What PEOs Need to Ask Prospective Clients

What PEOs Need to Ask Prospective Clients

Philip A. Toomey, Esq.

Tough Questions Regarding Harassment

Surprisingly, when conducting due diligence of prospective clients, few PEOs ask the really hard questions about harassment questions that can help assess risk and take proactive steps to protect the PEO’s core business. Understandably, the prospect of adding a new client to the roster can tempt anyone to turn a blind eye to potential landmines. However, adding the wrong client can irreparably damage everything the PEO has built. Asking a few critical questions before signing the deal can identify problem clients and minimize risk.

Let’s look at three critical questions a PEO must ask in the area of sexual harassment and why they are important. As background, remember that sexual harassment can be cross-gender, same gender, or because of sexual orientation. In certain circumstances, liability is absolute. Finally, punitive damages are frequently awarded to successful plaintiffs, and there is no insurance for punitive damage awards.

PEO Liability for Sexual Harassment

Often an out-of-compliance client will outsource its workforce in an effort to “clean up” its affairs. Their problem now becomes the PEO’s problem. The risk inherent in this offload doesn’t often receive adequate attention. Many times, PEOs rely on indemnification or split supervision responsibility clauses in the client service agreement (CSA) as protection. This reliance is misplaced.

While the CSA may spell out expectations between the PEO and the client, if the law imposes a duty, that duty runs to the PEO irrespective of the CSA’s language. Stated another way, because a client is “responsible” under a contract to do or not do something does not mean the PEO will not ultimately be liable. The PEO may end up holding the bag, with a dubious remedy of suing the client for costs and fees expended in defending and settling a matter.

Under current law, a PEO can find itself classified as a “joint” or “dual” employer with the client. If the PEO, by contract or otherwise, maintains any control over the client’s employees, it probably is a dual employer. Once dual employment is established, the harassed employee can look to both the PEO and the client for redress and damages. If the PEO has assumed training responsibilities under the CSA, as if often the case, liability may be absolute.

Best practice dictates that prior to forming the PEO-client relationship, three critical questions must be asked:

  • What preventive measures does the client already have?
  • What issues are percolating within the workforce?
  • What do regulatory agencies already know?

Existing Preventive Practices:
What to Ask and Why

Every employer is under an affirmative duty to have an effective policy designed to root out and prevent sexual harassment. At a bare minimum, the prospective client should easily produce:

  • A current updated written policy;
  • A record of training all employees;


  • Proof that required postings and distributions of information sheets have been made.

To be minimally compliant, the written policy must:

  • Define unacceptable conduct;
  • Make it easy for an employee to report harassment of any nature;
  • Have multiple reporting channels; and
  • Prohibit retaliation for reporting acts constituting harassment.

It is not enough to have a written policy. There must also be effective annual training, especially for supervisors. The definition of who is a supervisor is very broad. Anyone who can effectively recommend action related to hiring, firing, transferring, promoting, rewarding, disciplining, discharging, or taking action upon employee grievances is a supervisor. Do the training records document effective and regular training of the entire workforce? If not, watch out.

A good indicator of poor human resource management is when the basic documents cannot immediately be produced. Beware of the client who is making an effort to offload its human resource problems. Cleaning up these problems will eliminate the profit in the contract and lead to troublesome future relations between the PEO and the client.

Checklist of Dos and Don’ts

  • Do have a legitimate reason for asking for the information.
  • Do ask for information that is absolutely necessary.
  • Don’t ask for information that is designed to disclose a disability under state or federal law.
  • Don’t ask for information, except loss runs, designed to discover workers’ compensation history.
  • Do treat the information as confidential and have a written policy to protect the information.
  • For information that may disclose gender, age, or marital status, do have the potential client provide data in a summary format only.
  • Do treat the potential employees or client as applicants for employment with your company. They have all the same protections under state and federal laws.

What is Already There:
What to Ask and Why

Because the PEO may be a dual employer, understanding what has already occurred is absolutely critical. Ongoing problems become the PEO’s ongoing problems.

First, ask whether any complaints have been made, and if so, how each complaint was resolved. Even unsubstantiated, “closed” complaints can resurface to haunt the PEO. What changes occurred because of the complaint? Several courts have indicated that even if a complaint cannot be substantiated, some action, such as additional training, must be taken. The client’s lack of action could signal that harassment complaints are not taken seriously.

PEOs should ask about the client’s exit interview process. Ask to see the checklist. If there isn’t one, why? There is obvious value in exit interviews. Be wary of a client that does not conduct them. If exit interviews are conducted, do they cover working relationships? Were problems disclosed about individuals still in the client’s employ? Were complaints “dropped” because the complaining person left? Were complaints made that were not substantiated? If so, did the complaints focus on existing employees who remain within the workforce?

These questions are hard to ask, but yield practical information. They point the PEO to weakness in the client’s management or lack of follow-through.

If one person is the target of multiple exit complaints, the danger is obvious. Being forewarned is being forearmed. No “form contract” clause adequately addresses this issue. Reliance on contract language is a false sense of security.

Status of Complaints and Investigations:
What to Ask and Why

Equally important is complete disclosure of complaints made to government agencies. That includes, in certain areas, cities and counties. Regulatory investigations may point to ongoing problems that require PEO attention. Without knowing, the PEO can inadvertently assume responsibility to handle investigations because now the complainant is a PEO employee. The CSA must specify who controls and pays for managing any investigation. Equally important is, once a complaint has been made, the employee (and anyone participating in the investigation as a witness) is protected from retaliation. Any adverse job action, including reduction of hours or shift transfers, could be construed as retaliation. What will be done to protect against this type of claim? As a dual employer, the PEO may have to answer for adverse job action over which it exercises little, if any, control.

By asking the tough questions prior to signing the contract, the PEO will have a better grasp on the issues it will inherit. In its status as a dual employer, the PEO will be subject to costs and risk exposure. Evaluating these risks in advance will help it develop a client relationship that is both profitable and long lasting.

This article is designed to give general and timely information on the subject covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how matters relate to their own affairs

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