How to Choose the Right PEO for Your Business by Heather Wood

 how-to-choose-the-right-peo-for-your-businessTake a moment to recall the last vehicle you purchased.  Remember the color, the smell, and the way it felt to drive it off the lot? It was amazing, right?  You found the right combination of model, color, features, and mileage that met your financial needs. That’s an amazing feeling!  Now take a moment to recall how much time and energy it took to find that perfect vehicle.  I’ll bet you didn’t just drive to the nearest dealership and pick a car. You probably did some online research about consumer reviews, features and options, cost, and other factors. You may have talked with friends and family, or someone who was driving a similar model.  You armed yourself with knowledge.
When considering HR managed services companies, how should you choose? According to the National Association of Professional Employer Organizations (NAPEO), there are more than 780 Professional Employer Organizations (PEOs) in the United States. (Car shopping is starting to look better all the time!)  However, your approach to selecting the right provider for your company’s specific needs should be the same as when you’re purchasing a vehicle or making other long-term investments.  For most companies, outsourcing HR, payroll, employee benefits and risk management is well worth investigating.

I tell my clients, “There is a ‘right’ PEO for every business; it is up to you to choose the right partner.” It is important that the partner that you choose makes both business sense and financial sense to you.

Here’s why certification is important.

There are two voluntary certifications/accreditations that you will want to confirm your prospective PEO holds or has applied for: ESAC and IRS certification. Let’s start with the Employer Services Assurance Corporation (ESAC) accreditation, because this will significantly narrow your selection. Out of those 780 PEOs nationwide, fewer than 60 hold ESAC certification.  Similar to the FDIC assurance you’re familiar with in banking, ESAC accreditation means that through independent audits, a certified PEO is held to the highest standards in the industry. Each quarter, those PEOs undergo independent financial audits in order to confirm their good financial standings in conjunction with compliance with regulations and best practices. This allows ESAC to “provide millions of dollars in bonds back to key employer responsibilities.” How that relates to your business, is you are partnered with a financially stable PEO and your payroll dollars are bonded in the case of financial failure.

The second certification is newer: Certified Professional Employer Certification (CPEO), through the IRS. The significance to your business by partnering with a CPEO is that the Federal taxes that have already been paid year-to-date will be recognized by the IRS. This is especially important to those employees who are considered “highly compensated” wage earners. This frees both the employer and the employee from having to pay additional taxes due to a decision to partner with a PEO.  Note: This certification is new for 2017, and although some PEOs have completed their application process, the IRS will not issue the certifications until later this year.

Resources and experience matter.

Now that we have narrowed the pool a bit, let’s go one step further. Resources and experience are key to success. You don’t want to have to go through this process again, so it’s important to choose wisely the first time. You will continue to learn about all of the benefits of outsourcing your HR responsibilities; however, here are some important questions to ask during your evaluation process:

  • Who will I be interacting with on a day-to-day basis?
  • Will I have a support team or a single contact?
  • Which certifications do you require your HR managers to have, and on average, how many years of experience will my HR manager have?
  • If I have an issue, what is your process? Do you have a ticketing process or can I call my point of contact directly?
  • What if I have an issue on a weekend/holiday? How will that be handled?

By asking these questions (and others that will occur to you during the process), you will continue to narrow your choices based on what is important to you and your company. The answers of the PEO you select should align with how you would want to interact with an HR manager that you hire on-site.

At this point, you likely have determined that partnering with a PEO makes business sense. The next step is to confirm whether it makes financial sense for you. There are two standard pricing models most PEOs utilize. Keep in mind, it’s is about what makes the most sense for your business.

Does it make financial sense?

Most PEOs base their fees on a percentage of payroll. This information is an essential part of your evaluation. If you have a workforce that is primarily salaried, or a sales team, this has particular impact because as your payroll dollars increase with bonuses, commissions etc., your PEO fee will increase as well. Typically, I recommend this option to clients with a lower payroll burden and a high number of hourly workers and/or part time employees. The benefit of this fee structure is that the cost is relative to your payroll dollars, and often is the most cost-effective for these business models.

The second option is a flat rate per employee fee. This typically makes most sense in a workforce mostly made of salaried employees. Raises, bonuses and commissions have no impact on your PEO’s fees; giving you more freedom to reward your employees. The other benefit from this model is from an accounting aspect, as it is a fixed cost based on the number of employees on your team.

In closing, take your time in your evaluation process. Do not be afraid to ask any and all questions. The right PEO partner will be patient with you and answer those questions fully. They will also walk you through their qualifications, the options available to you, and demonstrate that they are the right partner for you and your team.

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Image: Denis Raev

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