June 17, 2021

PEOs and Coverage for Non-Leased Employees

A Professional Employer Organization (PEO) is a company that enters into a contractual joint-employment relationship with an employer (the “client employer”) by leasing employees to the client employer, with the PEO taking on certain responsibilities as co-employer; usually managing payroll, insurance (including Workers’ Compensation), and benefits.  Specifically with regard to Workers’ Compensation insurance, it has become commonplace for PEOs to obtain “leased employee only” policies, covering only those employees who have a co-employment relationship with the PEO and the client employer.

The NY Workers’ Compensation Board, through a Board Panel decision in Matter of Buffalo Transportation, 2019 NY Wrk Comp Bd. G1743006 (8/20/2019) had taken a hard position that any employee of a client employer, leased or not, would be considered a co-employee and covered by the PEO’s Workers’ Compensation policy.  This was based on an interpretation of Section 922(4) of the NY Labor Law, finding that when there is a PEO agreement, both the PEO and the client employer are considered co-employers for all employees of the client employer.  The Board found the only exclusion to this rule is when the client employer obtained a separate policy to cover non-leased employees.  The Board has since maintained this rule, resulting in extensive unexpected claims and liability for PEOs and their carriers.  This case was appealed.

On June 10, 2021, the Third Department Court of Appeals affirmed the Workers’ Compensation Board in finding a Professional Employer Organization (PEO) and its carrier liable for an injury suffered by an employee not leased from and not enrolled through the PEO.  Matter of Kevin Gaylord v. Buffalo Transportation et. al., 2021 N.Y. App. Div. LEXIS 3730, 2021 NY Slip Op 03644 (3rd Dept 2010).

However, the Third Department took a different approach, despite affirming the Board’s ultimate finding of coverage.  In this claim, the client employer Buffalo Transportation had entered into a PEO agreement, which was in effect on the date of the accident.  The PEO had secured a leased-employee only Workers’ Compensation insurance policy.  This Policy contained an endorsement, which provided coverage “for the workers leased to the client” and that the client remained obligated to secure coverage for non-leased employees.

The PEO and the carrier produced a list of employees that had been enrolled through the PEO and were leased employees.  The Court found that even though the claimant’s name was not on this list, there was the possibility that the claimant was classified under a different job title than that listed.  Further, the Court also found the fact that the claimant was paid directly by the client employer was insufficient to find claimant was not a leased employee.  Notably, the Policy at issue covered “all bus drivers”, and the claimant here was a bus driver.  Finally, the Court found that the list of covered employees was not made part of the WC insurance policy.

Ultimately, the Court found the burden of disclaiming coverage and co-employment relationship is on the PEO and its carrier.  The PEO and its carrier were found liable despite there being no indication claimant was enrolled in the PEO, that claimant was being paid directly by the client employer, and the Policy having contained the leased-employees only endorsement.

The decision appears to leave the door open for additional litigation on the issue.  The Board will likely continue to follow their precedent that all employees of the client employer are co-employees of the PEO.  However, the Court seemed to signal that with sufficient, significant, additional proof and testimony, the PEO and its carrier could be found to not have coverage.  This will likely take an additional appeal to the Third Department in an appropriate claim.

Recommendations based on the Court’s decision are to:

  1. Consider incorporating into the leased-employee policy a specific list of employees covered by the PEO and the policy, as the generic endorsement excluding non-leased employees was disregarded.  This may be a burdensome requirement, depending on rates of hiring and turnover.
  2. The Court seemed to agree with the Board, that if the client employer obtains a separate Workers’ Compensation policy for non-leased employees, then the separate policy would have coverage rather than the PEO and its carrier.  Therefore, it would be a best practice for PEOs to require their client employers to provide proof of WC coverage for any non-leased employee.
  3. In these types of cases, immediately produce the policy, list of covered employees, PEO agreement/client service agreement, and witnesses to be filed with and listed on the pre-hearing conference statement.  Witnesses should include both a PEO witness to testify claimant was never co-employed, and an underwriter to testify regarding the policy.

Brandon W. Sawyer is a partner in the firm’s New York Workers’ Compensation Practice.  If you have any questions, Mr. Sawyer can be contacted at bsawyer@c-wlaw.com.