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The Alphabet Soup of PEO’s and EPLI

Keven Steinberg of Steinberg Law • July 10, 2020

Evaluating EPLI Solutions with PEO's

There can be significant advantages when partnering with a Professional Employer Organization (PEO), especially for a small employer that may not have the breadth of HR expertise or the advantage of an entire risk management department.

Perhaps most important to their clients is that PEOs keep up with regulatory changes to ensure compliance and minimize risk to business owners.

This is why it is important to ensure that the PEOs you consider are not only up-to-date on regulations, proactively inform you of regulatory changes, but that they also provide an appropriate risk management system that includes Employment Practices Liability Insurance (EPLI).

Often referred to as EPLI coverage, this insurance protects businesses against an area of United States labor laws that deal with wrongful termination, sexual harassment, discrimination, invasion of privacy, false imprisonment, breach of contract, emotional distress, and wage and hour law violations.

Not all EPLI Policies are Created Equally

Not all insurance products are alike, and neither are EPLI coverages. While the advent of EPLI coverages is still relatively new (compared with traditional insurance products), most insurance brokers still have not heard of such coverage, do not know what the acronym means, and do not know the limitations and restrictions of EPLI coverage.

Thus, it is critical that your PEO know the various EPLI plans which are available and what they cover and do not cover.

Businesses cannot afford to ignore the chance that a workplace offense could put their organization in serious peril. After all, a big judgment for an aggrieved employee, not to mention the cost of litigation, could be devastating. But the right insurance policy could soften the blow. It might even save a business.

Even unfounded allegations can come with a price—which is why EPLI is essential. A business may do everything right and follow best practices and policies, but that does not stop employees from filing lawsuits, especially in poor economic times. The average cost for defending and settling employment law cases is over $150,000.00.

Make Sure The EPLI Policy has the Coverages You Want

In vetting EPLI coverages it is essential to note that standard EPLI policies generally do not include wage and hour claims, such as allegations of non-payment of over-time, missed meal and rest breaks, deficient pay checks, shortchanging employees on tips or failing to pay for time spent checking bags or putting on protective clothing. Other types of claims that typically are excluded relate to the Worker Adjustment and Retraining Notification Act, COBRA, the National Labor Relations Act, the Occupational Safety and Health Act, and the Americans with Disabilities Act.

Therefore, it is critical in choosing a PEO or in choosing between various options of EPLI coverage within a PEO, that the PEO understand that a standard EPLI policy has significant gaps in coverage and in areas where the business/employer is most vulnerable – wage and hour issues.

It is for this reason that in choosing a PEO, to first inquire if the EPLI coverage being offered also has what is often termed as a “wage and hour supplement”. Such supplemental coverage, provides limited coverage for wage and hour claims and such limitations must also be understood. But the important thing to know and to enquire about is whether such supplemental coverage is offered and if not, can it be obtained.

If wage and hour supplemental coverage is offered, be mindful that such coverage can and only covers the cost of defense (legal fees and costs), but does not provide indemnity coverage (settlements or judgments).

Moreover, this type of EPLI or supplemental coverage usually has what is commonly referred to in the trade as “burning limits”. This means that every dollar that the insurance company spends on defense (attorneys fees and costs), there is a dollar less that the business has in available coverage for other claims. Thus for example, if a robust EPLI policy is provided with $1 million of coverage under a burning limits policy, if the defense fees and costs are $200,000, then that leaves the business with only $800,000 in insurance (or settlement or judgment money).

The Importance of PEO Consultants and Your Attorney

Most PEOs do not know about or are not well versed in wage and hour supplemental coverage and its limitations and also are unfamiliar with “burning limits” policies. Therefore, in choosing a PEO, inquiries must be made of them to determine if they know about such intricacies and if not, can they put you in touch with their insurance broker and also, what EPLI products and options are available to your business.

Next, in determining the amount of coverage needed, the key parameters of coverage―what limit, at what cost and how much you must pay before it kicks in—vary significantly by employer size and by what state or region the business is located. Some states and regions are notoriously more litigiously oriented than others; some are more “employee friendly”; and each play a significant role in the underwriting process to determine premiums.

Small companies sometimes have up to $1 million in coverage against employment law claims. But before that coverage takes effect, there is a retention amount (deductible) that the business must first pay. This is often anywhere from $5,000 to 25,000 for smaller policies. It should be discussed with the PEO who is responsible for paying that retention (the PEO or the business).

At the other end of the spectrum, for companies with $5 billion or more in revenues, the median limit purchased is usually $30 million or more, with a retention of approximately $1 million.

Not all PEOs are one-size fits all and neither are EPLI policies. It is therefore critical to ensure that the PEO you choose other than meeting all other business requirements, is well versed in EPLI and supplemental coverages and can and will provide your business with each coverage available to suit your needs. It can and will be very costly to both the PEO and the business if a lawsuit arises where either there is no insurance coverage or not enough coverage.

Protecting Yourself with the Right EPLI Coverage

It can and will be very costly to both the PEO and the business if a lawsuit arises where either there is no insurance coverage or not enough coverage.

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