By Lisa R. Paul, CPCU
Paul Hanson Partners Specialty Insurance Solutions
As the cost of workers’ compensation has increased so dramatically over the last 24 months moving and storage companies are exploring Employee Leasing as an alternative that may reduce costs. This possible reduction in costs comes with additional exposures and contractural issues that must be addressed. Employers consider this option for various reasons. If for example your firm has experienced recent adverse losses and your experience modification has increased dramatically Employee Leasing may reduce costs by combining your experience in a pool with other employers that blends your experience modification with other participants. Other employers find that due to their company being smaller than those of their peers they have less opportunity to achieve competitive terms and do not qualify for significant schedule credits or premium discounts by themselves. A large Employee Leasing company with diverse exposures, multiple locations and larger premiums may be more effective at reducing their workers’ compensation costs compared to a smaller single employer.
Transferring your employees to an Employee Leasing company DOES NOT absolve your responsibility to comply with health and safety codes, to pay state and federal withholdings, to comply with state and federal labor codes or to cover your employees with workers’ compensation. Therefore, you must be assured contracturally that the Employee Leasing company complies with these requirements. An Employee Leasing company’s failure to comply with these requirements can cause your firm to incur substantial fines, penalties and unnecessary liabilities.
In considering an Employee Leasing company it would be necessary to confirm their length in business, review their financial strength (run a credit report), confirm any pending OSHA citations and to inquire and obtain any tax liens for delinquent state and federal tax withholdings, and review their record with the state labor commissioner regarding pending or previous complaints and citations.
If you are an employer with a low experience modification it may be more advantageous to enter into a contract where both you and the Employee Leasing company maintain a “co-employer” status and that timely reporting of your individual payroll and loss history is reported so that the computation for your experience modification will continue into the future. Some states do allow “co-employer” relationships whereas some do not. Please consult a local labor counsel to determine if this is feasible in your state. If however, your experience modification is high then reverting your employees to the Employee Leasing company may allow your experience modification to be blended with multiple employers while allowing time to pass for your adverse experience to ride out. Regardless of whether you elect to be a “co-employer” or to revert your employees to the Employee Leasing company you should contractually obligate the leasing company to provide monthly or quarterly payroll and loss data in the event you elect to terminate the relationship and are faced with replacing your workers’ compensation coverage. This data will be a MUST in procuring competitive workers’ compensation rates in the future. Too many times we have heard from employers attempting to leave the Employee Leasing company and are unable to secure workers’ compensation due to lack of adequate loss runs.
One of the benefits of being a direct employer who provides workers’ compensation on your employees is that workers’ compensation is the sole remedy for injured workers’ as respects your company. In other words an injured worker cannot receive worker’s compensation benefits under your policy and also sue you in a tort general liability case. By transferring your employees to a third party who has their own worker’s compensation coverage you lose this protection and expose yourself to general liability claims from the injured worker who is no longer your employee. Most general liability policies exclude protection on this tort claim leaving you without defense coverage protection and insurance.
An example, is your previous employee now working for the Employee Leasing company falls off your forklift and initiates a workers’ compensation claim against the Employee Leasing company, but also sues you alleging you did not maintain the forklift. Since you are not his employer the injured worker can sue you in a tort action without diminishing his workers’ compensation benefit against the Employee Leasing company. To protect your company from this possibility you must contracturally obligate the Employee Leasing company to evidence a workers’ compensation policy and a general liability policy. The workers’ compensation evidence should indicate an attachment and inclusion for the Alternate Employer Endorsement that names your company as the potential Alternatite Employer and also waive subrogation against you in the event of a claim. The general liability evidence should include an additional insured provision on behalf of your company, a hold harmless and again agreement to waive subrogation against you. This will place the potential tort action back to the Employee Leasing company. Also, in that you must evidence coverage for employees hired outside of your home state by your drivers the Employee Leasing company must provide evidence to your company and your national van line for this exposure. Besides just the certificates of insurance issued, your contract with the Employee Leasing company should include the requirements for all of the above. These certificates must be checked and resubmitted to you on each anniversary of the Employee Leasing company’s insurance renewal. It is also highly recommended that you require the Employee Leasing company to post a bond in the amount of your annual state and federal tax withholdings in the event they default on these payments.
Employee Leasing companies not only procure worker’s compensation on your employees but also conduct payroll and other related employer services. Often their hidden fees for these services can add up to be more than your savings on the workers’ compensation. Be assured that you have a complete fee schedule of all fees, fines, late fees or penalties and that this fee schedule is an addendum to your contract.
Cash flow and payments the Employee Leasing company can be very different than that of a single employer. Employee Leasing companies typically deduct all payroll, taxes, withholdings, service fees and workers’ compensation premiums on a weekly basis directly from your commercial checking account. If your firm reports your workers’ compensation payroll 15 days after the end of the month and then has 15 days to pay it then the Employee Leasing company can significantly change your cash flow particularly in the busy summer months.
As indicated throughout this analysis it is imperative that your Employee Leasing contract outlines and requires all of the items referenced above. Many movers have found that the minor savings on workers’ compensation premiums is overshadowed by the increased accounting fees, additional exposures if the the leasing company does not comply with contractural requirements or goes out of business unexpectedly. Please consult and review the proposed contract with your attorney, your accountant and your insurance broker.
Should you have any questions about Employee Leasing and its ramifications please don’t hesitate to contact Lisa R. Paul, CPCU, President, and CEO, Paul Hanson Insurance Services at (707) 252-5900.
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