How to choose a reliable PEO: 5 steps you can’t afford to avoid

In Goldilocks and the Three Bears, a little girl searches for porridge that’s not too hot, not too cold, but just right. Your search for the right professional employer organization (PEO) requires a similar journey of taste-testing to find the perfect match for your company.

As a co-employer, the PEO you choose will ultimately take responsibility for processing payroll, providing workers’ compensation insurance coverage, providing employee benefits and a host of other sensitive 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 close partner, you’ll need to conduct a thorough analysis of your potential PEO.

Here are five steps you can’t afford to avoid.

1. Check licensing and accreditation 

Reputable PEOs meet a variety of state and federal requirements, so begin your research by making sure the company is accredited, licensed or registered as appropriate and in good standing with these organizations:

  • Employer Services Assurance Corporation (ESAC) – This is an independent agency that reviews the ethical, financial and operational practices of PEOs. It also provides some financial assurance through bonds covering each PEO it accredits. To be accredited, a PEO must provide ESAC with comprehensive information, including audited financial statements, quarterly independent CPA verification of tax payments, benefit plan information and evidence of required employer insurance coverage.
  • State licensing or registration – Most states have an online tool that allows you to verify whether the PEO has an active license or registration, such as the Texas Department of Licensing and Regulation (TDLR).
  • The Better Business Bureau
  • Local and state chambers of commerce

You should check for licensing and good standing in each city and state in which you have employees.

In addition, recently, the IRS established a new voluntary program for PEOs – certified professional employer organizations (CPEO). The certification is the result of a decade of advocating for a federal law that establishes guidelines and a framework for the professional employer organization industry and the payment of federal employment taxes.

Unlike PEOs that are not IRS certified, a CPEO assumes the sole responsibility for federal employment taxes for wages it pays to worksite employees. In addition, the law governing the CPEO relationship allows customers to maintain specified tax credits for which they would otherwise be eligible. It also puts an end to wage base restarts for new and terminating customers – even during the year.*

So before you sign on the dotted line, you may want to ask: Are you 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. Ask for references

A reputable PEO will be happy to share references. Ask for three to five current customers’ contact information, ensuring the list includes a mix of long-term and newer clients. It’s a serious red flag if your potential PEO hesitates over this request or has trouble putting together such a list.

Some questions to ask the PEO’s current clients include:

  • Why did you join a PEO?
  • How many PEOs did you review before choosing this one?
  • 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?

3. Explore the PEO’s online presence

Look to social media and search engines for a sense of the PEO’s public persona. Check the company’s website, LinkedIn, Facebook and Twitter pages to see what it says about itself, and also search these sites for references to the company’s name, the CEO and the salespeople you interact with.

You’re not necessarily looking for dirt – you’re trying to get a sense of its corporate personality. Social media is a great place to discover if customers have complaints, what those complaints are and how the company responds.

Also look for what the PEO’s employees say about it online, what awards it’s won, if it’s recognized as a leader in the industry, whether it gives back to the community and more. If its own employees and current customers seem satisfied overall, and if the company responds in a positive manner to online questions and concerns, there’s an indication you’re likely to have a similar experience.

4. Assess financial strength and security

If the PEO is a publicly traded company, it should be easy to find its audited financial statements online. Look for the PEO’s annual report on its website or SEC.gov, and verify that information using your favorite investment research website.

If your potential PEO is privately owned, you should request a copy of its latest audited financial statements.

The audited financial statements should show that the PEO has adequate net worth and working capital, including sufficient financial reserves for any loss-sensitive or self-insured insurance plans.

Because these audits evaluate a PEO’s internal controls and accuracy of financial information, groups like the National Association of Professional Employer Organizations (NAPEO) consider it an industry best practice. Several state licensing and registration laws require PEOs to provide audited financial statements.

While independent audits won’t prevent fraud or financial failure, they will include the independent auditor’s opinion whether the PEO’s statements are materially accurate, complete and fairly presented per generally accepted accounting principles.

5. Research the company history

You can find a wealth of information about the PEO online, from its social media presence to news stories to court records. Then supplement your research by talking to a representative of the PEO to verify what you’ve read and find out details that may not be found online. Here are some questions to consider:

  • When was the company founded? How long has the current leadership team been in place?
  • How many years has the company offered PEO services? Are its PEO services its core offering or a sideline to another business?
  • Where is the company headquartered? How many other offices does the company have and where are these located?
  • How many corporate employees does it have?
  • How many clients and worksite employees (i.e., employees of client companies) does it have?
  • What is the company’s mission?
  • What are the company’s values?
  • What credentials does its staff members have?
  • Does the PEO have HR professionals in your company’s key locations? If not, what is their expected response time, should you need them onsite?
  • How does the PEO usually communicate with its clients? Does it proactively contact clients or wait for clients to call?
  • Can you meet the people who will service your account?
  • How many clients does an account representative typically handle?
  • Can you see your service agreement?

Answers to these questions will give you a better understanding of the personality of the PEO and whether your cultures will be aligned in a co-employment relationship. They can also help you determine the stability and sustainability of the PEO.

Learn more about finding the right PEO for your company. Download the free e-book, A Buyer’s Checklist: How to Compare Professional Employer Organizations.