Is it legal? Often times companies that are unfamiliar with PEOs or employee leasing, as it is sometimes called, ask themselves if this business arrangement is legal.

In California there have been abuses by companies wishing to "wash" their hands of high and well earned experience modifier through a PEO. Conversly there have been horror stories of PEOs that have written too much bad business and lost their Workers' Comp Carrier in the process. How is this for a phone call..."Dear Mr. Business Owner this is your PEO callling and we have lost our Workers Comp coverage. You might want to call the State Fund, because we no longer have coverage". In response to these issues Rule 4 was created to prevent Workers' Compensation abuses.

Rule 4, or the employee leasing rule, outlines the guidlines that PEOs must follow with respect to policy issuance, data reporting, experience rating, and endorsement requirements.

In 1991, the National Association of Insurance Commissioners issued the Model Employee Leasing Act. It supported the concept of multiple coordinated policies, whereby separate policies, classifications, and experience modifications are maintained for each client employer. In recent years, the growth of this industry and the enactment of state laws have changed the way these arrangements operate.

Click here to see the specific requirements that PEOs must meet.