In today's economic environment, many companies have difficulty hiring and retaining sufficient staff to operate. More small and mid-sized companies without dedicated internal administrative or HR staff partner with Professional Employer Organizations (PEOs) to help offload administrative burdens. In addition to providing HR, benefits, and payroll administration, PEOs often offer Employment Practices Liability (EPL) coverage to protect client companies against employee claims of wrongful termination, retaliation, harassment, discrimination, or other workplace claims.
While client companies benefit from not carrying the entire cost of EPL coverage when partnering with a PEO, they also essentially lose control of how a potential claim is defended or settled and how that may impact their reputation. When establishing a PEO relationship, clients also don't have the opportunity to negotiate the terms of the PEO's EPL policy or limits, making it vital that companies carefully assess the PEO's EPL offerings for any gaps. Specialty policies aimed toward PEOs and staffing firms include unique language and endorsements applicable to the specific exposures within the class.
Still, those are focused on the PEO rather than the client company. Depending on the quality and amount of EPL coverage, client companies may need to maintain additional EPL coverage to ensure adequate protection.
COMMON EPL COVERAGE GAPS
PEOs can help solve administrative issues for many employers, but that doesn't mean it's a one-size fits-all liability solution. Assuming that PEO EPL coverage is sufficient can result in unexpected coverage gaps for the client.
One of the most significant potential exposures is a gap in Workers' Compensation coverage that arises when a PEO's client contract includes a disclaimer that employees not on the PEO's payroll at the time of injury are not covered by the PEO's Workers' Compensation plan. In essence, this language refers to the timeframe between when the client company hires a worker and when the PEO processes the employment paperwork. If an employee is injured during that gap, the PEO may deny the claim, creating an opportunity for the injured party to sue the client company for payment of medical bills and lost wages. A Workers' Compensation gap is also created when a PEO ends a client agreement, which subsequently cancels the Workers' Compensation coverage provided by the PEO.3
EXECUTIVES, HOME OFFICE STAFF, INTERNS/VOLUNTEERS, AND TEMPORARY HELP
A client company may have executive employees or home office staff that fall outside the PEO EPL coverage. This makes it important that the company maintain its own EPL policy to protect against the potential exposure of a claim brought by one executive against another or home office staff not employed by the PEO. In such situations, the company needs to ensure the policy includes third-party coverage that would be triggered if a non-PEO employee were to discriminate or harass a third party. Client company executives also often work under an employment contract, which means the company would be wise to maintain its own EPL policy to ensure coverage if the executive were to file a claim due to a breach of the employment contract. Most EPL policies provide affirmative defense for breach of an employment contract. Still, they don't typically pay any remaining amount due under the contract or cover penalties for failing to pay out the remainder of the agreement. At the other end of the spectrum, another potential gap arises if the client company engages interns or volunteers. The PEO EPL policy generally won't extend coverage to those individuals or those hired directly from a staffing agency by the client to fill a short-term employment need.
Similarly, clients should be aware of what coverage is available when the PEO cannot provide their own employees to fulfill client staffing needs and relies on an outside staffing agency to provide needed staff to a client. Companies should proactively confirm if the PEO EPL covers these new temporary employees, if the client company can be added as an additional insured and if the provision includes third-party coverage. Some carriers offer an endorsement for temporary help that addresses this issue, but it only comes into play if the PEO hires the employees from a temporary firm and the contract exists between the PEO and the temporary help firm - not with the client. This kind of coverage only protects the client company if the temporary employee makes an EPL claim against the client company. It doesn't protect if the temporary employee is responsible for a third-party claim against the client company.
THIRD-PARTY & PEO EMPLOYEE CLAIMS
Client companies should confirm with the PEO that their EPL policy protects them from a third-party claim caused by the PEO employee and filed against the client company. Clients can obtain such protection in an indemnification agreement if not provided by the PEO's EPL insurance. PEO policies may have the option to extend coverage to client companies to protect against a lawsuit brought by a PEO employee alleging harassment or discrimination. However, such coverage is typically limited to defense only, creating another coverage gap that the client company's EPL policy can address.
CLIENT CLAIMS AGAINST THE PEO
Clients must be aware that PEO policies don't cover claims brought by client companies against the PEO itself. Companies that partner with a PEO to handle staffing should understand that if they file a lawsuit against the PEO, the PEO may not be in a position to defend or even pay the claim, making it a good idea for the client to require a PEO to carry Staffing/PEO E&O for wrongful placements.
OTHER COMMON EPL GAPS
In addition to the gaps noted above, EPL policies generally don't cover wage and hour claims, including allegations of non-payment of overtime, missed breaks or meals, inaccurate paychecks, failing to pay out employee tips, or not paying employees for the time needed to put on protective equipment. Even if wage and hour supplemental coverage is offered, such coverage usually only applies to the cost of defense and doesn't pay for settlements or judgments.2 Other kinds of claims commonly excluded relate to OSHA, the ADA, COBRA, the National Labor Relations Act, and the Worker Adjustment and Retraining Notification Act.2
HOW TO ENSURE EPL GAPS ARE COVERED
Gaining awareness of potential coverage gaps is the first step to ensuring all EPL bases have been covered. When stepping into a new PEO partnership, clients would be wise to:
Review the PEO EPL policy and all endorsements before signing a PEO contract. When partnering with a PEO, it's good to evaluate the EPL insurance offered sooner rather than later. Defending against a frivolous claim can be expensive, and ensuring adequate coverage can relieve a potentially devastating financial burden. Often companies are unaware of coverage through the PEO until a claim is filed, at which point it's too late to resolve a coverage gap.
As part of the review, client companies should make sure they understand precisely what a PEO will and will not handle when it comes to client employees, including annual evaluations, performance plans, and disciplinary action. Clients should also confirm who is considered the employer of record. If both the client company and the PEO are documented as the employer of record, then the client company may still have some level of liability from an EPL standpoint. If, after a thorough review, a company decides to sign with a PEO and elects to drop its EPL coverage, it's also important to purchase an ERP policy to protect against claims of any past wrongful acts.
Evaluate all policy language to make sure coverage is sufficient. It's not uncommon for a PEO's EPL policy language to be generic, as it's often applied across many companies. As clients, companies don't benefit from negotiating policy terms or conditions, but reviewing policy language can help a business determine if additional EPL insurance is needed to cover any gaps.1
When reviewing the policy, companies should check to see if it provides coverage for third-party claims such as discrimination or harassment, typically filed by customers or other non-employees. Most Customer Service Agreements (CSAs) will outline which party carries the coverage and who is covered, but if a company is large enough to have subsidiaries, clients should double-check to determine if those employees fall under the policy. Similarly, companies should clarify who is considered a "worksite employee" because some PEO EPL policies may exclude coverage for leased employees or contractors, providing coverage only to the company's work-site employees.
Typically, each PEO client will have a dedicated limit of liability (i.e., $1M), making it important to confirm that the limit isn't restricted by an aggregate limit of liability shared among all the PEO clients. If a shared aggregate limit is included, it indicates the most the PEO will pay during the policy period for all client companies - meaning the policy limits could already be reached even before a specific company's claim is filed.1
While every company hopes never to have to defend themselves against a claim, it's also a good idea to become familiar with the law firm that would serve as defense counsel should the unexpected happen. Third-party claims administrators are generally used, so the ability to negotiate defense counsel is very limited and often restricted to panel counsel. Because EPL insurers often sub-limit defense costs, it's also wise to determine if the policy includes a wage and hour supplement covering defense costs.1
Understand claim notice requirements. It's also critical that companies adhere to the policy's notice requirements because timely notice of a claim helps ensure coverage. Many may not realize that the notice requirements in a PEO EPL policy are often different than in a standard policy. Companies may be required to notify the correct PEO contact of a claim within as little as 72 hours, while a typical policy may allow 60-90 days or another reasonable time period to report a claim. A shorter reporting period is commonly included because communication must pass from the client to the PEO, who then notifies the carrier as the named insured, which makes it a multi-step process.1
Remember, ending a PEO relationship usually cancels the EPL policy. If a company terminates a PEO relationship and only maintains EPL insurance through the PEO, it can create a coverage gap. When thinking about ending a PEO relationship, companies should check the PEO EPL policy's status to confirm when coverage would end and talk to a knowledgeable broker to obtain continuity of coverage through a new EPL policy.1
Companies can't afford to ignore the risk that an employment practices claim could seriously jeopardize their business. A business can do everything right, follow best practices, and establish strong policies, but that doesn't always prevent employees from filing a lawsuit. The cost of defending a claim, paying a judgment, or settling can be devastating. Fortunately, the right insurance policy can soften the blow and potentially save a company's bottom line.2 Any employer considering utilizing a PEO should seriously consider retaining their EPL policy as long as they have non-PEO employees, including executives or managers, home office staff, interns, temporary workers, or volunteers. Such coverage should include defense of breach of an employment contract, third party liability, wage and hour coverage for any non-exempt employees that remain on the client company payroll, and an EPL definition of employee that includes temporary workers.
Weighing the advantages and disadvantages of stand-alone EPL, relying on the PEOs EPL policy, or depending on a combination of two policies, can be complex. Significant coverage gaps can occur if the client's unique needs aren't adequately considered. Deciding what coverage limits are needed within specific parameters and at what cost can vary significantly by employer size, industry, and location. Some states and regions are more litigious or employee-friendly than others, and each of these characteristics can influence the premiums assessed by underwriting. The cost of the EPL coverage is typically derived on a per-employee basis, and that cost is pushed to client companies per the CSA agreement. Typically, small companies will receive up to $1M in coverage with a retention of $5K - $35K, commonly payable by the PEO.2 There are also policies available in the marketplace that cover both in-house and leased employees and include retention reduction incentives as well as additional defense cost limits.
Because EPL policies and PEOs aren't one-size-fits-all, it's important to fully understand the complexities of a PEO relationship. Choosing an insurance partner that understands client business requirements and is well-versed in EPL as well as supplemental coverages needed to close coverage gaps can make all the difference. Contact your local CRC Group producer today to discuss how we can help protect your clients against the devastating impact of an employment practices claim.
- Mike Edmonds is an Assistant Vice President with CRC Group's Seattle office, where he specializes in Cyber & Technology, E&O, Healthcare, and Management Liability as part of the Seattle ExecPro Team.
- Alert: Using a Professional Employer Organization? Check for Employment Practices Liability Insurance, JDSUPRA, April 23, 2021. https://www.jdsupra.com/legalnews/alert-using-a-professional-employer-9345668/
- Evaluating EPLI Solutions with PEO's, PEO Focus, July 10, 2020. https://www.peofocus.com/the-alphabet-soup-of-peos-and-epli
- Workers' Compensation Coverage Gaps When Using PEOs, Cotney Attorneys & Consultants. https://www.cotneycl.com/workers-compensation-coverage-gaps-when-using-peos/