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Professional Employer Organization (PEO) Questions

A professional employer organization (PEO) is a firm that enables its clients to cost-effectively outsource its human resources functions such as employee benefits, payroll and workers’ compensation, recruiting, risk/safety management, and training and development. This is done by hiring the client’s employees and thus becoming an “employer of record” for both tax and insurances purposes. This practice is also known as “co-employment”. Often, people are confused as to whether a PEO is their legal employer or only an administrator, and who would decide their eligibility for insurance.

Below are some of the top questions on the subject answered by legal experts.

I have been terminated within two months of joining a Texas-based company that uses PEO services. How does this affect my commissions as they do not have a structured plan for payouts?

As Texas is an “employer at-will” state, your company can terminate you whenever they want, no matter how unreasonable it may seem, as long as the termination does not constitute illegal discrimination and does not violate the employment contract or company policy.

Also, an employer is obliged to pay you as per the contract and you are entitled to be notified of any change in wages. As for commissions, the employer may limit how commissions are earned and when they are payable even when a written commission plan exists. However, they are obliged to do this in a manner that allows employees to know if they are being paid correctly.

In your case, since the plan was not defined, the Texas Workforce Commission will likely not take a wage claim from you. This means you would probably have to file a suit yourself under the Texas wage laws or as a breach of contract.

Is a client service agreement with a PEO binding if the PEO is not a registered entity in the state where business will be conducted? Is the contract legally binding?

While businesses are not legally bound to be registered in the state, the terms of contract are still legally binding and enforceable. You may file a suit for violation of the client service agreement.

Is the PEO is only an administrator of my employment and the company my legal employer?

If a PEO has been contracted by a company and directs the workflow, it would be considered the legal employer of record. However, if the PEO only manages the human resource functions, and the workflow is directed by the company, then the company is the legal employer of record.

In the event of any misinformation in your credit report about your employer of record, you may contact the credit bureau directly in writing.

If a small business is contracted with a professional employer organization, would they still determine the employees’ eligibility for COBRA coverage?

Yes, the small business would determine an employee’s eligibility for COBRA coverage. However, after employment termination, employees are entitled to COBRA coverage for a minimum of 18 months.

Is it legal for a PEO to offer different health plans to employees of each of the different companies they service?

As each of the companies is a separate entity, they are within their rights to set their own policies and negotiate for different terms. This is similar to how unions may have different terms of employment from company to company. Therefore, there is no law prohibiting the PEO from offering different health plans.

If you are working for a company that outsources certain functions to a PEO, you may benefit from understanding the laws that govern your contract. For this, get in touch with a legal expert on the subject.
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