Nick Ondo, Commercial Insurance & Risk Advisor, Furman Insurance
There is no shortage of Professional Employer Organizations (PEOs) targeting the roofing industry. PEOs are most frequently utilized to help newly established or emerging roofing contractors secure workers’ compensation insurance for their first few years in business. The PEO providers are occasionally re-engaged later, after a roofing contractor experiences a severe injury with their stand-alone workers’ compensation carrier. While PEOs commonly provide payroll services and workers’ compensation benefits to roofing contractors, we find many contractors are not always completely aware of what fees are charged by the PEO for their services and what limitations there can be from a workers’ compensation insurance coverage perspective. This article aims to answer some frequently asked questions about PEOs from roofing contractors.
PEOs, sometimes referred to as employee leasing arrangements, are organizations that were developed to help small to midsize businesses outsource their human resources, payroll, employment taxes and workers’ compensation related functions. For the PEO to provide these services, the PEO becomes the co-employer and essentially leases the employees back to the roofing contractor.
Though the roofing contractor still officially hires its employees, the PEO coordinates business functions as a co-employer and the contractor pays the PEO for its services (often a percentage of total
salaries) as well as payroll for the employees.
Due to the risk of severe injury inherent in the roofing industry from a workers’ compensation perspective, many “stand-alone” workers’ comp carriers are not willing to offer workers’ comp policies to newly formed roofing companies with no performance rating or track record. The PEO market offers a solution to this underserved emerging contractor segment. They also create an ease of business by allowing the roofing contractor to focus on revenue generating activity, outsourcing the back-office related human resources and provide some tax-related accounting functions. In theory, PEOs also assume the liability of adhering to the legal tax and workplace standards as the administrative employer.
While there are various opinions voiced about difficulties in working with PEOs, the two most objective drawbacks of PEOs we commonly observe are the cost structure and the potential insurance coverage gaps for the roofing contractor. Most PEOs administrative fees are charged as a percentage of total payroll (typically 2-5 percent), which can be quite costly as a roofing contractor increases his or her staffing and associated payroll. They will also charge weekly minimum fees, which often exceed cost for weeks with lower payrolls due to production gaps or weather conditions when crews don’t work.
As for the potential insurance coverage gap, only the employees on the PEOs roster are eligible for workers’ comp benefits. Put another way, unless the employer follows the PEOs required steps to notify the PEO of an added employee, the PEO and its workers’ comp insurance carrier will exclude that employee from coverage and then deny any claims. PEOs offer workers’ comp benefits individually to each employee on a roofing contractors’ roster, whereas a stand-alone workers’ comp policy extends to anyone working for the roofing contractor. Stand-alone carriers charge premiums based on processed payroll but will cover
anyone working for the roofing company. Two common scenarios that leave a roofing contractor exposed are:
Case Study #1: There are five employees on the roster for the day and one of the crew members brings a friend or family member to make extra money one day. That additional person does not have workers’ comp coverage. If that person is injured on the jobsite, the roofing contractor would be obligated to absorb all medical, wage loss, impairment benefits, legal fees and future medical treatment for the duration of the injured workers’ injuries.
Case Study #2: The prime roofing contractor that has a PEO for workers’ comp coverage hires a subcontractor who also has a PEO for workers’ comp. If the subcontractor is not regularly updating their PEO roster and one of their employees not listed on the roster is injured, the cost of the claim would rise upstream to the prime roofing contractor. When this claim rises upstream, the prime roofing contractor’s PEO is not obligated to protect their interests, as the subcontractor’s employee is not on the prime contractor’s roster either. In this situation, the prime contractor would be obligated to absorb all medical, wage loss, impairment
benefits, legal fees and future medical treatment for the duration of the injured workers’ injuries.
A further outcome of this second scenario is that the prime contractor will often bring a lawsuit against the subcontractor for amounts that the prime contractor had to pay for the injured worker. Of course, the prime contractor would most likely no longer be using this subcontractor for any additional work.
Both scenarios can result in massive, unfunded and unforeseen financial burdens that could potentially bankrupt a roofing contractor.
The answer to this question will be different for every roofing contractor because it is dependent upon several factors including the size of the workforce, years in business, percentage of subcontractor usage and the owners experience in the roofing industry.
PEOs are often the starting point for a roofing contractor and create an ease of business for firms not well equipped to handle internal payroll, taxes and human resource-related functions. From a risk management perspective, the roofing industry recognizes that a stand-alone workers’ comp policy will protect a roofing contractor from potentially catastrophic uncovered
workers’ comp claims. If you are a roofing contractor and find yourself contemplating this question, reach out to a roofing insurance and risk management expert to help your roofing business consider how best to protect employees and your organization.
Nick Ondo, Commercial Insurance and Risk Advisor, Furman Insurance, Pompano Beach, can be reached at
nick@furmaninsurance.com.
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