What is a Professional Employer Organization Bond?
Professional employer organization bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating labor and employment activity in the organization’s jurisdiction as a condition of licensure for most professional employer organizations (“PEO’s”). PEO’s provide outsourced services to employers to help simplify tasks like recruiting, training, and employee benefits.
Professional employer organization 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 a PEO bond, will also be referred to as the “surety company” or the “bond company”. PEO bonds refer to the organization as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Professional Employer Organization Bond required?
Professional Employer Organizations 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 a PEO breaking state statutes and regulations for professional employer organizations. The surety company provides the government a guarantee (the surety bond) that the customers, vendors, suppliers and employees of a licensed PEO will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the PEO 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, professional employment organizations 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.
Professional employer organization bond violations triggering a bond payout may include an organization operating without the necessary licensing, any crime resulting from fraud, deceit, misclassification, and/or misconduct within the scope of the organization’s business, and attempting to use a suspended or cancelled license.
How much does a Professional Employer Organization Bond cost?
Professional employer organization bonds generally cost between 1.5% and 10% of the bond limit.
Example: $10,000 Professional Employer Organization Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|650 or above||1.5%||$150|
|499 or below||10.0%||$1,000|
The actual cost of a specific professional employer organization bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the organization’s license history, experience and creditworthiness.
Is a Credit Check Required for Professional Employer Organization Bonds?
Credit checks are required for professional employer organization bonds. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How does the wording in the bond form impact the cost of a Professional Employer Organization Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and professional employer organization (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 PEO via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a PEO 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 professional employer organization 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. PEO 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 organization 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 PEO failing to pay premiums due, claim payouts, or material changes in the PEO owner’s credit score. PEO 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”). Professional Employment Organization bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.