Key points
- PEOs (Professional Employer Organizations) are partners that take on HR roles, provide and administer insurance packages, and assume worker-related liabilities for client businesses.
- The PEO market has become diversified over the last few decades with large and small players offering varied service packages for specific regions, industries, and client needs.
- A PEO should be able to meet local regulations in whatever jurisdiction you plan on operating in, and have services and insurance packages that meet both your present and future needs.
- Some PEOs are certified by the IRS and/or accredited by ESAC. These benchmarks show that the PEO is compliant in the regions in which it operates, is a responsible taxpayer, is financially solvent, and engages in good business practices.
Professional Employer Organizations (PEOs) have been around for a long time — since the 1960s at least (though no one agrees when exactly they began). They act as business partners with their clients; they become a “co-employer” who is responsible and liable for payroll processing, tax reporting, regulatory compliance, and other Human Resources (HR) functions. In some cases, the PEO can even be a substitute for an internal HR department.
PEOs are also used because they can offer PEO health insurance and benefits packages at rates similar to those of larger corporations, which smaller businesses may not have access to.
The most recent statistics suggest that the financial benefits of PEO are considerable — an average 27.2 percent return on investment annually.
Over time the PEO market has matured, technology has allowed more automation and remote working, and many businesses have globalized their markets. Accordingly, the PEO marketplace has become more complex. The sheer number of PEOs on the market — all with apparently similar offerings — can make decision-making difficult.
Follow the guidelines below when comparing PEOs, and you should be able to find just the right fit for your business.
1. Find out which PEOs cover the regions your business operates in and plans to operate in the future
If the PEO does not cover a state or country you plan on hiring in, they will not be ready to comply with local regulations. This will affect everything from tax reporting, to workers’ compensation, to insurance. In some cases, it may not even be legal for the PEO to operate in that location.
2. Determine if the PEO offers the right insurance coverage for your business
By working with multiple insurance carriers, some PEOs can offer a wider range of insurance options, including health insurance, life insurance, liability insurance, and more. For example, the leading public PEO, ADP TotalSource offers multiple health insurance options for employees.
In addition, some PEOs have professionals who specialize in insurance and can provide expert guidance and advice to help you select the best coverage for your business. They can assist you in understanding the terms and conditions of different policies, and make recommendations based on your specific requirements: For example, they may advise on specific coverage options, adjusting deductibles, and negotiating pricing with insurance carriers.
PEOs can also assist you in managing the administration and compliance requirements of insurance coverage, including enrollment and employee education, claims processing, and ensuring regulatory compliance.
For some industries, insurance coverage may not be a guiding issue and price will be the major decision point. In other industries, such as offshore oil drilling or mining, come with unique risks and may require specialized insurance packages. Many PEOs only work with one insurance company in order to obtain lower premiums through bulk purchasing. If a PEO does not offer insurance packages that suit your industry or cover your region, it will not be a good choice.
3. Learn about the software platform offered by the PEO
Many PEOs offer platforms that allow employees, management, and owners to access services and view their data online. This can be especially useful if you have a remote workforce or many regional offices.
When assessing a PEO platform, it is important to check that the PEO takes cybersecurity and employee personal data protection seriously.
To find out more about how to assess PEO platforms check out our ranking of the best PEO software in 2023.
4. Find out which packages are available
If your business only needs payroll and tax processing in one jurisdiction, and doesn’t plan on needing anything more in the future, there is no reason to pay for unnecessary services. On the other end of the spectrum, you may need hiring, onboarding, offboarding, training, retirement packages, and employee wellness programs in several different states and countries. Find out what is available on the market and narrow down the choices to the PEOs that offer packages that you need.
5. Check online reviews
The best recommendation or warning comes from other customers. Read the reviews and find out what other businesses are saying. Don’t forget to compare apples to apples though; a PEO may be deficient or excel in services that do not affect your region or industry.
6. Consider whether the company is accredited or certified
Working with a certified and/or accredited PEO ensures that your co-employment partner is following regulations and is recognized for maintaining good business practices. The main type of certification for PEOs in the US is through the Internal Revenue Service (read more in our guide to certified PEOs). The main accreditation for PEOs is given by the Employer Services Assurance Corporation (ESAC). Both accreditation and certification are voluntary.
Certified PEO (or ‘CPEO’) eligibility requirements include financial reporting qualifications, bonding, the establishment of the PEO’s area of operations, proof of their experience and background, among other expectations. More details on CPEO requirements may be found on the IRS website.
ESAC accreditation is obtained alongside or in lieu of IRS certification. Accreditation establishes that the PEO is financially viable, that they follow federal and state tax reporting regulations, and that they provide compliant health and workers’ compensation insurance. Some states also accept ESAC accreditation as proof the PEO meets state licensing requirements.
Choosing a PEO solution— the right way
How to choose the right PEO solution — our take
Choosing a PEO solution can feel like the ‘paradox of choice’ — with so many similar-looking options it is hard to work out which one is right for your business. To choose the right PEO solution for you, we recommend you pay careful attention to the proposed service offerings, consider certification or accreditation and carefully read any online reviews of the company.
To find our more about choosing the right PEO solution, check out our top 10 PEO guide for 2023.
FAQ
You should pick a PEO that complies with state and national regulations regarding tax reporting, labor regulations, and insurance in all areas that you already or plan on employing staff. The PEO should have packages available that meet your needs in the present and in the future, at competitive pricing. They should provide software and customer service that are capable and easy to access for employees, management, and owners. A good PEO should also come recommended by your peers. If a PEO meets all of these standards, it will be a good pick as your co-employment partner.
Companies of every size use PEOs, but the size of the company may determine which PEO and which services they use. Smaller companies operating in one state may prefer the local expertise of a Regional PEO (read more in our small business hiring guide).
By contrast, startups hiring remote staff may need a large PEO with flexible options and a strong software platform. Growing companies will look for PEOs that take over time-consuming HR tasks and help them save on insurance and benefits packages. Larger companies may look for a PEO that can operate in many different jurisdictions and help managers to keep track of thousands of co-employees.
