8 considerations when selecting a professional employer organization

As employment laws, tax laws and health care reform continue to change at a rapid pace, it can be difficult for business owners to keep up. Establishing a co-employment relationship with a reputable professional employer organization (PEO) may be the greatest investment you can make toward realizing success and helping your company to reduce liability with HR-related compliance and liability issues.

If you are weighing the option of outsourcing human resource (HR) duties through a co-employment relationship, here are eight important things to consider when selecting a PEO.

1. The financial strength and security of the candidate company

Does the PEO have a demonstrated history of adherence to the industry’s professional performance practices, including responsible financial management of its business? Verify that the PEO’s financial statements are independently audited by a CPA.

It’s important for PEOs to have audited financial statements for a couple of reasons. First, several state PEO licensing and registration laws actually require it. Because these audits enhance internal controls and accuracy of financial information, groups like The National Association of Professional Employer Organizations (NAPEO) consider it an industry best practice. While independent audits don’t prevent fraud or financial failure, they confirm that the PEO’s financial statements are accurate, complete and fairly presented according to generally accepted accounting principles (GAAP).

If the PEO is a publicly-traded company, it should be easy to find their financial statements online. However, most PEOs are private entities that don’t have public financial statements. These PEOs should be able to provide you with an independent CPA’s verification of their audited financial statements and payment of taxes and benefits.

Another thing to consider is whether the PEO has been designated a certified professional employer organization (CPEO) by the IRS. It’s not a simple process to get certified by the IRS, and not every PEO will qualify. Here are some of the requirements for companies seeking certification:

  • 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

The IRS wants to take a good look at the PEOs it certifies because a CPEO is solely responsible for remitting employment taxes on wages it pays to worksite employees (its client’s employees). If a non-certified PEO fails to remit federal payroll taxes, the IRS may ask the PEO’s client to remit the payroll taxes, even if the client has already paid the PEO. Basically, the IRS wants to be sure the taxes get paid. *

To discover the specific benefits of choosing a CPEO, 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. Their commitment to customer service

It’s important to determine what best suits your business and find a PEO that offers the appropriate level of support. Meet the people who will be serving you. Some companies 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. A dedicated service team can be priceless.

Ask the PEOs you’re considering for their “staff support ratio” – the number of corporate staff members it employs compared to the number of worksite employees (employees of its clients) it serves. This can be a good way to measure of the level of service you can expect.

3. The breadth of their benefit plan options

A PEO whose health insurance plan centers on a state-specific carrier (e.g., Blue Cross Blue Shield of Tennessee) won’t work if you have employees in other states or plan to expand your business outside of that carrier’s network.

Talk to each PEO you’re evaluating about where your employees live currently and where they might be if your company grew into a new city. They can tell you whether they have access to multiple insurance carriers and networks that would accommodate that growth.

4. Their client and professional references

Ask every PEO you research for references from their clients and/or business partners, preferably those in your industry and/or geographic area. Look into the types of companies PEOs serve. Is there a business on that list similar to your size and needs? You want to find a PEO that is helping businesses of all sizes and industries.

You may also find case studies or video testimonials on a PEO’s company 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.

5. The company’s administrative and management expertise and competence

What experience and depth does its internal staff have? Are they familiar with the laws governing your city and state? Make sure the PEO is qualified to handle your business. Ask direct questions to make certain they can adequately handle the specifics of your size, industry and HR needs.

Check up on the PEO’s background, certifications and make sure it is accredited by the Employer Services Assurance Corporation (ESAC). This is an independent agency that reviews the ethical, financial and operational practices of accredited PEOs.

And be sure to find out if the PEO’s HR specialists have strong professional training or designations. You should ask the co-employer to talk to you about their staff’s competence and experience.

6. How employee benefits are funded

Is the PEO’s group health plan sponsored by the PEO? Is the plan fully-insured or self-funded? What carriers or third-party administrator (TPA) does the PEO use? Is the TPA or carrier authorized to do business in your state?

Under a fully-insured group health plan, the employer pays a fixed premium to the insurer and the insurer is responsible for the payment of all claims. The employer has no financial risk other than to pay the premium. In contrast, under a self-funded plan, the employer (not the insurer) is responsible for funding the claims. The employer assumes the role of the insurer in a self-funded arrangement. Self-funded plans will often hire TPAs, or third-party administrators, to handle the plan administration functions an insurer would typically handle under a fully-insured plan, such as the payment of claims.

7. How employee benefits are tailored

Determine if the benefits offered by the PEO fit the needs of your employees. Do you need a rich, full-feature benefits package for your employees? Speak to your employees beforehand so you know exactly what will work for your company. Then, ask the PEO if you (as the client employer) would have input into HR policies. Can you customize their benefits plans and policies to fit your needs?

8. The fine print

Are the respective parties’ responsibilities and liabilities clearly laid out? What provisions permit you or the PEO to cancel the terms of the contract? Does the company carry employment practices liability insurance and what coverage (if any) will you gain via the co-employment relationship?

How can your business benefit?

The decision to enter into a co-employment relationship is not one to be taken lightly, and there are many factors that must first be considered. To learn more, download our free e-book, HR Outsourcing: A Step-by-Step Guide to Professional Employer Organizations (PEOs).

Since 1986, Insperity has specialized solely in human resources management solutions. Click here to learn how our HR services can help grow your business.

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