Professional Employer Organizations (PEOs) and Workers' Compensation

What is a Professional Employer Organization (PEO)?

A Professional Employer Organization (PEO) is a company that provides bundled employment services including human resources management, payroll processing, tax filing, employee benefits administration, and workers' compensation insurance. When you work for a company that uses a PEO, you enter into what's called a co-employment relationship where both the PEO and your direct employer share certain employment responsibilities.

As of 2025, California is home to 4.3 million small businesses, with nearly 99% classified as small businesses. Many of these employers use PEOs to manage complex California employment laws, including workers' compensation requirements.

Joint Employment Liability Under Labor Code Section 2810.3

California Labor Code Section 2810.3 establishes joint employer liability between client employers and labor contractors (including PEOs). This law is critical for injured workers because it ensures that multiple parties can be held responsible for workers' compensation coverage.

Key Provisions:

• A "client employer" shares legal responsibility with its "labor contractor" for wages and workers' compensation coverage
• Joint liability applies when an employer has 25+ employees AND uses 5+ workers from a labor contractor
• The client employer cannot shift workers' compensation liability to the labor contractor
• These protections cannot be waived by contract

2025 Precedent Case: $1.3 Million Penalty

In a recent precedent decision, the California Labor Commissioner upheld two citations against an employer for operating without workers' compensation coverage. The employer had contracted with PEOs for workers, payroll services, and insurance, but the PEO's workers' comp "coverage" was bogus. The employer was held liable for over $1.3 million in penalties for operating without valid workers' compensation coverage.

This case reinforces that employers cannot avoid liability by simply hiring a PEO - they must verify that actual, valid workers' compensation coverage exists.

New Worker Protection Laws Effective January 1, 2026

Several new California laws strengthen protections for workers, including those in PEO arrangements:

SB 847: Workers' Compensation Fraud Prevention

Makes it easier for the state to collect from employers who fail to provide workers' compensation coverage, ensuring injured workers receive the benefits they're entitled to.

SB 261: Enhanced Wage Recovery

Increases employer accountability for unpaid wage judgments with penalties up to three times the amount owed if not paid within 180 days.

SB 294: Workplace Know Your Rights Act

Requires employers to provide employees with standalone notices regarding workers' compensation rights, immigration protections, and other workplace rights by February 1, 2026.

SB 216: Contractor Workers' Comp Requirements

By 2026, all licensed contractors must have workers' compensation insurance, even if they have no employees, closing a significant coverage gap.

California Workers' Compensation Costs

California ranks as the 4th most expensive state for workers' compensation insurance. As of September 2025, advisory pure workers' comp premium rates average $1.52 per $100 in payroll - among the highest in the nation.

Many small businesses use PEOs specifically to access group workers' compensation coverage at potentially lower rates. However, this cost savings comes with risks if the PEO's coverage is not properly maintained.

PEO Workers' Comp Considerations:

• When in a PEO arrangement, the PEO is typically the named insured, not your employer
• Your employer may not have control over legal strategy or settlements
• Coverage is shared across all PEO clients, which can dilute policy limits
• California's WCIRB may allow client-specific experience modification tracking

Legal Requirements Under Labor Code Section 3700

California Labor Code Section 3700 requires all employers to maintain workers' compensation insurance. Failure to comply has serious consequences:

• Criminal Offense: Operating without coverage is a misdemeanor
• Fines: Up to $100,000 in state penalties
• Imprisonment: Up to one year in county jail
• Business Suspension: DLSE can issue stop orders preventing business operations until coverage is obtained

For contractors, failure to maintain continuous workers' compensation coverage will result in license suspension, and any work performed while suspended is considered unlicensed work subject to disciplinary action.

Protecting Yourself as an Employee

If you work for an employer that uses a PEO, take these steps to protect your rights:

1. Request proof of coverage: Ask your employer for documentation showing valid workers' compensation insurance
2. Verify the policy: Ensure your employer is listed as an additional insured on the PEO's policy
3. Check for valid carrier: Confirm the insurance is provided by a licensed carrier approved by the California Department of Insurance
4. Report immediately: If injured, report your injury to both your direct employer and the PEO
5. Document everything: Keep copies of all communications about your injury and coverage
6. Seek legal help: If you encounter resistance or denial, contact a workers' compensation attorney