Whose Employee Is It Anyway: PEOs and Workers' Compensation Liability in New York

In New York workers' compensation, there are many presumptions that come into play in favor of a claimant and in favor of applying coverage from an insurer. One of the steadfast principles in favor of this is the idea that an employer who obtains a workers' compensation policy is presumed to obtain coverage for any and all employees that they employ. This generally places the burden on employers and carriers to show that any exclusions or exemptions would preclude coverage in a particular case.[1]

Most workers' compensation law judges (WCLJs) are proficient in dealing with these simple types of coverage issues, but a recent string of cases has challenged them and the New York Workers’ Compensation Board as a whole. It all hinges on a particular type of employer that is not familiar to many of the judges and does not seem to be familiar to the Commissioners of the Board, either. This is a Professional Employer Organization or PEO.

The idea behind a PEO is that a client company, say a construction firm, leases employees through a PEO instead of hiring them directly. The PEO provides payroll, human resources, benefits and tax administration services on behalf of the employees it leases and also obtains workers' compensation insurance coverage for those employees. This allows the client company to focus on the things that it is good at, like in the construction company example - building things, while the PEO can specialize in the things that it is good at, all the administrative tasks.

A problem can occur when a client company employs people separately or in addition to the employees that it leases from a PEO. Under the employer handbook promulgated by the Workers' Compensation Board itself, it is stated, “If the client firm hires any non-lease employees (and/or wishes to protect itself from the claims of uninsured subcontractors working for it) the client firm must purchase a separate workers' compensation policy to provide coverage to individuals not specifically listed on their contract with the PEO.”[2] In addition, the New York Compensation Insurance Ratings Board has issued rules that direct: “The client is obligated to provide a separate policy for any non-leased workers.”[3]

Despite these directions by state agencies, the board has decided to implement its own rules and regulations. In Matter of Staff Pro, the board included a line of throwaway dicta that had no bearing on the facts of that case and stated “a PEO does not avoid its statutory obligation [to provide compensation coverage] merely by contracting it away … [and] would still be responsible if the client does not obtain a policy.”[4]

As a non-issue, no one appealed this statement because it had no bearing on the case at hand. Subsequently, however, the board has used this newly fabricated legal theory to justify finding that policies taken out by PEOs to cover leased employees are now expanded to cover non-leased employees, even in the face of limiting language inserted into the policies at the direction of state agencies, including the board itself.

There would be far-reaching impacts on PEOs if this holding was allowed to stand unchallenged, as PEOs are not in a position to monitor worksites and will have to implement huge time-consuming and expensive audit procedures resulting in increased costs. Alternatively, PEO’s would have to adjust pricing to include some number of additional employees into their policies to account for the increased risk, adding to increased overall costs. Many PEOs will simply be unable to afford to do business in New York, and client firms will be forced to once again take on administrative tasks that they do not specialize in, thus lowering the overall productivity of the state’s economy. Furthermore, there is a legitimate question as to whether there is a sufficient insurable interest that would allow the PEO to obtain a policy to cover workers that it has no contractual or business relationship.

Recently, the Third Department handed PEOs and their insurers a lifeline. In Matter of Gaylord v. Buffalo Transportation[5], decided in June of 2021, the court held that a PEO bore the burden of showing that a claimant was not a leased employee, and therefore was not covered by a PEO insurance policy containing the appropriate limiting language. Although in that case, they found that the PEO had not met their burden of proof, they dismissed out of hand the board’s reasoning that a PEO policy would cover non-leased employees if the client company failed to obtain a separate policy. In doing so, they laid out several possible options to meet that burden of proof:

1. Provide sworn affidavits that the claimant was not a leased employee.
2. Provide comprehensive lists of all leased employees showing that the claimant was not on the roster.
3. Attach a list of leased employees to the PEO policy provided by the insurer.
4. Establish that they only leased certain types of workers that did not include the claimant.

It is clear that the Third Department was correct in holding that non-leased employees can be excluded from coverage under these PEO policies, and although the options they laid out are somewhat burdensome, they can be met with substantially less cost and effort than the alternative of having to provide coverage to an unknown number of non-leased employees. Most importantly, this decision provides a roadmap for litigating these issues going forward.

PEOs should undertake a thorough review of the documentation that they provide to their client companies regarding covered employees and consider taking such steps as they are cost-effective to show that coverage is limited to a certain subset of leased employees. This may include complete rosters of covered employees be submitted in any controverted claim where the status of the claimant as leased or not is in question and/or that sufficient sworn affidavits be provided to further establish a lack of coverage.

While this area of workers' compensation law continues to be a fluid situation, the recent case law has provided a path forward to effectively litigate these claims in a cost-effective way. These relatively simple changes can be made early and without undue increases in cost or exposure.