8 Questions to Ask Before You Choose a Professional Employer Organization (PEO)

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HR overwhelm is par for the course for many small business owners. HR responsibilities are time-consuming, resource-intensive, and downright exhausting. But you don't have to tackle those tasks alone. When you're struggling to keep your head above water, a professional employer organization (PEO) may be the best investment you can make in the future of your business.

A PEO helps you manage the tedious tasks of HR and reduce liability concerns around compliance and taxes. They become an extension of your team, handling everything from payroll and benefits to compliance and risk management.

But with the PEO industry growing at a rate of more than 7% every year and new PEOS entering the market all the time, how do you choose the right one for your small business? Here are 8 important questions to ask as you compare PEO companies:

Questions to Ask a Professional Employer Organization (PEO)

It’s going to take some research and homework to learn the details about the companies you’re looking at, but the payoff will be worth it. While PEOs often appear similar on the surface, the nuts and bolts of how they operate and what they offer vary significantly.

Ask these questions when you’re in the research stage:

1. What kind of company and workforce do you have (industry/size)?

PEOs often specialize in particular industries or company sizes, so it's important to find one that understands your unique needs. For example, if you run a small, blue-collar company, you'll want a PEO that has expertise in that sector, not one that primarily serves larger software firms.

2. What credentials does the PEO have?

Look for a PEO with a proven track record - check how long they've been in business and how many clients they've served. Verify that their financial statements are independently audited and that they have a solid business model in place. You don't want to entrust your HR to a company that might fold in a few months.

3. Is the company certified by the IRS?

While IRS certification isn't mandatory, it does indicate that the PEO has passed rigorous IRS standards. Certified PEOs have passed an annual CPA audit, received quarterly confirmation of tax payments, conducted employee background checks, and met strict IRS requirements. If the PEO isn't certified, you'll need to verify all of these things yourself.

4. What is the pricing model?

PEOs price their services differently, so make sure you understand exactly what you're paying for. Look for transparent, unbundled pricing that clearly lists all fees and prices for add-on services. In general, PEO quotes are comprised of five elements:

• FICA (Federal Insurance Contributions Act - Employers must withhold FICA taxes from employee paychecks and pay them to the IRS. You’re already paying these taxes now, and the PEO will simply pass on the cost to you when they take over the responsibility for payroll. The FICA cost should remain consistent from PEO to PEO.
  
  
• FUTA (Federal Unemployment Tax Act) -  FUTA is also a payroll tax, and it is designed to provide unemployment payments to employees who lose their jobs. Like FICA, FUTA remains consistent based on federal mandates.
  
  
• SUTA (State Unemployment Tax Act) - This is where the quotes begin to vary. Because states determine their own SUTA rates, the rate will be different for a business in Florida as compared with one in California. A PEO that operates in multiple states will charge a different SUTA rate in each state. Rates also vary based on the number of unemployment claims a business has and their turnover rate.
  
  
• Workers Compensation - As you compare quotes, look at each of the workers’ compensatIon codes that you currently utilize and compare them with the rates offered by the PEO. The hope is that the PEO will be able to offer you a cost savings on each of those codes, but that is not always the case. A PEO’s rate may increase due to their number of claims. They will either pass this on to you as the client or charge you a lower rate than they pay. The workers’ compensation fee may also include co-pays, deductibles, and incentives for remaining accident free.
  
  
• Administrative fees - Administrative fees may be charged as a flat fee per employee or as a percentage of payroll. Admin fees can get tricky, however, because they often include value-added service fees which vary widely and may not always be stated up front. Fees may be itemized in the fine print and may be assessed on a per occurrence basis, so always read every page of the quote carefully.
  
  

5. What are their HR credentials?

Does the PEO's HR team have substantial experience in your industry? How do they handle performance reviews, handbooks, separation agreements, and other HR tasks? Make sure their process fits well with your company culture.

6. What is the fine print on their benefits offering?

Look beyond just the pricing - dive into the details of the benefits plans they provide. What carriers do they work with? What types of plans are offered? Will there be annual price increases based on claims?

Remember that PEOs don’t all handle insurance and benefits the same. Some may offer a group plan, while others may offer brokerage services instead. If the PEO does offer a group plan, that doesn’t mean you are automatically eligible, or that you will automatically get better rates. The bottom line is that a PEO group plan will usually help you lower your insurance rates, but take time to talk through all the details with the PEO before you make a decision. 

7.How does the technology platform function?

If you don’t have the resources to purchase and implement an HRIS for your company, you’ll enjoy significant benefits from the HRIS system offered by a PEO. For example:

You’ll have access to a top-level HRIS without the cost of licensing and implementation. 

• The PEO will  cover technology costs such as licensing, maintenance, upgrades, and tech support. 
• You can move payroll, employee records, benefits management, and time records online for easier management and data integration. 
• Employees can update personal information, request time off, complete and sign off on required training, and access insurance and benefits information online through the self-service portal.
• You can automate routine HR processes such as approvals, performance management, and scheduling with reminders and alerts.

8. What do their customers say?

Look for customer testimonials or reviews online. Remember, a case study provided by the PEO can be helpful, but it’s likely not going to show you any drawbacks or flaws. Get real opinions from real customers before you make your decision.

Choose the Right PEO the First Time

If all of that sounds like a lot of research, it is. That’s where we come in. Our PEO Matching Tool is designed to help you narrow down your options and create your short list—no headaches required. Check it out today and find out which PEO company is right for your business!