For years, small businesses have purchased workers' compensation insurance, but few have actually implemented risk management strategies to keep costs down. One reason is that small businesses don't have the expertise in this area or the time to devote to it. Another is that insurance companies are often not equipped to deliver these types of services to micro businesses.
Professional employer organizations (PEOs) have long recognized the importance of workplace health and safety, and risk management has always been a central component of the total human resources solution PEOs provide to small business clients.
Seven years ago, under the guidance of the National Association of Professional Employer Organizations (NAPEO), a set of voluntary risk management professional performance practices was created and put in place through two important performance validation programs — the PEO Accreditation Program, established in 1995, and the PEO Workers' Compensation Risk Management Program, established in 2002. These programs are the respective responsibility of two independent, nonprofit organizations, the Employer Services Assurance Corporation and the Certification Institute (CI).
Jane McCoggins, executive director of both CI and the Employer Services Assurance Corporation, believes the PEO industry understands the importance of establishing ethical, operational and financial discipline, and of following proven risk management best practices. "As the PEO industry grew, its leadership quickly realized the need for independent organizations to develop certification programs to address the unique aspects of a PEO's operations and to provide independent verification of a PEO's adherence to industry best practices and standards," she said. "CI's risk management certification program has helped to win workers' compensation carrier confidence in the program and PEOs."
Rex Eley, one of the leaders involved in establishing the Employer Services Assurance Corporation and the CI, believes the greatest strength of the certification is that it was developed primarily by workers' compensation carriers with their own standards and procedures. Eley noted that the certification board, which approves applications for certifications, is composed of representatives of workers' compensation carriers, PEOs, regulators, and other executives with risk management experience.
Proof of Certification Value
"We applied for our workers' compensation risk management certification in 2003," reported Carl H. Kleimann, president of Euless, Texas-based Odyssey OneSource, Inc. "Since that time, our developed loss ratio has consistently improved, from 66.49 percent in 2002 to 18.25 percent in 2008. Implementing the certification program's best practices has also had a positive and tangible effect on our carrier relations."
Kleimann is also the current president of the CI's Workers' Compensation Certification Board and is a past president of NAPEO, serving from 2001 to 2002. "The 42 certified PEOs are a powerful mechanism for bringing risk management best practices to the small business marketplace. This group currently represents over $13 billion in employee annual wages and $240 million in annual workers' compensation premiums," he said.
Certification of a PEO's risk management practices creates a win-win for all parties — the small business, the insurance carrier and the PEO. Certification gives business owners assurance that their PEO service provider has the capability to deliver risk management results. The payback in health and safety programs comes in the form of improved productivity, fewer insurance and workers' compensation claims, less absenteeism, a decrease in accidents, reduced staff turnover, and higher employee morale, all of which lead to a better business reputation and customer loyalty for the business owner.
In return, worksite employees are rewarded with a safer workplace. Most small business employers cannot afford the full-time services of the occupational health and safety specialists employed by some of the larger companies. Yet workplace hazards are just as common in small businesses as they are in large companies. The certification program provides assurance to employees and carriers that appropriate safety standards are in place and being followed.
What's Ahead
The rising cost of health care directly affects the cost of workers' compensation insurance and will continue to be a burden for small firms. However, a well-planned health and safety program is attainable even for small businesses, and it does not have to be an administrative burden if it is outsourced to a PEO. A business owner with a PEO relationship can benefit from economies of scale for both workers' compensation insurance and healthcare benefits.
The reality is that human resource management involves a lot more than paying employees on time and tracking vacation days. The PEO model enables an estimated 300,000 small businesses to cost-effectively outsource the management of human resources, workers' compensation, employee benefits, and payroll. As a result, business owners are able to retain and attract employee talent and focus on their core competencies to grow their bottom line. As the economy continues to wane and employment compliance gets more complex, the potential for the PEO industry remains promising with high client retention rates, a projected 20 percent increase in revenues for 2009, and the current untapped market now serving two to three million Americans.
Milan Yager is the executive vice president of the National Association of Professional Employer Organizations. He may be reached at myager@napeo.org or www.napeo.org.
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