By Vance O. Knapp, Esq.*

Dealing with HR issues can frequently be a hassle, especially with having to keep up with all of the various changes in wage and hour, disability, discrimination and employee leave laws, let alone having to deal with employer obligations under the Affordable Care Act and just managing your company’s compensation and benefits programs. There are companies known as professional employer organizations (“PEO”), that will provide some, if not all of these services for your business, and can often times make your business more efficient and save your company money. However, there are risks in entering into “single source” or “full service” human resource outsourcing agreements with these PEOs.

Full service PEOs will not only provide payroll and benefit administration services, but they will also provide complete human resources consulting services including sample employee handbooks, mandatory employment and wage and hour postings. Full service PEOs will conduct workplace investigations of discrimination, sexual harassment and disability claims made by your company’s employees. Some of these full service PEOs may offer employment practices liability insurance (“EPLI”), which will provide your company with insurance coverage for employment discrimination and employment-related tort claims (e.g., misrepresentation, intentional infliction of emotional distress). In theory, this can reduce and eliminate the need for an HR manager or department, but these full service PEOs may prevent your company from taking unilateral personnel action against a problematic employee. Unilateral action by your company could potentially jeopardize part, or all of its EPLI insurance coverage. In other words, the full service PEO may require your company to obtain their consent, before you can fire an employee. In addition, once your company enters into a “single source” or “full service” agreement with a PEO, the U.S. Equal Employment Opportunity Commission and other federal and state labor and employment government agencies will likely view your relationship with the PEO as a co-employer.

As a co-employer, these governmental agencies will consider both entities to be the “employer” for your company’s employees–your company and the PEO will be jointly and severely liable for any alleged violations of employment discrimination and/or wage and hour laws. However, the “single source” or “full service” PEO agreement will likely include an indemnity clause requiring your company to completely indemnify and defend the PEO against claims brought by your employees.

Does this mean that your company should not consider outsourcing some, if not all of its HR functions? No. But, your company needs to perform due diligence before entering into a “single source” or “full service” human resources outsourcing agreement. Some of the issues to consider are:

  • Does your company have an experienced HR professional, not just an office manager?
  • What types of HR functions can your company outsource, e.g., payroll and benefits administration, anti-harassment/anti-discrimination training?
  • What, if any, employee relations functions does your company want to retain or outsource?
  • Does it make sense to use online HR products that can provide some of the typical HR functions (e.g., benefit and leave administration) for a set monthly fee?
  • Are you willing to delegate all of your personnel decisions to a third-party that may not know your company’s culture and values?
  • What is the likelihood that you will need an outside company to conduct internal investigations of your business?
  • What type of input will your company have concerning personnel decisions with the “single source” / “full service” PEO?
  • What are your co-employer/indemnity obligations under a “single source” or “full service” PEO arrangement?
  • Will the PEOs perform all of the services, or will it use other vendors (subcontractors)?
  • Does the PEO agreement automatically renew on an annual basis? How can the PEO agreement be terminated? Are there penalties for early termination?
  • Does your company need EPLI insurance, and if so, in what amounts? What type of coverage?
  • Read the fine print in these PEO agreements, and understand what your company’s duties and obligations are.

*Vance is a partner in the Labor and Employment Law Department at Sherman & Howard L.L.C. He advises and represents all types of employers on labor and employment matters and can be contacted at (303) 299-8162, vknapp@shermanhoward.com; www.shermanhoward.com

© Sherman & Howard L.L.C. (2015).