How To Choose a Professional Employer Organization

A professional employer organization uses a co-employment model. Your company and the PEO share certain employer responsibilities, with the PEO processing payroll, withholding and paying payroll taxes, maintaining workers' compensation coverage, administering employee benefits and providing human resource guidance — if you choose to delegate all these functions.

Co-employment arrangements suit small and midsize companies — your company gets access to knowledge and expertise to create HR policies and practices and offer training and development resources to your employees, as well as Fortune 500-level benefits at lower premiums. Selecting a PEO may even impact your taxes — it uses its own employer identification number, and if its state unemployment tax rate is lower than yours, your tax burden can decrease. (The tax situation with PEOs can be complicated, however, so work closely with a qualified tax practitioner.)

PEOs typically either charge by a percentage of payroll, around 15% of your gross wages paid, or base their fee on the number of employees you have and the services you purchase — usually a flat fee of $150 to $200 per employee per month. Some PEOs charge a one-time setup fee.

Factors and questions you should consider when comparing PEO providers include:

• Pricing and available features — do they provide recruiting and outplacement services?
• What is the minimum number of employees the PEO requires?
• Can some of its services be customized?
• As your business grows, will the PEO service grow with you? What services can you add as you grow?
• Does the PEO offer an online payroll portal or a mobile app? Is there an IT support line you can call if you have technical problems after hours? Does the firm offer live chat in addition to email and phone support?

What else to look for

Check to see whether the company is a member of the National Association of Professional Employer Organizations, the national trade association of the PEO industry. You can use NAPEO's Find a PEO search tool to select a PEO in your state. Determine whether the PEO's financial statements are independently audited by a certified public accountant, whether their risk management practices have been independently certified by the Certification Institute or whether they're accredited by the Employer Services Assurance Corporation.

The ESAC is an independent nonprofit and an official accreditation and financial assurance organization for the PEO industry. The ESAC is managed by a board of directors, including PEO industry attorneys, CPAs and independent directors who make the final decisions regarding PEO accreditation. Earning accreditation demonstrates a PEO’s financial stability, ethical business conduct and adherence to operational standards and regulatory requirements.

Some PEOs qualify for certification developed by the IRS. Certified PEOs have met the strict financial, legal and reporting requirements of the IRS. Working with CPEOs may afford you certain financial protections and tax benefits. The certification program requires a CPEO to post a bond each year, guaranteeing payment of its federal employment tax liabilities and protecting customers by requiring that the CPEO assume liability for wages paid to employees.

Look for PEOs that:

• Have a strong track record and fiscal stability.
• Can meet the unique needs of your business and employees.
• Supply references from other clients in your industry.
• Provide comprehensive support and compliance expertise.
• Offer services and coverages where you do business.
• Are accredited by ESAC or certified by the IRS.

And consider these caveats:

• Does the senior staff have professional training or designations? Investigate the company's administrative and management expertise and competence.
• Understand how employee benefits are funded. Is the PEO fully insured or partially self-funded? Is it authorized to do business in your state?
• How are employee benefits tailored? Determine whether they fit the needs of your employees.
• Review the service agreement. Are the respective parties' responsibilities and liabilities clearly laid out? What guarantees are provided? What provisions permit you or the PEO to cancel the terms of the contract?

Make sure the company you're considering meets all state requirements. In choosing a PEO, you're looking for a firm to help manage facility security and workplace safety risks in a compliant and fair manner. If you plan and choose carefully, a PEO can prove to be a terrific partner for your business, freeing you to focus on your core tasks.