What to Look For When Selecting a PEO

True to form, when an emerging business trend proves itself successful with lots of room for growth and improvement, there are many factions that eventually branch out as a result of that trend. A very concrete example of this is outsourcing, with PEO as the branching faction. The establishment of PEO, or professional employer organization, is one way of stabilizing the outsourcing industry through regulations and enforced compliance.

What is a PEO?

The PEO industry is a business model for outsourcing human resource services. PEOs, also known as employee leasing or staff leasing in some business circles, provide administrative services for tasks such as human resources, the handling of employee benefits, payroll, and workers’ compensations. The industry has consistently experienced 20% annual growth over the past decade as state and federal regulations continue to grow and become more complex. Particularly in specific states such as California, were labor laws are extremely complex and differ from federal guidelines, California PEO and California employee leasing firms have sustained consistent growth in the marketplace.

In a PEO relationship, the employees of the client worksite are “transferred” to the payroll of the PEO, which in turn reports all wages, taxes and benefits under its state tax identification number. In other words, a PEO firm hires a client company’s staff on paper, thereby making the PEO the employer of record, or Co-Employer, in all legal agreements or contracts. The PEO industry is currently estimated as a $51 billion industry serving an estimated 100,000 small to mid-sized businesses and 2 million to 3 million workers. With strong annual growth rates, about 700 authorized and recognized PEOs offering a wide array of employment services and benefits are operating in North America.

What to Consider When Looking at PEOs

Since its inception, there has been a series of abuses reported in regards to fraudulent PEOs or legal PEOs not performing the agreed services, such as non-payment of employee insurance premiums or misreporting taxes and workers’ compensation rates. In 1991, several laws were passed to protect workers from these abuses. At the same time, the development of such laws opened the doors for more global provisions to be made to ensure that prospective clients are not affected adversely at the other end of the spectrum.

As such, this led to the creation of trade associations that could deal with abuses from PEO companies; associations such as the National Association of Professional Employer Organizations or NAPEO, formerly known as National Staff Leasing Association or NSLA, and the Employer Services Assurance Corporation or ESAC.

NAPEO, in particular, provides prospective clients with a few guidelines to help them seek out the services of a PEO. Some of these guidelines include:

a) Assess the needs of your company first. Since there are now several PEO companies specializing in different branches, it is imperative that you know exactly what your company needs so that you will not have to pay for services that you don’t really need. Determine your HR and risk management needs, and try to compare the services being offered by the PEO companies.

b) Meet every potential PEO provider. Although there seems to be a lot of PEO companies that are willing to provide you with internet based communication, it will be best that you try to meet these people so that you can gauge their legitimacy and their capability to perform the tasks you need. Other gauges of legitimacy may include:

i. Professional references from clients and colleagues

ii. PEO background – you can check whether the PEO has a history of business competency, actual business certification, permit to operate in the state or country they are based, affiliation to the NAPEO or ESAC, etc.

c) Review the written agreement thoroughly, and preferably have the company’s retained lawyer give you a read-through. There is a difference between a verbal agreement and a written contract. Make sure that you know exactly what you are signing, and if you have any questions about certain policies or feel that the contract should be giving you more, then ask your lawyer (or the PEO) company.

A professional employer organization can certainly be a boon to many companies, but only if yours really needs the services offered, and you have thoroughly checked the contract. Make sure that you are getting what you want and that there are no hidden costs that you are unaware of. If everything is fine, then PEOs can save you a lot of money in providing professional help in areas of employment in which you either lack the skills to carry out properly, or would cost you too much to set up a department to handle.


Ari is the Director of Marketing at CPEhr, a leading Human Resources Outsourcing and Professional Employer Organization. CPEhr specializes in labor law in California, and provides a comprehensive HR service package for employers. This includes: HR compliance, tra...

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