‘flow of employees’ differentiation breakdown of staffing office signup and placement at operational facility versus operational facility origin and office placement on the PEO books is oversimplified. Of course, there are many other distinguishing factors and nuances. What is particularly different is that with a temporary staffing agency, the value they add as an employer is to assume all employment liability. With a PEO, they are ‘co-employers’ and add value by assuming potential liability. PEOs also engage in a long-term, co-employment partnership with clients, whereas temporary staffing agencies focus on providing temporary or contract workers to fill specific positions for a limited duration.

What are the legal difficulties inherent in employee leasing, and how can these best be tackled by a competent employment law attorney or team?

Employee leasing, or with any form of co-employment relationship, can present several legal challenges. The overarching challenge is the large scope of liability that exists, or can exist, in an employment setting. This can include issues such as employment discrimination, wage and hour violations, or wrongful termination claims. Since PEOs sometimes provide employee benefits and retirement plans to workers, ensuring compliance with complex benefit laws, such as ERISA (Employee Retirement Income Security Act), or tax laws, can be challenging. And of course, with our legal practice, we see the challenges that manifest in terms of employee safety (OSHA) and more prominently, in the workers’ compensation system.

It is fundamentally challenging to have operational actions (injuries, personnel action, employment-related conduct), which a PEO has to deal with and yet has only a degree of control over. While PEOs may scaffold an excellent safety program including well-trained supervisors, shape and implement employment policies, ultimately, the client company is the proverbial ‘boots on the ground’ to oversee operations. Thus, a challenge, and certainly an opportunity, is for the client company to execute the policies and procedures. It is also crucial that, in the times where there are injuries, incidents, or claims, that the PEO and client company have excellent and honest communication, as well as strong degree of trust and partnership.

Employee leasing, or with any form of co-employment relationship, can present several legal challenges. The overarching challenge is the large scope of liability that exists, or can exist, in an employment setting.

PEOs must stay up-to-date with ever-changing employment laws and regulations at the federal, state, and local levels. A good employment law attorney can provide ongoing counsel on compliance matters, including anti-discrimination laws, workplace safety regulations, workers’ compensation requirements and more. They can help develop policies and practices that align with legal requirements and mitigate potential compliance risks.

It is always important to have a good employment law attorney to guide PEOs and client companies in personnel actions including discipline and termination processes, addressing performance issues, and ensuring compliance with applicable laws, such as providing proper notice and documenting the reasons for termination. In the event of employment-related disputes or lawsuits, employment law attorneys can provide representation and support. They can assist in alternative dispute resolution methods, such as mediation or arbitration and, if necessary, advocate for the PEO or client company in court proceedings.

Overall, competent employment law attorneys or teams ensure compliance, help navigate complex employment laws, and protect business interests. By partnering with knowledgeable employment law professionals, PEOs can effectively address legal challenges, mitigate risks, and maintain a legally compliant and harmonious employment environment.

How far does a PEO’s liability extend when it comes to workers’ compensation?

The extent of a PEO’s workers’ compensation liability can vary, depending again on the specific contractual agreements and applicable laws. But generally, in a co-employment relationship, the PEO assumes workers’ compensation coverage for the co-employed workers. The PEOs obtain workers’ compensation insurance policies to cover the co-employed workers and, barring any issues (such as non-compliance on the part of a client company), the PEO indemnifies the client company of liability. The PEO administers the claim, engages legal representation to defend the claim (depending on whether the claim is litigated or not) and ultimately brings the claim to resolution.

As with most workers’ compensation coverage, there are often limitations or exclusions in coverage, such as serious and willful misconduct, as well as claims against the employer for retaliation in response to filing a claim. Coverage typically extends to resolution of a case in chief, and any tortious claims against the client company are often excluded.

But again, PEOs often assist client companies in implementing risk management strategies and safety programs to reduce the likelihood of workplace accidents and subsequent workers’ compensation claims. By promoting a culture of safety and providing guidance on best practices, PEOs aim to minimise risks and associated liabilities.

PEOs must ensure compliance with workers’ compensation laws and regulations, including obligations such as proper state reporting, insurance premium calculations, and coverage adequacy. Therefore, it is crucial for PEOs and their clients to consult with legal and insurance professionals to fully understand their respective obligations and coverage.

How much does a PEO’s liability vary from state to state?

The liability of a PEO can indeed vary from state to state. There are certain federal laws that apply to all state as overarching measures in the workplace as a threshold minimum of employee rights; however, beyond that, each state varies in what protections it affords its employees. Whether it is disability laws, wage laws, or laws regarding discrimination and protected classes, there are endless variables for PEOs to navigate on state-by-state basis.

Many of the claims arising from the workplace are resolved on a localised level by administrative agencies and administrative law, such as state labour boards, tax boards and divisions of the Occupational Safety and Health Administration (OSHA). Similarly, the workers’ compensation system is also governed at the state level, as each state has its own labour code, as well as statutes and regulations related to workers’ compensation.

In short, some of the states’ laws are more ‘employee-friendly’ and thus generally prone to a greater risk of liability to the employer (and PEO). Conversely, other states vary to fewer workplace regulations, more barriers or defences to claims, and limitations on the recovery exposure. These variations between states impact the cost and liability for PEOs in providing coverage and ultimately affect the premiums that the client companies pay as a result.

What are the most common incidents that can result in a PEO being held liable for workers’ compensation?

As a PEO’s liability is essentially a function of its client company’s liability for an injury claim, a PEO would not necessarily have any particularly different incidents of liability than ordinary.

On a general basis, PEOs can be held liable for workers’ compensation claims when workers sustain injuries performing their usual and customary job duties. This can include injuries resulting from accidents, falls, negligent equipment operation, or transportation-related incidences. Issues of causation and apportionment of liability are of course subject to argument, but an injury that arises out of and in the course of employment is generally covered by workers’ compensation insurance.

PEOs may be held liable for workers’ compensation claims arising from occupational illnesses or diseases that are caused or aggravated by the work environment. Examples include exposure to toxic substances, such as chemicals or asbestos, which result in respiratory conditions, cancer, or other long-term health issues.

It is crucial for PEOs and their clients to consult with legal and insurance professionals to fully understand their respective obligations and coverage.

Injuries may be specific (or acute) in nature, meaning that they have a definite date of injury. Examples of these injuries would be a fall, an incident causing a fracture or a ligament tear, a strike to the head, or a chemical burn.

On the other hand, there are cumulative trauma injuries (or repetitive in nature). These injuries develop over time due to repetitive motions, prolonged exertion, or exposure to ergonomic risk factors. Common examples include carpal tunnel syndrome, strained back injuries, or tendonitis caused by repetitive tasks.

What overlapping issues typically accompany these events?

When incidents occur that result in workers’ compensation claims, some overlapping issues can be present with a PEO relationship. They do not frequently occur, but as there is another party (a PEO) between the typical employer to insurance carrier relationship, sometimes a claim is not properly reported from the client company, either unintentionally or otherwise. Further, because there is a chain of communications between those reporting injuries through the client company to the PEO, there are often important details lost in translation throughout the chain.

An injury claim must be promptly and accurately reported by the client company to the PEO. However, issues can immediately arise should the client company intentionally bypass reporting of the injury, attempt to dissuade the employee from pursuing a claim or seeking medical attention, or attempt to get the employee medical treatment without reporting the claim. There may also be an unintentional failure to report a claim, as sometimes an employee may report a complaint or an injury in an inconspicuous manner, meaning that it is not apparent to trigger the client company to initiate the claims process. Or there may simply be administrative negligence causing a failure to report.

In any event, if a claim is not timely reported or inaccurately reported, it may set forth a domino effect of negative consequences. For example, untimely reporting may bar certain defences, causing the employer to incur liability. It could prevent the administration of the claims adjuster to timely complete compliance documentation and afford an employee the opportunity to seek treatment. The insurance company may lose the ability to control medical care within its network.

Further, an employee who is not properly treated may seek legal representation, and there could be a greater incidence of claims litigation and thus resulting costs. A miscommunicated or inaccurate report of a claim could cause the claims team to improperly deny or accept a claim. It could misguide the claims team and legal representation and obscure what true action should be taken on the claim, as well as what liability truly exists, if any.

Do you have any further comments to make regarding the employment law concerns of PEOs?

When working with PEOs or if you have any PEO-related questions or generally need guidance, we recommend you rely upon a good insurance broker, along with experienced employment law and workers’ compensation attorneys. We are happy to assist directly or by way of referring you on to the right parties, so please do not hesitate to reach out.


CB Everett, Managing Partner

CBE Law Group

425 E. 4th Street, Suite E, Long Beach, CA 90802, USA

Tel: +1 213-357-5121

Fax: +1 213-357-5122



CBE Everett is the managing partner and the founder of CBE Law Group. His experience includes a number of successful trials of workers’ compensation matters before the Workers’ Compensation Appeals Board, resolution of claims of serious injury; defence of claims for discrimination under the Labor Code, and many other employment law matters. He has also successfully represented employers before other state agencies, including the EEOC, the DFEH, the Labor Commissioner, and the Unemployment Insurance Appeals Board.

CBE Law Group is a California-based workers’ compensation insurance defence firm. The group works with major insurance companies, third party administrators, employers and PEOs, providing aggressive defence of workers’ compensation matters. The firm is also proficient in defence regarding discrimination claims under Labor Code section 132a and the resolution of lien claims.

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