PEO - Workers’ Comp: The Pros, The Cons, and What to Watch Out For

Workers’ Comp PEOs
Mordechai Kamenetsky
June 28, 2024
Last Updated: 
September 11, 2023

PEO workers' comp means that you partner with a Professional Employer Organization (PEO) to provide workers' compensation insurance. A PEO, also known as an employee leasing company, handles HR services such as payroll, benefits, compliance, and workers' comp for small or medium-sized businesses. 

This arrangement can be beneficial for startups, high-risk businesses, or those with a poor claims history.

But is PEO workers’ comp a good fit for your business? In this post, we’ll explain what PEO workers’ comp is, discuss the advantages and disadvantages, and highlight the key things to check before signing on.

Table of Contents

What is a PEO?

A PEO (professional employer organization), also known as an employee leasing company partners with your small or medium-sized business to provide HR services such as payroll, benefits, compliance, and workers' comp. 

The PEO charges a fee to manage these functions, which usually ranges from 3% to 15% of your gross payroll. 

a secretary looking for files

How does a PEO work? 

When you hire a PEO, the PEO steps in and becomes the “employer of record” for your employees. While you still handle all the day-to-day management of your employees, for all legal and HR purposes the PEO becomes the employer. 

A PEO is called a ‘leasing company’ since the PEO officially “owns” the employees and  your business is “leasing” its employees back from the PEO.

Instead of your employees being part of, say, a 19-person company, they’re now “employees” of a huge umbrella PEO. This technically places them in a pool with thousands of workers. 

Why might a PEO be the workers’ comp solution for me? 

Startups, high-risk businesses, those with a poor claims history often have a hard time getting workers' comp coverage. In these cases, a PEO can be the best solution. 

Since the PEO operates like a “company” with a large pool of employees spread across diverse industries, they dilute the risk. They’re betting on a larger pool, and your company’s risk becomes a drop in that ocean. Carriers are willing to take that gamble. 

Kickstand Case
From our files:

Here are two instances of businesses that were declined coverage from regular carriers, but later found coverage through a PEO: 

1. A Non-Emergency Medical Transportation Company: This was a new venture with no prior workers’ comp coverage. Such operations are considered high risk by many carriers. 

2. A Mold Removal and Remediation Company: The nature of this business is considered hazardous so most carriers will not offer coverage to such businesses.

Advantages of PEO Workers’ Comp

There are many perks when you partner with a PEO. 

Why might a PEO be the workers’ comp solution for me?

The go-to for high-risk businesses

If you’re a new or high-risk business declined by the standard market, your only options are PEOs or state funds.

State funds are a last resort; they don’t want to insure you - so they make it hard to work with them. They may only offer higher than normal rates and can lack some flexibility. In contrast, PEOs want your business so they’ll negotiate with you to get you better premiums.

What are the advantages of PEO workers' comp?

Premium benefits for your employees

Because PEOs “employ” such a large number of workers, they have the scale to offer big-business benefits to theiremployees. Your employees can be working in your small to midsize company while enjoying the benefits of a Fortune 500 company. 

What is a PEO?

Expertise in HR, compliance, and payroll

If you're a startup or small company, there are probably a lot of compliance and HR requirements that get pushed under the rug. For instance, Employee Practice Liability Insurance (EPLI) is mandatory for certain businesses but most businesses only get EPLI after they get sued.

PEOs have experience in managing these aspects for a wide range of companies. They have streamlined processes that will benefit your employees and free up your clerical staff. 

Pay as you go: 

Pay-as-you-go workers' comp benefits

PEOs can easily offer pay-as-you-go workers' comp since they compute workers' comp bills alongside payroll. 

A regular workers’ comp policy requires you to pay premiums based on your projected annual payroll. Pay-as-you-go is different because instead of projecting payroll, you pay premiums based on actual payroll. 

What this means for your business is smaller upfront payments - as low as 10% of your premium instead of the standard 25% - and smaller monthly payments instead of the standard 9 or 10 larger installments.|

For startups and small businesses where cash flow is critical, this flexibility can be a game-changer. 

Decided to go with a PEO for your workers’ comp? Here’s what to watch out for:

Eliminates Annual Audits

Because PEOs are involved in your payroll management and other operational procedures, you don’t need an end-of-year audit like you do with traditional workers’ comp. Your PEO is basically “auditing” you every month as they do your payroll for you.

They also are experts in classifying your workers, so they don't need to check at the end of the term. You’ll avoid surprise bills at audit and last-minute pre-audit frenzy.  

Downsides of PEO workers' comp 

While partnering with a PEO offers benefits, there are also drawbacks.

PEO fees 

PEO fees 

While PEOs often advertise "lower rates" for workers' compensation insurance, this messaging can be misleading. The total cost often includes not just the premiums, but also administrative fees, setup fees, and sometimes even termination fees.

So while the upfront costs may seem competitive, a more detailed analysis may reveal that you're not saving as much as you initially thought, or might even be paying more in the long run.
Downsides of PEO workers' comp

HR quality concerns

One of the downsides of entrusting your HR functions to a PEO is the potential compromise on quality. For example, cookie-cutter policies may not fit your company culture, or you may find that the PEO is less responsive to employee concerns and issues than an in-house HR department would be.

1099 issues 

1099 issues 

Many PEOs only agree to process payroll to W2 employees. This can create issues if you have 1099 subcontractors in your workforce.

You may find yourself needing to manage two different systems: one for your W-2 employees through the PEO and another for your 1099 contractors, thereby complicating what was supposed to be a streamlined process.

‍Kickstand Tip:
Kickstand Tip:

If you decide to go with a PEO because you’re getting declined by the standard market, you don’t need to be with them forever. After a year or two of low or zero claims, standard carriers may consider you and you can exit the PEO.

Think of a PEO as a temporary but necessary solution. 

Decided to go with a PEO for your workers’ comp? Here’s what to watch out for: 

When you get your PEO quote, check the associated fees to make sure they’re reasonable. Keep an eye out for these 4 common fees:

  1. Admin Fee - The admin fee can either be a percentage or a flat fee, depending on which amount is higher. Pay special attention to the higher of the two.
  2. Setup Fee - Some PEOs charge substantial setup fees. In certain cases, we've seen proposals with setup fees ranging from $1,000 to $2,500.
  3. Deductibles - While deductibles might be presented as an option, it's often better to decline. Unfortunately, they are typically required by PEOs.
  4. Weekly minimum premium - This fee obligates you to pay a fixed pay each week regardless of your rate. This can substantially increase your premium. Pay attention to this “weekly minimum” as it can be a deal breaker if it doesn't align with your business needs. 
Kickstand Case:
Kickstand Case:

Our non-emergency medical transport client got a quote for PEO. When we reviewed his quote we realized that there was an $850 weekly minimum premium! That meant that even if his rate was much lower, that is what they would charge him each week. Beware of such charges. 

Still not sure if a PEO is right for you? 

Here at Kickstand, we’ll analyze your business needs and let you know if a PEO is right for you. If you decide to go with a PEO, we’ll review the quote to make sure that there are no hidden fees and that you’re getting the most comprehensive coverage. Call us at  866-338-6388 or fill out an instant quote.

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Note: The information provided in this blog is intended for general informational purposes only and is not a substitute for professional legal or insurance advice. Laws and regulations regarding workers' compensation insurance are complex and vary by state and by specific circumstances. Therefore, readers are encouraged to consult with a qualified legal or insurance professional to obtain advice with respect to any particular issue or problem they might have.

Mordechai Kamenetsky

Mordechai Kamenetsky, co-founder and lead agent of Kickstand, is recognized as an expert in workers' compensation. He is passionate about helping small businesses manage risks and lower their workers' comp costs. In his articles, he educates readers and clients on the intricacies of workers' comp insurance.

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