PEO or Your Own Workers' Comp After You Buy?

Choose a professional employer organization (PEO) if you want one vendor for payroll, human resources (HR), benefits and workers' comp. Choose your own policy if you want control of class codes, claims and your experience mod (the score that adjusts your premium for claims history). Either way, have coverage in force at closing, because the seller's PEO coverage may not follow you. This guide is for buyers whose new company used a PEO, or who are weighing one.

The short answer

In a PEO policy basis, the PEO holds the workers' comp policy and your employees are covered under it. In a client policy basis, you keep your own policy while the PEO runs payroll and HR. Many PEOs use the first setup, and some allow the second.
Do not assume the seller's PEO coverage covers your people at closing. Read the client service agreement, and have your own PEO agreement or your own policy effective at closing.
Joining or leaving a PEO is not an ownership change for experience rating under National Council on Compensation Insurance (NCCI) rules, but special mod rules apply while you are on a PEO and when you leave.
Choose by control, mod history, exit flexibility and what your lender and customers need to see, not by headline price. Compare quotes on the same payroll and job duties.

What is a PEO, and how does it handle workers' comp?

A PEO takes over employer paperwork for a small company: payroll, tax filings, benefits administration and often workers' comp. You and the PEO sign a client service agreement and share employer duties. People call this co-employment (see the co-employment glossary entry). Who counts as "the employer" can differ for taxes, workers' comp and employment claims, so read the contract.

For workers' comp there are two common setups:

PEO policy basis. The PEO holds the workers' comp policy and your employees are covered under it.
Client policy basis. You keep your own policy with your own insurer, and the PEO provides other services such as payroll and benefits.

NCCI's experience rating manual has separate rules for each. Some states use independent rating bureaus with their own rules. In four states (North Dakota, Ohio, Washington and Wyoming) the state fund is the only source of workers' comp, so there is no private carrier choice, and state fund policies there do not include employer's liability, so stop gap coverage (an add-on that covers employee injury lawsuits the state fund does not) is usually added. See also workers' compensation insurance.

PEO policy or your own policy: how do they compare?

Use this table to frame your own questions. Terms vary by PEO, carrier and state, so confirm each row in writing.

Question	PEO policy basis	Your own policy
Who holds the policy?	The PEO, with your employees covered under it.	Your company is the named insured.
Whose experience mod drives price?	Under NCCI rules, your last mod from before the PEO for two years, then the PEO's mod.	Your own mod, which usually carries the seller's claims history if you bought the same operation (see how to review your experience mod for errors).
Who decides class codes and runs claims?	Usually the PEO and its carrier. Ask how each role is coded and what claim data you will see.	Your insurer, with your input at audit, and your own program.
Your protection under workers' comp law	Depends on how the PEO's policy covers you and on state law. Ask whether you keep exclusive remedy (the bar on most injury suits against you). Get the endorsement in writing and your attorney's view.	You are the named insured on your own policy.
Certificates for customers	Ask how the PEO issues them, including the additional insured and waiver wording your contracts need.	Your broker or carrier issues them under your policy.
Leaving	Set by the agreement's termination terms, state notice rules and the mod rules for leaving a PEO.	Set by the policy's cancellation and renewal terms.

A PEO is not insurance, and price comparisons are rarely apples to apples. A PEO fee bundles services you would otherwise buy separately, so compare the full cost, not only the comp line.

What happens to the seller's PEO coverage when you close?

PEO coverage runs to the PEO's client under the client service agreement. In an asset purchase, your new company is not that client, so the seller's PEO coverage does not automatically reach your workers. Nothing in the usual arrangement carries that coverage to a buyer, so plan on your own PEO agreement or your own workers' comp policy being effective at closing. Ask the PEO to confirm in writing. In a stock purchase, the employer entity stays the same, but the agreement's change of control terms decide whether and how the PEO relationship continues. Read them before you sign (see asset purchase vs stock purchase).

Notice and termination mechanics are state specific. Wisconsin and North Carolina, for example, each have their own PEO notice and endorsement rules (cited below), so confirm the current rule with your state regulator. The risk is a gap: the seller's arrangement ends on closing day and nothing starts. To avoid it, see changing payroll providers without a workers' comp gap.

How does a PEO change your experience mod?

Under NCCI rules, joining or leaving a PEO is not an ownership change for experience rating, and PEO status does not exclude your claims history. For a PEO policy basis:

While you are on the PEO's policy: the insurer uses your most recent mod from before the PEO agreement (or 1.00 if you had none) for two years from the date the PEO's rating starts, then the PEO's mod.
When the arrangement ends: if it lasted more than two years, the lower of your pre-agreement mod or the former PEO's mod applies. If it lasted less than two years, the higher of your current mod or your last mod before the arrangement applies. That mod applies for one year, then your own current mod (or 1.00) takes over.

Other systems differ. Massachusetts, for example, combines leased employees' experience with the client's, and some states have PEO statutes or independent bureaus with their own rules. Ask for the numbers in your state.

A hypothetical example. A buyer's new company had a mod of 1.15 before it joined a PEO. The PEO's own mod is 0.90. After three years the company leaves for its own policy in a state that follows the NCCI rule above. Because the PEO relationship lasted more than two years, the lower of 1.15 and 0.90 applies, so the company starts its own policy at 0.90 for one year, then its own current mod takes over. Had the relationship lasted only 18 months, the rule would compare the company's own current mod with its last mod before the PEO (1.15) and use the higher of the two, so the PEO's 0.90 would not help. The numbers are round and illustrative, and the rating organization decides the actual mod.

Which route fits the company you just bought?

Neither route wins on every point. Use these prompts to sort your own situation:

A PEO may fit if the company has no HR or payroll staff, or you want one vendor for payroll, benefits and workers' comp.
Your own policy may fit if you want control over class codes, claims handling and safety, the company has a clean history you want to build on, you operate in several states, or you want a documented loss history for a future sale (see clean loss history and exit value).
A split may fit if you keep your own policy and use the PEO for payroll and benefits, where both allow it.

Ask your lender in writing whether the loan documents require proof of workers' comp on your own policy or accept the PEO's certificate (see insurance requirements for Small Business Administration (SBA) loans).

If you expect to move later, read the termination terms and the mod rules above before you sign, because they set the price of leaving. Benefits questions belong with a benefits advisor and your attorney (see group health benefits after an asset sale).

What should you ask before you decide?

Bring these to the seller, the PEO and the insurer. Ask for answers in writing.

Policy basis and mod. Is the workforce on a PEO policy basis or the seller's own policy, and whose mod history is used?
Client service agreement. What does it say about change of control, assignment and termination notice?
Closing day coverage. Will the PEO or its carrier cover the new entity on closing day, and from what hour? Does the policy cover it as an insured or alternate employer, and what does state law say about exclusive remedy for PEO clients?
Class codes. How are class codes assigned to each role, and can you review them?
Claims and audits. How will claims and payroll audits be reported to you?
Certificates. How are certificates issued, with the additional insured and waiver wording your customers require?
Leaving. What happens to the mod and to your coverage if you leave in year one, year two or year three, and will the PEO provide loss runs for our employees by policy year if we do?
Employment practices. Does the PEO offer employment practices liability protection, and what does it exclude or limit for us as the client?
Licensing. Is the PEO licensed or registered where your employees work, if your state requires it? Confirm on your state regulator's lookup.

For an inherited policy, see the new owner review of workers' comp. For pay-as-you-go billing, see pay-as-you-go workers' comp.

Can Morrow review our PEO paperwork?

Morrow is an independent insurance agency focused on business insurance. It is licensed in Arizona, California, Colorado, Florida, Georgia, Illinois, Louisiana, Massachusetts, Michigan, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Virginia. Morrow does not run payroll, benefits or a PEO. It can review the workers' comp or PEO documents you inherited, flag gaps against the business you bought, and request quotes for a stand-alone workers' comp policy in states where private carriers write it. In Ohio, one of the states where Morrow is licensed, the state fund is the only source, so a private quote is not an option there. Any terms depend on carrier underwriting, and a quote is not coverage until a carrier binds it. Confirm any broker's license, Morrow's included, on your state insurance department's lookup. If you need benefits advice, employment law advice, or you operate in a state where Morrow is not licensed, look to a benefits advisor, an employment attorney or a licensed agency in your state.

Keep reading

Frequently asked questions

Does the seller's PEO workers' comp cover me when I buy the business?

Do not assume it does. PEO coverage runs to the PEO's client under the client service agreement. In an asset purchase your new company is generally not that client, so ask the PEO whether it will cover your new entity and from what hour, and have your own PEO agreement or policy effective at closing. In a stock purchase the same employer continues, but the agreement's change of control terms decide what happens.

Does leaving a PEO reset my experience mod?

Not as an ownership change. Under NCCI rules your claims history is not wiped because you used a PEO, but a special rule sets the mod that applies for one year after you leave, and it can differ from your own current mod. Other states and bureaus can differ, so ask for the numbers.

Can I keep my own workers' comp policy and still use a PEO for payroll?

Often, yes. NCCI's rules recognize a client policy basis, where you keep your own policy and the PEO provides other services. Whether a given PEO and insurer allow it depends on their terms, so ask before you sign.

Will a PEO's workers' comp cost me less than my own policy?

There is no general answer. A PEO bundles payroll, HR, benefits and workers' comp, and its pricing depends on its own pool, your payroll and your job duties. Compare quotes on the same payroll and class codes, and the whole bundle against separate services.

What if I buy a business in a state with a state workers' comp fund?

North Dakota, Ohio, Washington and Wyoming are monopolistic states, so the state fund is the only source of workers' comp. How a PEO works there is a state-specific question, so ask the PEO, the state fund and your attorney before closing.

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.

PEO vs Your Own Workers' Comp Policy After an Acquisition