Analysis of the PEO Model Act
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Section 1: Purpose and Intent

What the bill says: This section sets the foundation for the rest of the Model PEO Bill. It provides the statutory reasoning for enactment, which is required in some states. It also defines which state department will be responsible for regulating the industry and assures that existing employee rights are protected.

  • How the PEO industry benefits: Section 1 provides a statutory foundation for the industry as a separately defined business.

 

Section 2: Definitions

 What the bill says: The definition section provides a clear and succinct set of definitions for the PEO industry. It clearly defines the relationship between PEOs, covered employees, and clients. It also makes a lucid distinction between the PEO industry and temporary agencies.

  • How the PEO industry benefits: The Model PEO Bill standardizes PEO definitions and clearly enunciates the nature and limits of co-employment. It clarifies that the client remains responsible for any employer right or obligation not otherwise allocated by the Bill or the professional employer agreement, and removes uncertainty for both the PEO and its clients. By standardizing PEO definitions, opportunities can be expanded to grow markets.

 

Section 3: Rights, Duties, and Obligations Unaffected by this Act

What the bill says: This section provides clear, statutory resolution of four issues: collective bargaining agreements; professional licensing; tax credits and other incentives; and disadvantaged businesses.

  • How the PEO industry benefits: Section 3 clarifies that a PEO arrangement does not affect or alter any collective bargaining agreement. It preserves professional licensing and certification as an employee/client responsibility and protects PEOs from "practice of" limitations (e.g., a PEO does not practice medicine by co-employing doctors). It further allows co-employees to be counted as employees of the client for various tax credits and other economic programs. Finally, it clarifies that a client does not lose any disadvantaged business qualification because of the PEO arrangement.

 

Sections 4-6: Registration, Fees, and Financial Capacity

  • What the bill says: These three sections establish the basic registration requirements. This includes the information the PEO is required to provide and protects this information as confidential. Two or more PEOs held under common control are allowed to register as a PEO Group. The financial capacity for registration is set as working capital of $100,000 based upon an audited financial statement or a bond, letter of credit, or securities of equal value. It allows limited registration for PEOs domiciled outside of the state with fewer than 50 covered employees in the state, provided that the PEO is licensed or registered in another state.
  • How the PEO industry benefits: Sections 4 through 6 provide a rational, limited regulatory structure that will protect legitimate PEOs that are doing business in the state. It limits fees and assures that PEO records are confidential.

 

Section 7: General Requirements and Provisions

What the bill says: This section of the Model PEO Bill addresses the elements of the professional employer agreement. It allocates the rights, duties, and obligations for the PEO, client, and covered employee. It also provides limitation on liability, addresses tax issues, and distinguishes sale of PEO services from the sale of insurance.

  • How the PEO industry benefits: Section 7 provides the PEO employer status with a right of direction and control over covered employees. It clearly defines the professional employer agreement as the governing document for the PEO/client relationship. If duties and liabilities are not allocated to the PEO by the contract or Bill then they remain with the client. It protects the PEO from liability beyond its control, including product, errors and omissions, and workers' liability for the client's product. It also limits new employee liability and assures the state that a PEO is not in the business of selling insurance.

 

Section 8: Benefit Plans

What the bill says: This section states that both the client and PEO are the employer for retirement and welfare benefit plans. It also clarifies that a welfare benefit plan offered to the covered employees of a single, fully insured PEO is not a MEWA, and is exempt from state MEWA licensing requirements. It provides a statutory basis, under small group health law, for a PEO to be considered the employer of all its covered employees of one or more client companies. It also allows a PEO to be self-insured, as long as certain requirements are met.

  • How the PEO industry benefits: Section 8 establishes a state law basis for the PEO to offer retirement and welfare benefit plans, and it allows a PEO plan to be treated as a single-employer plan under state law so that the PEO is not subject to onerous state MEWA laws.

 

Section 9: Workers' Compensation

What the bill says: This section states that the responsibility to obtain workers' compensation coverage will be specifically allocated to either the client or the PEO, and both will have the protection of exclusive remedy.

  • How the PEO industry benefits: Section 9 allows a choice as to which entity maintains workers' compensation coverage. It assures that both the PEO and its clients are protected under the exclusive remedy provisions.

 

Section 10: Unemployment Compensation Insurance

What the bill says: All covered employees are considered employees of the PEO for purposes of unemployment compensation insurance. Upon termination of the professional employer agreement, the client is treated as a new employer without previous experience, unless that client is otherwise eligible for an experience rating.

  • How the PEO industry benefits: This section allows the PEO to report and pay for unemployment compensation insurance using its state employer account number and contribution rate. It also provides that if a client cancels with a PEO, it will be treated as a new employer without a previous experience record unless otherwise eligible for an experience rating.

 

Section 11 Enforcement

  • What the bill says: It prohibits non-registered PEOs from unfairly competing or distorting the marketplace. It allows the regulatory agency the enforcement authority to take quick action against illegal, unauthorized, or fraudulent PEO operations.
  • How the PEO industry benefits: This protects legitimate PEOs by allowing "bad actors" to be disciplined or removed from the market. In the past, action by regulators was after the fact and after the damage was done. This provision allows the regulator to take prompt corrective action to preserve a fair and open market for PEO services.

 

Sections 12 & 13: Severability and Effective Date

What the bill says: These routine sections preserve the remainder of the Bill if any section is found invalid due to state law and provides a date when the act will become effective.

  • How the PEO industry benefits: These sections do not allow state law to invalidate the entire act because of one section.