But not always. Back in Seattle, Interwest Insulation was getting along just fine-until the Washington State Department of Labor and Industries decided to conduct an audit. The auditors learned Interwest had not been paying state workers' compensation premiums, and they didn't buy the explanation that the firm's employees were covered by Barrett, which met state standards for self-insurance. An administrative law judge determined that Interwest was the sole employer, liable for $38,453 in unpaid industrial insurance premiums. After the Board of Industrial Insurance Appeals affirmed that ruling, Sonners took it to court and lost. Last June, after five years of legal wrangling, the Court of Appeals of Washington affirmed again. The appeals court noted that under state law, the employer is the one who exercises control over the employees. Co-employers must both exercise control, and Barrett did not. Interwest was in charge of hiring and firing employees, sending workers to job sites, providing materials and directing jobs to be done. State law overruled the contract between the companies. (Although Sonners has since sold the business's assets, he plans to appeal to the Washington Supreme Court.)
Attorney James Harward, who just completed a term as chairman of Utah's professional licensing board for PEOs, notes that state laws in this area are often quirky. "Some states require that the PEO takes some role in hiring and firing," he says. "A lot of states are not up to speed-for instance, they're stuck on who issues the W-2 form." For example, Nevada requires three workers' compensation policies-one for each co-employer and one for both. Utah, on the other hand, requires a master policy and two subpolicies.
So if you're thinking of signing on with a PEO or employee leasing company, have your attorney draft the contract or go over it carefully to make sure all relevant state laws are addressed. And be aware that state laws in this area are still evolving, so you may need periodic updates.