Some Questions Raised Re: Big PEO Workers Comp

Barrett Business Services, Inc.(BBSI) is a very large PEO-Professional Employer Organization, also known as an employee leasing firm. Such companies provide Workers Compensation coverage, among other services, to client companies by means of contractual agreements that make the PEO the "co-employer", at least on paper, of the workers of the client company.

Now come reports that BBSI is under investigation regarding how the company reported certain charges associated with its Workers Compensation costs.

California passed a new law in 2014 that prohibited PEOs from self-insuring their Workers Comp obligations. So BBSI entered into what is known as a fronting arrangement with ACE. A fronting arrangement is one where an insurance company that is licensed to write Workers Comp insurance in a state enters into a behind-the-scenes arrangement, typically with a captive insurer that isn't eligible to write Workers Comp. The fronting insurer issues a policy, but enters into a reinsurance arrangement with the captive so that the fronting insurer isn't responsible for paying claims up to an agreed upon amount. So in the BBSI case, ACE was passing back all claims up to five million dollars.

The investigation isn't whether or not this all was kosher--surprisingly, these arrangements are not unheard of, although insurance regulators really don't have a good handle on the practice. The investigation of BBSI involves the question of whether they violated securities laws requiring providing accurate financial information to investors.

See, that's the weird thing, to me. This whole complicated structure of having a PEO provide WC coverage to thousands and thousands of smaller companies, and to do it by means of a fronting arrangement where the insurance company that everyone thinks if providing coverage really isn't--that all likely is done according to the rules. Which leads me to ask the question--who the heck ever decided that such complicated arrangements were such a good idea?

The answer is that no one decided it, really. The insurance industry figured out how to structure these deals in such a way that the insurance regulators never really had a good idea of what was going on, how widespread the practice has been, and how wobbly some of these houses of cards might be--not until the cards collapse, that is.

Now, in this particular case of BBSI, there is absolutely nothing in the published reports that indicate any wrongdoing. Not yet, at any rate. But this early news report does make me recall other situations involving big PEOs that did turn out to be card-constructed housing units.

Time will tell how this one turns out. Stay tuned.