Industry Best Practices

A. Basic PEO Requirements Identified as Best Practices
Financially Responsible* - The PEO should have the verifiable financial ability from company (as best demonstrated by audited financials), personal or other sources to assure payment of the ultimate expected loss risk. This is the risk contractually assumed by the PEO under the current workers' compensation policy or plan as determined by actuarially-sound methods for calculating loss development. At the same time, the PEO should also meet all other financial employer responsibilities, including outstanding loss exposure remaining from prior workers' compensation policies or plans.--*Performed by the PEO's WC carrier.
Operationally Responsible - The PEO and its Controlling Persons must have a history of meeting its contractual obligations and complying with all state and federal laws, including state registration and licensing laws, WC coverage requirements, and payment of all employer obligations, including timely payment of wages, payroll taxes, and all amounts due under insurance policies and employee benefit plans.
1. Full Service - The PEO should contractually establish and in fact assume appropriate PEO employer responsibilities and liabilities, including:
a) Payment of wages and taxes;
b) Right of direction and control of worksite employees;
c) Ensuring the provisions of workers' compensation coverage, as required by state law, and proactive loss prevention & claims management services;
d) Sponsoring or co-sponsoring employee benefits;
e) Establishing appropriate workplace employment and risk management policies and procedures;
f) Providing other HR services; and
g) Shared involvement in worksite employee hiring, discipline and termination.
2. Written Risk Management Plan - The PEO should maintain a written risk management plan that is updated at least annually and communicated to all internal employees. The plan should include:
a) Description of key service offerings;
b) Target market demographics (including list of states and size range/types of clients);
c) Sales and marketing strategy to achieve controlled growth;
d) Growth projections vs. track record;
e) Client retention goals vs. track record;
f) Overview of Client risk assessment and formal periodic review procedures; and
g) Overview of risk management strategy.
3. Organizational Structure/Staffing - The PEO should maintain and document that it has adequate internal staff and/or outsourced capabilities, including qualifications and authority appropriate for delivering promised services to target markets in the areas of HR/legal compliance, WC risk assessment, safety and loss prevention, and WC claims management. If some of these requirements are outsourced, the PEO should be able to provide a copy of the service contracts and descriptions of the staff and qualifications of each service provider. Authority should be delegated with clear separation between responsibility for sales and responsibility for Client risk assessment, pricing and termination.
4. Basic Record Retention - The PEO should maintain the following current Client information, including additions and deletions: Client ID#, state, start date and termination date, brief general description of Client operations, number of employees, hazard group rating, and payroll by class code. Records should include a list of terminated Clients for at least the past three years and proof of written termination notices sent to all worksite employees of terminated Clients. Records should be readily available to the WC carrier.
5. Employee Handbook - Handbook should clearly define the employment relationship and set forth key workplace policies and procedures. The handbook should also discuss procedures for claims reporting, return-to-work, general safety rules and safety incentive programs, if any. Receipt of handbook by all worksite employees should be documented.
6. Controllable Business Structure -
a) A PEO should not engage in contractual or other business arrangements (e.g. "piggybacking") that would result in or otherwise appear to provide workers' compensation coverage to Worksite Employees that are not covered by or subject to a client service agreement executed with, or purchased by, a PEO that is a named insured on the policy of workers' compensation or is the sponsor of a duly authorized plan of self-insurance. Without limitation, the foregoing shall apply to any transaction or series of transactions that are either not fully disclosed or otherwise deceptive to the workers' compensation carrier or to the PEO's clients, or the substance of which is insufficient to establish an employment relationship between the Worksite Employees to be covered by workers' compensation and the PEO that is a named insured on the policy of workers' compensation or is the sponsor of a duly authorized plan of self insurance.
b) The PEO should be in compliance with the "single coverage" statutes of states where such statutes exist, and not allow any Clients or worksite employees served by a single business entity (i.e. same federal identification number) to be covered by more than one workers' compensation carrier (i.e. no "split coverage" or "separation of coverage" within a single business entity).
B. Client Service Contract:
A PEO should execute with all Clients a written client service agreement (CSA) that includes the following best practice provisions. If one or more specific provisions are missing from the PEO’s existing CSA, the PEO should incorporate these provisions into the CSA to be used for all new Clients going forward and for existing Clients whenever re-contracting is otherwise required. The PEO should also immediately implement as appropriate the substantive requirements of each of these best practices with all existing Clients regardless of whether the CSA in effect for a given Client specifies the exact best practice wording shown below.
1. Drug-Free Workplace - The CSA should require the Client to cooperate with the PEO’s requirements in establishing and implementing a drug-free workplace policy or program as permitted by applicable state and federal law or collective bargaining agreements.
2. Effective Employment Date - The CSA should provide a specific procedure for establishing the beginning date of employment for existing worksite employees and also delineate when all future hires are deemed to be co-employees of the PEO.
3. Termination - This provision must give the PEO the specific right to promptly terminate a Client for:
a) Failure to pay for PEO's services;
b) Failure to properly report all time worked and wages of worksite employees;
c) Failure to disclose key information regarding the nature of work duties, business operations and locations of workers;
d) Changes in business operations, financial conditions or workforce that would materially change the cost and/or risk of providing the promised services; or
e) Non-compliance with terms of the CSA or workplace policies related to employment practices, safety and return-to-work programs, or timely injury reporting.
4. Notice of Termination - The CSA should include a statement that in the event of Client termination, the PEO shall provide all worksite employees with immediate written notice of termination.
5. Client Cooperation and Compliance - The CSA should have a requirement that the Client cooperate with PEO in implementing and enforcing workplace safety and risk management policies and require Client's compliance with applicable state and federal OSHA regulations.
6. Records and Worksite Inspection - The CSA must provide the PEO and its workers' compensation carrier the right to inspect the Client's records and worksite to verify job duties and compensation of employees and to verify compliance with safety requirements during the term of the service agreement, as well as the right of the WC carrier to audit the Client's records and worksite for up to one year after the end of any policy period, even if the CSA has been terminated.
C. Client Risk Assessment:
PEOs deemed to be following best practices are those that have established and consistently follow a written risk assessment plan, as outlined below:
1. Written Carrier Notification Procedures - The PEO should establish and consistently follow written procedures for: a) identifying Clients requiring WC carrier pre-approval and documenting the decision, and (b) timely notifying the WC carrier of Client additions, deletions, and new worksite locations.
2. Segregation of Responsibility and Authority - There should be clear and meaningful segregation of responsibility and authority between sales and Client risk assessment/pricing, including workers' compensation insurance and related services.
3. Sound Risk Assessment for New Clients - The PEO should consistently follow sound risk assessment procedures for new Client acquisition including:
a) Requiring a workers' compensation information form (i.e. application) acceptable to the WC carrier that requests at a minimum:
(1) A description of the business operations, adequate for determining nature of WC risk, of all related companies (with tax IDs) and states of operations;
(2) Estimated wages, number of employees, job/position description, and state by class code and copies of tax and/or payroll reports used to verify wages;
(3) Location address of any worksites with a concentration of 100 or more employees;
(4) Three years of loss runs; if unavailable, three years of OSHA logs;
(5) Copy of OSHA worksite citation reports, if any;
(6) Copy of prior WC carrier policy declaration sheet, if available;
(7) Copies of any existing safety manual or policies, if available;
(8) Copy of drug-free workplace policy or program, if available; and
(9) Copy of policy and procedures for pre- or post-employment background investigations of New Hires in positions with significant risk exposure, if available.
b) Comparing the nature of each prospective Client's business with a prohibited list of high risk hazard classes before giving further consideration. Such list shall conform with any carrier-provided prohibited list. In the absence of a carrier provided list, the PEO shall maintain an internal prohibited list that is reasonable and demonstrably compatible with the expertise of the PEO's loss prevention staff or contract service providers.
c) Identifying potential contingent workers' compensation exposures arising from uninsured subcontractors.
d) Obtaining a site assessment report as appropriate for the level of risk exposure and acceptable to the WC carrier.
e) Using NCCI Basic Manual and SCOPES Manual to verify accuracy of all class codes in view of the description of operations and the site assessment report.
f) Confirming the accuracy of estimated wages by class code by comparing wages reported for the prior policy period with wages reported on state/federal employment tax reports. Confirm the accuracy of data submitted by the prospective Client with the Client's actual first payroll.
g) Submitting for WC carrier pre-approval, as required by carrier agreement, if prospect is in a carrier-defined high-risk category.
h) Evaluating the prospective Client's accident frequency for each of the three most recent years using loss runs and/or OSHA 300 logs to look for trends and evaluate all losses over $25,000, and to determine the risk management practices that could be used to reduce frequency.
i) Obtaining a credit report, financial statement, or performing some other form of financial risk assessment to determine the financial stability and credit worthiness of the Client.
j) Following established risk assessment criteria approved by the WC carrier to make final risk assessment decisions as well as to formulate any special safety and risk management requirements to be included in the client service agreement.
k) Maintain assessment documentation on all prospective Clients whether approved or declined for at least the previous 6 months.
l) A PEO that is planning to acquire another PEO or the Clients of another PEO should inform its workers' compensation carrier in a timely and accurate manner of the material aspects of such acquisition and obtain prior approval of the carrier if the acquired risk is to be covered by the PEO's current carrier during the current or subsequent policy periods. The PEO should begin implementation of its risk management best practices program on a going-forward basis at the acquired Client worksites, as appropriate for each Client's risk exposures and prior accident history, within 60 days of the date of acquisition. Without limitation, "acquisition" includes acquisition of all or part of the ownership interests or assets of another PEO, the assignment of client service agreements, mergers, consolidations or other types of acquisitive reorganizations, and options to acquire any interest in ownership or assets of another PEO.
D. Loss Prevention Management:
Best practices include having established and consistently implemented a sound, written workers' compensation loss prevention management system consisting of the following elements:
1. Compliance with Loss Prevention Requirements - The PEO must establish and follow written procedures for requiring the Client to comply with requirements that are considered to be “critical” to the continued acceptability of the Client. The procedures should include a description of the methodology for: (a) communicating requirements to the Client, (b) establishing target dates for compliance, (c) taking the appropriate action if the Client fails to comply, and (d) documenting the action(s) taken.
2. New Client "Needs Assessment" - The PEO must establish and follow written procedures for conducting a "needs assessment" of each new Client and produce a service plan that is consistent with the needs assessment. This assessment should consider the Client's operational exposures, controls and loss history as well as compliance with any state or federal safety regulations. It should also consider any Client request for specific service and any loss prevention requirements included in the CSA. The procedures must include how the assessment and service plans will be documented and used. The service plan should include a description of any visits that are to be "standard operating procedure" such as "conducting an annual worksite survey of all clients in Hazard Group II or greater.
3. Providing Appropriate Loss Prevention Services - Written procedures must be established and followed for delivering loss prevention services to the Client consistent with the service plan. The procedures must include a discussion of how service delivery is to be documented and how the documentation is to be maintained.
4. Accident Investigation - Written policies and procedures should include a provision requiring investigation of employee accidents when such accidents result in a work related injury and/or illness and subsequently reported as a claim to the PEO. Procedures should describe which accidents will be investigated (medical only, lost time and/or certain types of injuries), the method to be used (telephone vs. on-site), and the form or format documenting the investigation results.
5. Certificate Tracking Confirmation – Where applicable, the PEO should confirm that clients with material contingent workers' compensation exposures have appropriate certificate tracking processes in place.
6. Background Investigations - Where applicable, the PEO should require as part of the service plan and as a provision of the client service agreement that Clients cooperate with the PEO in conducting pre-employment and/or post-employment (with continued employment contingent on results) background investigations, as permitted by law, for job positions with significant exposures such as truck drivers (MVR review), security guards and other high risk jobs.
7. Claims Review - The PEO's Risk Manager should review and document at least monthly claims experience and resulting recommendations for clients with claims frequency or severity issues. Results of these reviews should be used to implement client-specific corrective actions where warranted such as terminating the client, placing the client on a watch-list, providing loss prevention services, or monitoring claims development.
E. Claims Management:
Best practices for claims management mean that a PEO has a written claims management plan, including the following elements:
1. The PEO must establish and follow written procedures to ensure that an experienced claims management person immediately contacts injured workers (or family), who are involved in lost-time accidents over 7 days. The purpose for the contact is to show concern and to help educate them regarding their rights and benefits under workers’ compensation law to help prevent unnecessary litigation.
2. The PEO must establish and follow written procedures to ensure an experienced Claims Manager reviews open claims with the carrier's claims adjusters to ensure timely and appropriate administration of claims and adjustment of claim reserves. Such reviews should be conducted at least quarterly unless the carrier requires other procedures.
3. Fraud Hotline - The PEO should provide a workers' compensation fraud hotline with a reward for the confidential reporting of fraudulent claims that lead to conviction of fraud, unless provided by the WC carrier or not justified based on risk exposure and PEO size.
4. Claims Analysis – Using carrier generated loss runs and/or an internal claims tracking program, the PEO should monitor and update at least monthly WC claims performance for each WC policy by noting (a) the addition of new claims, (b) changes in the status (open or closed and movement from medical only to lost time) of all claims, (c) the total amount incurred for each claim, and (d) changes in both the amount paid (medical and indemnity), and the outstanding reserve amounts. A brief description of injuries or illnesses and the expected disposition of the claim should be provided for any claims with incurred losses in excess of $25,000, lost time in excess of 7 days, and/or with evidence of claims handling strategies that include pending settlement offers.
5. Return-to-Work - The PEO should establish up-front and communicate appropriately in writing to all employees a specific Return-to-Work program including job descriptions of potential light duty work and compensation and obtain each Client's agreement to participate as required by the client service agreement.
6. Compliance with Timely Reporting Requirements - The PEO should require and monitor its own compliance with timely reporting of all accidents and claims to the WC carrier. Policy should require that employees and supervisors report all accidents on the day of occurrence to the designated worksite manager before leaving work, and all worksite managers are to report claims to the designated PEO claims manager by the next business day to ensure timely centralized reporting of all lost time claims to the WC carrier within three business days of the date of injury unless earlier notification is required by the WC carrier or state or federal law. However, if acceptable to the carrier, the PEO may use the carrier’s lag report for managing this process.
7. Managed Care Providers - The PEO should use managed care providers, where available, to treat injured workers consistent with WC carrier requirements and state law.
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