Working with PEOs: Do you know the risks?

PEO’s (Professional Employer Organizations) comprise a nearly $10 billion industry in the United States. These companies provide valuable services to clients who want to leverage a 3^rd party employer to handle the statutory employer responsibilities as a co-employer of their workers. 

PEOs essentially hire their clients’ workers, thereby becoming their employer of record for tax and insurance purposes, charging a service fee (usually between 4 – 12% of payroll) in return for taking over the payrolling and HR functions of the workers performing services for their clients.  

In recent years many staffing companies have looked to PEOs to help employ the workers they recruit who perform services at client sites. This relationship is a bit more complex that a direct one between a PEO and a client company because there may be three employers rather than two – the staffing company, the client company, and the PEO.

Some staffing companies are attracted to using PEOs because they be able to leverage the PEO’s workers’ compensation coverage at a much lower rate than their company could obtain directly through a broker or through State insurance.  However, many staffing companies that use PEOs are unaware of the risks involved in using these resources to lower workers’ compensation costs.  

Problems occur when staffing companies attempt to obtain a lower worker’s compensation rate by “piggybacking” off of another PEOs insurance policy.  In California piggybacking was barred in 2003, but some staffing companies and PEOs do not understand the complexities of this type of engagement which may be primarily based on saving on workers’ compensation insurance.

Recently, California’s State Compensation Insurance Fund (SCIF) won a case that found a staffing company and a PEO in violation of subverting payment of millions of dollars worth of worker’s compensation premiums.

According to sources close to the case, the damages and penalties could end up costing upward of $300 million dollars – due in part, to Code Section 756 which says an employer is liable for 10 times the amount of premium it avoided paying due to its fraudulent actions.

Because of the potentially ruinous penalties, consult your legal counsel if you are considering engaging a PEO to make sure that the arrangement you undertake is in compliance with federal and state law and that the PEO has a proper arrangement with their insurance carrier. The rules and regulations for employing contingent workers can be complex and it can be easy to fall into non-compliance of them.

Emergent is a trusted employer of temporary and project-based contingent workers throughout the U.S. Our family of companies services are utilized by Fortune 500 companies and small businesses alike. Emergent is not a PEO, we screen and employ the workers staffing companies recruit, looking after employer obligations such as HR, Legal, Risk Management, Payrolling and Worker’s Compensation.

To find out more about how Emergent can help your business today call us at (855) 850-5000 or e-mail us at info@emergent.com. 

The Difference Between a Recruiter and a Valued Staffing Partner

Written by Guest Blogger - Steve Catt

Any good recruiter knows that the key to finding the right contractor for a client is having the opportunity to  talk directly with the hiring manager; gathering information that will give his or her company a competitive advantage while using the opportunity to build rapport and creditability with the client. Yet, the vast majority of recruiters who get this opportunity squander their advantage by asking the wrong questions and by taking the wrong kind of job order.

The problem is that recruiters and hiring managers are trained to think of contractor requirements in terms of years of experience, education, duties, task and responsibilities etc. and not in terms of the specific desired outcome they want to temporary resource to provide. When a company hires a contractor, they bring that contractor in to do something that provides a desired outcome. If the client did not need that outcome, why would they need a contractor in the first place?

But what questions do we ask? Mostly, they are questions that give us no insight into what the client really needs, such as how many years of experience the contractor should have, whether or not the contractor has an MBA etc. But what does it really matter if someone has 8 or 10 years of experience as opposed to 6 or 12 years of experience?!

If you want a real advantage in your search, differentiate yourself from the competition and add real value- start by asking the hiring manager these four key questions:

• What is the desired outcome you want the contractor to provide?
• Who is the contractor providing the outcome for and what are their expectations?
• What happens if the outcome isn’t accomplished by that date it’s required?
• How are you going to quantify that the engagement was successful and that the contractor did a great job?

Once you have the answers to these questions, you have changed the game and you will have a huge leg up on finding exactly the right person to solve your client’s needs. Why? Because you know what the problem is because you took the time to learn the outcome the client wants the contractor to provide!

Now when all the rest of recruiters are asking candidates questions like “Do you have 5-7 years Oracle or or “on a scale of 1-10, how would you rate your Excel skills?”  You are asking your candidates questions such as:

“My client needs a person who can provide this specific outcome, for this type of stakeholder who expects that the following needs to be done within this timeframe or this bad thing will happen and this is how they will quantify success”. Please describe where you have you provided a similar outcome and how would you go about providing the outcome in this instance?”

You will quickly ascertain the players from the pretenders. Also, both your candidates and clients will see you as a partner rather than just another recruiter.

In future, when you present your candidates based on the outcomes they provided and/or can provide in the future, rather than on nebulous skills and education, you sell value as opposed to individuals.

Remember, to become to client’s desired recruiter you need to concentrate on the desired outcome…. 

Steve Catt is a successful entrepreneur and one of most highly regarded staffing professionals in Southern California. Steve's simple, logical approach to helping a client define the outcome they want from every job and then finding the best person to provide that outcome, in the clients environment, has made him the go to staffing partner for companies large and small for nearly twenty years. His latest project, The RiteVu, is revolutionizing the way companies identify, select and manage the contract labor.

Find Steve Catt on LinkedIn at http://www.linkedin.com/in/stevecatt or at www.theritevu.com

Legal Issues That Could Cause Trouble For Your Staffing Business

As anyone who has been in the staffing industry for any length of time knows, the rules and regulations surrounding the industry are complex and change frequently. As well as federal laws, each State has unique employment rules and regulations that make it challenging for staffing companies with limited resources to work across multiple states. Staffing companies that operate in California, New York and Massachusetts in particular, can have their work cut out trying to accommodate the unique rules and regulations of those States. 

Some staffing companies provide solid, compliant solutions for Clients companies where reducing co-employments risks are important, However, the level of employer compliance when employing temporary workers, varies widely from company to company.

Some smaller to mid-sized staffing companies and independent recruiters engage the services of companies like Emergent (www.emergent.com) to serve as the employer of the workers they recruit helping them provide  cost-effective, compliant and lower risk staffing solutions for the temporary workers they supply to Clients. 

Some small to medium size staffing companies attempt to manage back office functions, insurance, payroll funding, and risk management with limited resourcse. Others, often unbenownced to their clients straddle potential misclassification issues by delivering workers on 1099s even though the Client is directing their work on a day-to-day basis.  With these scenarios in mind, here are just some of the key issues that staffing companies need to look out for.  

Discrimination and Background Checks

Discrimination complaints filed with the Equal Employment Opportunity Commission can lead to expensive litigation and costly settlements for a staffing company. In some cases, staffing companies are leveraged by clients as a way to outsource tests or screening functions that may create EEOC issues for them. However, staffing companies must resist pressure from their clients to apply any potentially unlawful or high-risk methodologies which may include screening.

Becoming more popular is the use of publically available social networks and websites to screen candidates, however that can land staffing companies in trouble. Employers may be accused of overlooking the online profiles of people based on prohibited criteria such as race, creed, color, nationality, sex, religious affiliation, marital status, or their medical condition.

Immigration Issues

If your staffing company is placing a foreign national, the staffing firm must address government immigration requirements carefully, because even unintentional violations can have costly repercussions. When starting a job, employees AND contractors are required to prove that they are legally entitled to work in the United States and the staffing company must only accept original documents. Employers must verify the identity and eligibility to work for all new employees. An I-9 form must be completed and kept on file by the employer. 

SUTA Dumping

SUTA dumping is a practice sometimes used by companies doing business in the U.S. to circumvent paying unemployment insurance taxes that may have been increased because of previous experience employing workers with a large number of unemployment claims. If an employer’s payroll is subject to a high unemployment insurance tax rate, the employer sometimes tries to reduce that rate by shifting its payroll to an entity with a lower unemployment insurance tax rate. Some companies get multiple account numbers with a state unemployment insurance agency, and shuffle employees around to the account number with the lowest unemployment insurance rate each year.


Another tactic is to buy a business with a lower unemployment insurance rate and shuffle employees to that other business to pay the lower tax rate. The federal government addressed the issue in 2004, but the practice still occurs – even though it’s highly scrutinized.  

Worker Misclassification

State unemployment insurance reserves have fallen due to the recession which is one reason worker misclassification has become a high priority for government agencies. The IRS has clamped down on Independent Contractor Misclassification, allocating $25 million dollars to indentify misclassified employees.

Many staffing companies engage temporary workers on a 1099 basis because it’s the easiest and ‘cheapest’ way to engage temporary and project-based contingent staff. However, 46% of temporary workers classified as 1099 contractors are found by the IRS to be misclassified. Also, as many as one in three companies fail their worker classification audits.

Staffing companies sometimes face complex compliance issues related to worker classification, and the risks associated with misclassification have increased dramatically – when a  company is found to be in breach of the rules, penalties include back taxes, PLUS interest AND a fine of up to 35% of the total. These penalties can easily stretch into millions of dollars. Defending these cases can take years and also absorb thousands of dollars and a hours.

No hard and fast definition of what differentiates an independent contractor from an employee exists but the IRS 20 point test is a good barometer, included on our article on 1099 misclassification. If independent contractors do not meet one or more of these criteria, they may be more appropriately classified as W-2 employees.

Worker classification audits can be triggered in many ways. An independent contractor might file an application for unemployment benefits or fail to properly report income taxes. Workers might also challenge their own classification if other employees in similar positions received higher compensation or better benefits. The IRS has provided the SS-8 form for workers to submit directly to the agency who are not sure if they are classified properly. Staffing companies and independent recruiters must classify workers correctly to protect themselves and their clients from the risk – although many staffing companies feel pricing pressure the urge to deliver 1099 workers who should be properly classified as W-2 workers should be resisted.

Wage and Hour Regulations

Companies may pressure staffing firms to classify workers as exempt from overtime pay. Staffing firms must resist this pressure as the staffing company – as well as the client - may be liable for the violations.  See our article for more information on wage and hour laws in California.

Emergent reduces the cost and risk of supplying temporary and project-based workers to Clients. Emergent is one of the largest employers of contingent labor in the United States and handles employer obligations such as payroll, tax remittance, human resource management, invoicing, accounts receivable, and workers' compensation insurance at a significantly lower cost. Call (855) 250-5000 or email info@emergent.com to speak with a representative about how we can help your today. More information is available atwww.emergent.com