Key Takeaways:

• The New York Third Department for the first time found no coverage on the part of Professional Employer Organizations for a non-leased employee

• Professional Employer Organizations must continue to provide their insurance policy, client leasing agreement, a detailed list of all leased employees, and testimony regarding the same in defense against workers’ compensation coverage claims

• The Third Department did not comment on whether Professional Employer Organizations must additionally ensure that their clients obtain and provide coverage to their non-leased employees

As we continue spinning around on this big blue marble, the landscape of how much workers’ compensation coverage Professional Employer Organizations (PEOs) provide to underlying employers keeps evolving. While the Third Department’s 2021 decisions in Gaylord and Cardona led to multiple victories on behalf of PEOs on the issue of covering unleased employees, it admittedly created an arduous standard to follow: Notably, finding against the PEOs in each of those respective cases.

At long last, the Third Department has issued a win for PEOs on the issue of coverage for a non-leased employee that should serve as ammunition against these claims in the immediate future. In Brown v. Buffalo Transportation (December 2023), the Third Department fleshed out its own standard as created in Gaylord and Cardona. First, a brief history of the claim put as succinctly as possible: As we have seen time and time again, the law judge initially found claimant was an employee of the underlying employer and, therefore, covered by the PEO’s policy, and this was affirmed on appeal. Following this affirmation, the Third Department issued its rulings in Gaylord and Cardona, causing the PEO to seek reconsideration via an additional appeal. Lo and behold, the board actually reversed its prior affirmation, noting that the totality of the record supported the notion that claimant was non-leased and, therefore, not covered by the policy under this new standard.

This brings us to the Third Department’s ruling in Brown; first, they clarified that the board was well within its right to reverse course given its continuing jurisdiction under Section 123. As to the merits, the Third Department ultimately found that the PEO satisfied the prongs of Gaylord by providing the policy, client leasing agreement, list of leased employees, and testimony on behalf of the PEO. Notably, while some deficiencies were found pertaining to the comprehensiveness of the list, the testimony provided was sufficient to overcome said issues. Ultimately, given the Gaylord standard was met, the Third Department affirmed the decision to find that the non-leased claimant was not covered by the PEO policy.

While this is a great step for PEOs in New York, the waters remain choppy; as we have commented on previously, recent board panel decisions continue to set forth an additional obligation on the part of PEOs to ascertain a client’s compliance with providing workers’ compensation insurance for non-leased employees. Without evidence of any such efforts to determine whether coverage was obtained – along with satisfaction of the other requirements as stated – the board will simply find the claimant a covered co-employee of both the PEO and its client.

Of course, the Third Department in Brown made no mention of this additional requirement, so it remains to be seen how this will impact the board’s decision making from here on out. Going forward, relying upon Brown will be a key first step in defending against these coverage claims. In the interim, hypervigilance on the part of the PEOs to satisfy these requirements remains crucial in this journey to finally establish proper PEO coverage.