Choosing the right professional employer organization (PEO) for your company is a huge project.
As a co-employer, the PEO you choose will ultimately take responsibility for payroll processing, providing workers’ compensation insurance coverage, providing an employee benefits package and a host of other sensitive human resources (HR) and administrative tasks.
A mismatch between your company’s culture and that of your PEO, or partnering with a financially unstable PEO, can spell trouble both for your company and your employees. The internet abounds with stories of PEOs increasing rates without warning or going out of business without paying employees or payroll taxes.
To ensure the best fit possible between your company and this trusted partner, you’ll need to conduct a thorough analysis of your potential PEO, digging deeper than just the PEO’s Employer Services Assurance Corporation (ESAC) accreditation, if any, as well as the PEO’s online reviews and financial statements.
To be a well-informed buyer, get answers to these seven due diligence questions specific to the PEO industry.
1. Are you a certified PEO?
The IRS has a voluntary certification program for PEOs. It’s not a simple process to get certified by the IRS, and not every PEO qualifies.
Here are some of the requirements for companies seeking this certified PEO (CPEO) * designation from the IRS:
- An independent audit of their financial statements
- CPA-affirmed documentation that they remit employment taxes in a timely manner
- Documentation that they have positive working capital
- Background reports of their individuals responsible for employment tax payments
For small business owners, there are several benefits to choosing a CPEO over a noncertified PEO, including:
- CPEOs are solely liable for the payment of federal employment taxes on wages it pays to worksite employees.
- In most cases, your business retains the ability to obtain certain tax credits when in a CPEO relationship.
- When you enter into or leave the CPEO relationship, your wage base doesn’t start over – the CPEO gets to succeed to the wage base of the employees of the customer coming into the relationship – so there’s no longer a double payment of taxes. A company leaving a CPEO relationship would have successor employer status, which means that it does not have to restart the wage base for payment of employment taxes.
So, before selecting a PEO, it can make a difference to find out: Is this a certified professional employer organization?
To learn more about CPEOs, read: What is a CPEO? Here’s your easy-to-understand guide
* The IRS does not endorse any particular certified professional employer organization. For more information on certified employer organizations go to www.IRS.gov.
2. What does your service agreement look like?
Not all PEOs offer the same set of HR services.
The PEO’s client service agreement (CSA) sets out the terms and conditions of your relationship with the PEO. It should specify what employer obligations the PEO is assuming as well as what employer obligations the client is retaining. Looking at the fine print of each PEO’s client service agreement combined with your other due diligence will help you decide which PEO offers you:
- The best service
- The greatest value
- The type of expertise that your organization needs
This will also help you ensure a PEO will deliver on the promises you read about in their marketing materials and that there’s nothing that would prevent you from taking the next step.
When looking at the CSA, are the respective parties’ responsibilities and liabilities clearly laid out? What provisions permit you or the PEO to terminate the contract?
If you come across any terms that are vague or problematic, ask your PEO representative for an explanation.
Also, ask if there are any service offerings that aren’t specifically covered in their CSA. Some PEOs offer support in ways that aren’t easily captured in a legal document, like elevating team performance or succession planning.
3. How much should I expect my PEO service fee to increase each year?
To be sure the PEO can offer you long-term cost savings, find out, on average, how much the PEO’s service fees have increased over the past few years.
The best-value PEOs can keep annual service fee increases down.
If you’re getting low introductory pricing, asking this question can help you avoid surprise PEO cost increases later.
To better understand PEO pricing, read this.
4. Tell us about your EPLI coverage
The goal in asking this question is to find out:
- If the PEO carries employment practices liability insurance (EPLI)
- What coverage your company would gain by joining this PEO
This is important because EPLI can help protect small businesses from the financial consequences associated with a variety of employment-related lawsuits, such as wrongful termination or noncompliance with the Americans with Disabilities Act.
Many PEOs provide EPLI coverage that you would otherwise not have considered. Knowing how much coverage you’re gaining (if any) can help you compare the level of risk management you would get with one PEO versus another.
5. How are healthcare benefits funded?
More specifically, the PEO should answer the following questions:
Is the PEO’s group health plan sponsored by the PEO?
Or would you retain plan sponsorship and fiduciary responsibilities?
Is the plan fully insured, or self-funded?
Under fully insured group health insurance plans, the benefits are provided through a group insurance policy issued by an insurer and the insurer guarantees the payment of claims.
In contrast, under self-funded plans, the employer (not the insurer) is responsible for funding the claims.
What carriers or third-party administrator (TPA) does the PEO use?
If health benefits are provided under a fully insured, PEO-sponsored plan, you will want to make sure the PEO’s insurance carriers are reputable and provide coverage in the areas where you have employees.
If benefits are provided under a self-funded plan, the PEO will typically have a TPA that handles plan benefits administration functions the insurer would typically handle under a fully insured plan.
Is the TPA or carrier authorized to do business in your state?
If it isn’t, the PEO may not be able to provide insurance to employees in that state. If this is the case, how has the PEO addressed this matter with its clients?
6. Can we meet the people who will be servicing our account?
Some PEOs are strictly web-based. Some charge extra to speak with a live representative, while others use call centers. In these cases, you may speak with a different person each time you need help.
Other providers offer fully staffed offices around the country. These PEO companies typically provide more person-to-person service and support. And if you join one with a nearby office, you may have opportunities to meet the PEO’s service team in-person.
It’s important to find a PEO that offers the appropriate level of support to suit your business’s HR needs, so ask to meet the people who will be serving you.
You can also ask the PEOs you’re considering for their “staff support ratio” – the number of the PEO’s service team members to the total number of their client companies’ employees. This can be a good metric to compare the level of service you can expect from one PEO to another.
A PEO that provides one service team member for every 2,000 client employees may be less attentive to your needs than a PEO that provides one service team member for every 200 client employees.
7. Can we speak with some of your clients?
A reputable PEO will be happy to share client references, preferably those in your industry or geographic area. Look into the types of companies PEOs serve. Is there a business on their list similar to your size and needs?
Some questions to ask a PEO’s current clients:
- Why did you join a PEO?
- Why did you choose this particular PEO?
- How has the PEO helped your business?
- What do you wish you had known before you joined the PEO?
- What are this PEO’s weaknesses?
- How long do you plan to stay with the PEO? Why?
You may also find case studies or video testimonials on a PEO’s website and independent client reviews published elsewhere online. Just be sure to read online reviews critically (and even consider contacting the author for more information) if you’re going to make a choice based on what they say.
Selecting the best PEO for your company
The decision to enter into a co-employment relationship and engage in HR outsourcing is not one to be taken lightly.
Also, switching PEOs can be time-consuming, so it’s critical to choose the right PEO the first time.
Still puzzled by PEOs?
The professional employer organization (PEO) option is a fundamental part of HR outsourcing – so why is it so complicated? See how a team of office workers breaks through the confusion to understand how PEOs can offer their business the optimal blend of strategy and support.
To learn more about finding the best PEO that will take your company to the next level, download our free e-book: A buyer’s checklist: How to compare professional employer organizations (PEOs).