Q: I’ve seen several Professional Employer Organizations (PEOs) promote a "cost savings" for business owners for signing up with their program. They advise that by risk pooling with other employers, their Workers Compensation rates are greatly reduced and this savings is passed along to their clients.
Could someone who is affiliated with one of these companies please clarify?
A: PEO's are best suited to offer "cost savings" for businesses with high experience mods or high-risk operations. In addition, PEO's can offer greater credits in states that otherwise restrict premium credits (i.e. New Jersey, Florida) or where territorial rating factors play a role (i.e. Los Angeles County). In essence, PEO's are a loophole that do not need to directly abide by statutory workers' comp rating rule. That being said, I do have two stipulations with PEO's. First, it is best to work with reputable, financially stable, and long-standing companies, who preferably own their workers' compensation insurance carrier. Second, it is best to work with a PEO that maintains the clients experience mod. Some (if not most) PEO's lump the clients employees in a mass policy so no payroll is run under the actual company. In doing so, the experience modification "freezes" which makes it harder for the company to leave the PEO in the future and more importantly the company loses its ability and benefits of reducing their experience mod.