Change Payroll Providers Without a Workers' Comp Gap

To avoid a workers' comp gap, bind a policy in your own company's name, effective the moment you take over, before you move any payroll. Let the seller's arrangement end only after you have that confirmation in writing. The seller's pay-as-you-go or professional employer organization (PEO) coverage is usually tied to the seller's company and payroll account. In an asset purchase it generally stops covering your workers at closing. In a stock purchase, a payroll switch can still break the billing link the policy depends on. This guide is for buyers whose payroll provider, workers' comp setup or both change at closing or in the months after.

The short answer

In a small business, workers' comp usually sits in one of three places: a regular policy, a pay-as-you-go policy billed through the payroll provider, or a PEO's master policy. Find out which one before closing.
In an asset purchase, plan on your new company needing its own coverage at closing. A workers' comp policy cannot be transferred without the insurer's written consent, and PEO coverage usually runs to the PEO's client, which is the seller, under the client service agreement.
Bind first, switch second. A quote or an application is not coverage, so get a binder or policy number with the right effective date in writing.
Pay-as-you-go does not end audits. The seller's ending policy still gets a final audit, and yours will be audited too.
In most states the policy requires you to report the ownership change to the carrier within 90 days. Some state rating bureaus use their own forms and timing, and the four state fund states (North Dakota, Ohio, Washington and Wyoming) have their own rules.

Where does the seller's workers' comp live today?

Before closing, find out exactly how the seller buys and pays for workers' compensation. In owner-run businesses it usually takes one of three forms, and each one ends differently when the business changes hands.

Three common workers' comp setups and what usually happens at closing
Setup	Who holds the policy	Asset purchase	Stock purchase
Regular policy with a deposit and a year-end audit	The seller's company, with a carrier	The policy stays with the seller. Your new company needs its own.	The company keeps its policy, subject to the ownership change report and the carrier's terms.
Pay-as-you-go policy billed through the payroll provider	The seller's company, with a carrier; the payroll provider sends payroll data and premium each pay period	Tied to the seller's policy and payroll account. Your new company needs its own policy and billing setup.	The policy can continue, but a new payroll provider can break the billing link. Ask the carrier first.
Professional employer organization	Usually the PEO, under its own policy covering the seller's worksite employees	Coverage runs to the PEO's client, the seller. Your new company needs its own PEO agreement or policy.	The client is the same, but the agreement's change of control and termination terms decide what happens.

Ask the seller for the workers' comp information page, the payroll provider's workers' comp setup and, if there is a PEO, the client service agreement with its termination terms. A co-employment arrangement can look like an ordinary payroll service from the outside, so ask directly who the employer of record is.

What happens to a pay-as-you-go policy when payroll moves?

Pay-as-you-go (also called pay-by-pay) billing charges premium each payroll cycle based on actual payroll instead of a large deposit up front. It runs through payroll providers and participating carriers, and it is not available with every carrier or in every state. Three things matter at a sale:

It is tied to one policy and one payroll account. When the seller's payroll account closes, the premium feed stops. What happens to the policy then depends on the carrier's and the payroll provider's terms, so ask both, in writing, before closing.
Audits still happen. Under the standard policy used in most states, the final premium is set from actual payroll after the policy ends, and the insurer can audit records for up to three years afterward. The seller's ending policy gets a final premium audit, and any balance usually follows the named insured (in a stock deal, the company you now own). Ask deal counsel who bears it under the purchase agreement.
Cancelling mid-term can cost extra. The standard policy says premium can be calculated at more than a pro rata share (a short-rate penalty) when the insured cancels, unless the state's rules say otherwise. Some state manuals waive this when the whole business is sold. Ask before anyone cancels.

For how the billing itself works and what it costs to run, see pay-as-you-go workers' comp and payment plans.

What if you switch payroll providers months after closing?

Many buyers keep the seller's payroll provider through closing and switch later, often at a quarter end or the new year. If your workers' comp is billed pay-as-you-go, the policy and the payroll feed are linked, so the switch is a workers' comp event too.

Ask whether your carrier works with the new provider. If it does not, you may need a new policy with a carrier that does, bound to start no later than the moment the old one ends.
Check the cancellation terms first. Cancelling the old policy mid-term starts its final audit and, depending on the state's rules, can carry the short-rate charge described above.
Check the first payroll on the new system. Confirm the premium report reached the carrier and that each employee maps to the right class code and state.
Switch at renewal if you can. Changing providers on the policy's renewal date avoids a mid-term cancellation and leaves one clean audit per policy.

What if the seller used a PEO?

In a PEO arrangement the PEO acts as a co-employer and often covers the worksite employees under its own workers' comp policy. That coverage exists because of the PEO's agreement with its client. If you bought the assets through a new company, your company is not that client. Unless you sign your own client service agreement effective at closing or bind your own policy, your crew may have no coverage on day one.

Termination dates follow state rules. In Wisconsin, for example, the state has said a client's coverage under the PEO's policy does not end until 30 days after the PEO notifies the state. Do not assume an overlap; get the termination date in writing.
Your experience mod may move. Under National Council on Compensation Insurance (NCCI) rules, leaving a PEO is not itself an ownership change. But time in a PEO can affect the experience modification you start with (the claims-based factor that raises or lowers your rate).
Benefits may end too. PEOs often provide the health and retirement plans, and leaving can end them the same day. Bring in a benefits advisor and read what happens to employee health benefits after an asset sale.

Staying with the same PEO under a new agreement can be the simplest path; leaving makes sense if you want your own policy and payroll. Either way, the new arrangement has to start when the old one stops.

How do you line up the dates so there is no gap?

The rule is simple: bind first, switch second. Work backward from the closing date.

A workers' comp transition timeline for closing
When	Step	Why it matters
Once the deal is signed	Choose the setup: your own policy, pay-as-you-go through your payroll provider, or a PEO	Each has its own application and approval steps
Several weeks before closing	Send payroll by job type and state, headcount, owners to include or exclude, loss runs and the seller's mod	Carriers price on class codes and payroll; gaps in the information slow quotes
Before closing	Get a binder or policy with your company as the named insured, effective at the start of the closing date, listing every state where people work	A quote or application is not coverage until the carrier binds it
Before the first payroll	Confirm the new payroll provider is linked to the policy	The billing feed and the coverage are separate; you need both
Closing day	Seller cancels its policy, or the PEO ends the seller's coverage, effective no earlier than 12:01 a.m. the day after closing, so the two overlap for the closing day	A short overlap costs little; a gap of even a few hours can leave an injury uncovered
Within 90 days	Report the ownership change to your carrier as the policy requires (in NCCI states, within 90 days, usually on NCCI's ownership information form or its online tool; bureau and state fund states have their own routes)	The policy requires it; late reports can lead to corrected mods applied back to the change date
After the seller's policy ends	Keep payroll records and cooperate with the final audit	The audit can arrive months later

A hypothetical example. A buyer closes an asset purchase of a 25-person landscaping company on a Friday. The seller ran payroll and workers' comp through a PEO. The buyer assumed its new pay-as-you-go policy was in place, but it was still a quote waiting on a payroll split by job type. On Monday a crew member is badly cut, with about $40,000 in medical bills and lost wages. The PEO's coverage ended at closing, and the buyer's policy was bound on Wednesday. Depending on the state, the buyer could face that claim directly plus penalties for operating without coverage. A five-minute check for a binder on Thursday would have caught it. See what happens if business insurance lapses.

Which states work differently?

North Dakota, Ohio, Washington and Wyoming are monopolistic state fund states: workers' comp there must come from the state fund, so a private carrier's pay-as-you-go program cannot cover those employees. State fund policies there do not include employer's liability, so employers usually add stop gap coverage.
Washington and Ohio also have successor rules that can make a buyer answer for some of the seller's unpaid state fund obligations. Washington's rule turns on giving the Department of Labor and Industries written notice of the purchase. The statute also expects the buyer to hold back enough of the price to cover amounts owed until the seller shows nothing is due. Raise both with counsel before closing; see stock vs asset deal: who covers old claims.
Texas lets most private employers choose not to carry workers' comp. If the seller opted out, decide with counsel rather than by default. Employers that opt out must still notify the Texas Division of Workers' Compensation of their non-coverage and report certain injuries, and a new company formed for the purchase makes its own choice.
States with their own rating bureaus, such as California, New York, Pennsylvania and North Carolina, may use their own forms for ownership changes.

If employees work in more than one state, list every state where they work on your policy, except the four state fund states, which need their own state fund account. Ask your broker how other states coverage on your policy handles a state you add later. The workers' comp review for new owners covers class codes, mods and limits in more depth.

What should you ask the seller, the payroll provider and the PEO?

Seller: Are there open claims or a pending audit?
Payroll provider: What happens to the workers' comp link when the account closes, and can my policy connect before the first payroll?
PEO: What is the exact termination date and time for the seller's coverage? Can my new company sign an agreement effective at closing? What happens to benefits?
Your broker: Is my policy bound, with which effective date, and which states are listed? Who files the ownership change report?

If the seller will keep running payroll for a short time after closing, put the insurance terms in that agreement; see transition services agreements and insurance. Morrow can check the setup you inherited and request quotes for your own coverage; terms depend on carrier underwriting.

Keep reading

Frequently asked questions

Can I keep running payroll through the seller's account for a few weeks after closing?

Be careful. The workers' comp tied to that account belongs to the seller's company and may not cover people who are now your employees. Get your own coverage in place at closing, put insurance terms in any transition agreement, and ask deal counsel how the arrangement should work.

Will leaving the seller's PEO change my experience mod?

It can. Under NCCI rules, leaving a PEO is not itself an ownership change; your purchase of the business is the ownership change that must be reported. But the time the business spent in a PEO can affect the mod you start with, so ask for the numbers.

What if there was a day or two with no coverage?

Call your broker right away and do not misstate dates on any application. Carriers generally will not backdate coverage over a gap, and an injury during the gap is unlikely to be covered by either policy. Consequences for operating without coverage vary by state, so talk to counsel if it happened.

Who pays the final audit bill on the seller's policy?

Usually the named insured on that policy. In a stock deal that is the company you bought; in an asset deal it is normally the seller. The purchase agreement decides who bears the cost in the end, so check it with your attorney.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Changing Payroll Providers Without a Workers' Comp Gap