Since PEOs are the employer of record, they shoulder the insurance risk for health care, workers compensation, and unemployment. They must be mindful of this exposure as they grow and control for it with risk management.
For example, if a PEO takes on a client with a higher likelihood of physical injury (like a construction company) they risk more workers compensation claims and thus a higher workers compensation insurance premium. This will cause them to either lose margin or pass it on to their customers raising the price and potentially causing churn.
That’s why it’s useful to think of a PEO as an underwriting business where they must carefully manage their exposure and unexpectedly lower or higher revenue as a result.
See also:
- The flipside of PEOs offering better healthcare is the exposure to rising premiums
Links to this note
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The US Is the Only Country That Recognizes Co-Employment
Professional employer organizations rely on co-employment to share responsibilities with their customers. A company enters into an agreement with a PEO where the PEO is responsible for statutory requirements (remitting payroll taxes and compliance with labor laws) and the company acts as the workplace employer that hires, terminates, and supervises. (Interestingly, PEOs also have the power to hire/fire, but it is seldom, if ever, used). Each state recognizes co-employment (to some degree).
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Peos Kick You off If One Employee Overutilizes Insurance
A business can get kicked off of their PEO or unable to use a PEO if even a single employee “overutilizes” insurance benefits. When it comes to health insurance this can mean one person has a severe illness or medical condition.