What is an Employment Agency Bond?
Employment agency bonds are a subset of the broader license bond category that must be filed with the government agency (city, county, or state) responsible for regulating employment agency activity in the agency’s jurisdiction as a condition of licensure for most employment agencies. Many states handle employment agency licensing directly, while others allow local municipalities to regulate and license employment listing agencies.
Employment agency license bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as an employment agency license bond, will also be referred to as the “surety company” or the “bond company”. Employment agency bonds refer to the staffing agency as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is an employment agency bond required?
Employment agencies are required to purchase license bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from an agency breaking labor agency law. The surety company provides the government a guarantee (the surety bond) that the prospective employees and employers to whom a licensed employment agency solicits services will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the employment agency license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, employment agencies are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Employment agency license bond violations triggering a bond payout may include an agency failing to comply with licensing requirements or fraud or incompetence of the employment agency in regards to prospective employees.
How much does an employment agency bond cost?
Employment agency license bonds generally cost around 1% of the bond limit with a minimum premium of $100.00.
Example: $10,000 Employment Agency Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|680 or above||1.0%||$100|
|650 - 679||1.5%||$150|
|499 or below||10.0%||$1,000|
Is a Credit Check Required for Employment Agency Bonds?
Credit checks are required for most employment agency bonds.
How does the wording in the bond form impact the cost of an employment agency bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and employment agency(principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the personnel agency via higher bond premiums, stricter underwriting or collateral. The primary text to consider in an employment agency license bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 employee leasing agency bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Employment agency bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the contractor and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the contractor failing to pay premiums due and/or claim payouts. Employment agency bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Employment agency bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.