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Not My Employee – How Professional Employment Organizations Can Protect Against Unnecessary Liability


Not My Employee – How Professional Employment Organizations Can Protect Against Unnecessary Liability

Key Takeaways:

  • New Jersey’s dual employment concept allows the Workers’ Compensation court  to find that more than one entity is an employer.

  • When the only question on a motion for medical  and/or temporary disability benefits is which employer or carrier is liable for benefits, the court rules allow the judge to order one employer to pay benefits without prejudice, subject  to later reimbursement if another party is found liable.

  • Professional Employment Organizations must protect  themselves by having clear guidelines and policies to establish the employees to which they will provide benefits.

During a recent court session, I witnessed a judge enter an order compelling a Professional Employment Organization (PEO) to pay benefits without prejudice for an employee who was in no way associated with the PEO, according to counsel. The attorney, obviously distraught, argued that the PEO was wrongly named in the action and had only recently formed a relationship with the actual employer. The business relationship did not exist during the alleged period of employment. The actual employer had not filed an answer to the claim petition and, thus, was not present in court. Regardless, the judge relied on a provision in the court rules which allowed him to order one employer—the PEO—to pay benefits without prejudice, subject to reimbursement, if the only question on the motion for benefits is who is the correct employer or carrier.

As the above scenario outlines, sometimes when a party does the right thing, it can still be punished by the court. The judge entered an order against the only party present in the action because the actual employer had not answered the claim petition. Based on the dual employment concept and this provision in the court rules, it is imperative that PEOs take necessary measures to protect themselves from potential unjust liability by taking steps to delineate to which employees they are responsible for paying benefits.

The dual employment concept allows the court to find more than one employer for the purposes of providing workers’ compensation benefits. Among other factors, the court can find an employer/employee relationship based on a contract of hire, payment of wages, right to direct and control work, and the ability to hire/fire/recall the employee. Sometimes when a PEO leases an employee to a client, these factors can lead the court to find that both the PEO and the client company could be employers for the purpose of providing benefits. But what happens if the client company hires an employee independent of the PEO and then does not provide that employee benefits? As seen in the scenario here, the judge will likely try to order the PEO to provide benefits to a person who was never its employee.

So how can PEOs best prepare themselves to defend against this situation, you ask. By making it very clear to whom they must provide benefits. Many times PEOs contract with a client company to provide healthcare benefits, payroll services, or another type of service. The PEO and the client company clearly have a business relationship, but the PEO must make it clear that the business relationship does not automatically lead to any of the client company employees being considered employees of the PEO. The PEO should make clear in the contract with a client company which employees it will cover for the purpose of benefits. It should outline how those employees are hired and what work activities fall under the client agreement. The PEO should keep a comprehensive list of employees leased to the client company. It should outline that employees not leased by the PEO are not covered for any benefits.

The judge will look at the above factors in determining who is an employer in a PEO/client company case. While the court rules still give the judge discretion to order a PEO to provide benefits without prejudice if there is a dispute as to who is the correct employer, providing the judge with answers to the above questions will make it much harder for the judge to order a PEO to provide benefits, if all of the factors weigh against the PEO as the employer. If we can provide the judge with a contract that states that only employees who have gone through the PEO employment process are covered, a provision in the contract noting that the PEO does not direct and control the activities of the onsite workers, and show a comprehensive list of all employees covered by the PEO, we will be in a much stronger position to argue against employment than if we simply say “this person is not an employee.”

The New Jersey Workers’ Compensation Act is to be interpreted broadly to provide injured workers with benefits. However, those benefits should come from the correct employer/carrier and PEOs can use the above tips to protect themselves from paying benefits to any employees independently hired by client companies.

Should you have any questions on this issue or how this may impact your business, please contact the following individuals: