The first issue for small companies is the possibility that, by working with a PEO, the PEO client company becomes subject to both state and federal employment laws that would not have applied prior to engaging the PEO. Quite simply, many employment laws are written for larger corporations and companies with smaller populations are exempted. When a company becomes a co-employer with a PEO, they become a co-employer with a company that often employs thousands of people. Hence, large employer legal obligations and problems with the company’s “former” employees (now co-employees with the PEO) may become their problems as well.
But can the small company be party to such legal issues? Often PEOs, in an effort to attract attention, imply that they cannot. At the federal law level, this may (litigation has not reached this level yet) be true. Interestingly, however, these days many state level employment laws exceed the reach of federal laws in both coverage and penalties. Many of these state laws allow the naming of both individuals and employers’ “agents” as parties to employment law suits. Agents are usually defined as anyone or any business having the ability to impact the work of the employee in question. Hence supervisors, advisors, and co-employers can all be named. Even the national PEO industry website (www.napeo.org), although not unequivocally, warns about this possibility.
While a significant employment law charge is rare, it only takes one to put you out of business. A mid-size employer in the DC metropolitan area recently went to court on a sexual harassment charge; it lost. After already spending the entire business unit’s profit for the year on defense, the judgment might bankrupt him. The chief executive continues to spend resources – time, money, energy – on an appeal while simultaneously talking to bankruptcy attorneys.
But this could never happen to a company with a PEO, right? Wrong! Remember, the courts rely on the nature of a relationship, not just the technical aspects of employment. If a PEO client is directing work, requiring adherence to policies such as attendance, managing performance including making decisions on terminating employment, an employer/employee relationship is established. And there is no way to engage a PEO without participation of this nature. In other words, if it looks like an employee, it is an employee.
As any savvy CEO knows, it doesn’t matter who’s right or wrong, the costs of handling a situation internally or preparing a defense in and of themselves are an extraordinary expenses for a small business to bear. So buyers beware – if it looks too good to be true – it is!
