The CPA's Guide to PEOs

Here’s your primer. A professional employer organization (PEO) provides comprehensive outsourced human resources (HR) solutions to small and midsize businesses. By leveraging the employee count summed from the many client-companies the PEO contracts with, it’s able to negotiate better rates and features for the various employee benefits it aims to offer—but the benefits can stretch beyond that. For instance, employers often partner with a PEO to:

• Secure higher quality insurance plans at a lower cost.
• Access HR expertise without employing specialists.
• Provide a superior technology platform to employees.
• Manage employee risk and improve safety programs.
• Create a consistent onboarding process.
• Maintain compliance with local, state, and federal regulations.
• Save time to focus on core business operations.

“Co-employment” is how these benefits are unlocked. A PEO creates a unique contract between it and its client-company—a separate business organization, like yours or your client’s—to share the rights and responsibilities of a hired employee. As a co-employer, the PEO puts the client-company’s staff on its payroll, sends W-2s and paychecks with their name and employer identification number on it (along with the client-company’s name), and claims the employees on its taxes. The PEO is essentially the administrative employer, while the client-company remains the worksite employer with the hiring and firing authority. For those who worry that the client-company will lose control of its employees through the PEO agreement, Rob Wilson, president and CEO of Employco USA Inc., says that’s simply not true: “Your employees are employees of the PEO for tax purposes only—the employees always work for you.”

According to the National Association of Professional Employer Organizations (NAPEO), “The average client of a NAPEO member company is a business with 19 worksite employees.” Additionally, more than 15% of all U.S. businesses with 10 to 99 employees are PEO clients.

Robert Lane, a benefits broker with The Horton Group, points out that many employers use PEOs in conjunction with their existing internal HR departments. Using a PEO’s HR person onsite can provide a level of consistency HR departments often lack, especially in high turnover positions. Better yet, the extra support enables existing HR staff to turn the department toward more strategic functions.

Michael Colucci, CEO of Idilus LLC, a provider of payroll, HR, risk management, and benefits administration services, recognizes there are circumstances when co-employment agreements don’t make sense, though—particularly when an employer doesn’t want their employees to be paid under a PEO’s tax ID number—but the company still needs all the management and support services the PEO can offer: “That’s where an ASO comes in.”

Administrative services organizations (ASOs) are another outsourcing option to consider by employers looking to boost their benefit offerings while streamlining their staffing resources. Like PEOs, ASOs provide outsourced HR services, such as payroll and benefits administration, but they don’t require the co-employment arrangement of a PEO. Under the ASO approach, the client-company simply outsources specific HR tasks to the ASO while retaining the liability.

“We become like an outside management services organization for the client to be able to expand their resources in providing services to their employees,” Colucci explains. Regardless of whether you go the PEO or ASO route, benefits abound.

The Perks of Partnering With a PEO

While it may have once been the case, Wilson notes that it’s a common misconception that PEOs only provide healthcare or workers’ compensation benefits: “Today, it’s about all the HR services and strategically using those services to attract and retain employees.”

Colucci admits the basics, like better group benefits, still top the list of perks, but that’s only part of the pros. PEOs may also provide:

• Benefits management. A PEO can manage all the benefits, so employers don’t have to communicate with carriers. “We deal with the carriers to ensure everything runs correctly,” Colucci notes.
• Access to better technology. “The biggest things keeping employers awake at night are recruiting, retaining, and training their employees,” Colucci says. “Software can provide sophisticated applicant tracking—from hiring to onboarding and beyond—but many smaller employers can’t afford this technology on their own. A PEO makes it possible.”
• Compliance assistance. Today’s hybrid work environment means employees are working in different states, which in turn means different sets of regulations for payroll, unemployment insurance, taxes, sexual harassment training, and more. “Many employers aren’t set up for those complexities,” Colucci explains. “PEOs do this as a normal course of business.”
• Training. PEOs also help their client-companies comply with regulations by offering access to sophisticated training technology. Employees are assigned the appropriate courses and their progress is tracked. “All of these services reduce the client-company’s burden,” Colucci says.

Once the client-company’s team is freed from compliance burdens, paperwork, and back-office tasks, it can focus on growth and strategy. Wilson adds: “There’s a lot more juggling today because of different state and federal regulations. That’s where a PEO company is turnkey.”

The Key to Picking a PEO

“PEOs come in all different sizes,” Lane notes, stressing that “it’s imperative to know what services you’re looking for and to evaluate what each PEO offers and how they’ll work with you before deciding if it’s the right fit for your company.” He suggests talking to at least three PEOs during the initial search, while adding these steps to complete your due diligence:

• Check references. A good PEO should provide references for comparable organizations to help evaluate their reputation and experience.
• Analyze pricing transparency. Some PEOs may bundle pricing into a lump sum and charge a percentage of gross payroll without showing how much you’re paying for workers’ compensation insurance, healthcare benefits or, most importantly, administrative fees. The PEO should show you exactly what it’s charging. As another part of pricing transparency, confirm if health insurance will be self-funded or fully insured. “Self-funded PEOs have been limited in many states and regulated because of inconsistencies in pricing and transparency,” Lane cautions. “Perform your due diligence and insist on transparent pricing.”
• Look beyond HR. PEOs continue to evolve, adapt, and add services beyond employee benefits. “It’s really more about strategy,” Lane says. “Hire a PEO to enhance the areas you don’t do as well.”
• Verify certification. PEOs can become and remain certified under the IRS’ Certified Professional Employer Organization (CPEO) Program. CPEOs must meet various tax status, background, experience, business location, financial reporting, and bonding requirements, among others. While many smaller, reputable PEOs might not be certified, it’s a factor for consideration.
• Understand the level of service. Is there a dedicated person to contact or just an 800 number? “If personalization is important, this is a key point to consider,” Wilson advises. “Understand how technology will be used and the level of customer service your employees will receive.”

Priming the PEO Relationship

According to Lane, the decision to partner with a particular PEO should be driven by the employee experience. “Companies spend enormous amounts of time, money, and resources on attracting and retaining the best talent, so you need to ensure your human capital management systems reflect that,” he says.

“Remember, you’re bringing in a PEO to enhance your HR opportunities and employee benefit options,” Wilson adds. A big part of that enhancement is getting the implementation right. “Make sure the PEO understands what’s important to you as a business, what your expectations are, and what the timeline is for meeting those expectations,” he says. “It’s also important to meet the team you’ll be working with and to ask if you’ll have the same team each week.”

Colucci emphasizes the importance of communication. “When an organization partners with a PEO, you don’t just flip a switch and start working together the next day,” he cautions. “There’s an implementation and transition process. It’s essential for the PEO to communicate with the client-company, and more importantly, the client-company must be able to get in touch with the PEO’s implementation team to make sure things are done correctly. Mistakes will happen, and you want to be able to fix them quickly.”

Once you’re up and running, don’t let your PEO relationship get stuck on autopilot, either. “Ask about the next four months, six months, or year,” Wilson suggests. “No one has a crystal ball for rates, but given the current environment, look at the PEO’s history of rate changes. When you’re coming to a PEO for their buying power, you don’t want to be hit with a 15% rate increase shortly after forming the relationship.”

The PEO Opportunity for CPAs

After 10 years as the CFO of a PEO, Randy Butler, CPA, became a director at Somerset CPAs, a firm that specializes in working with PEO clients. Butler says CPAs are uniquely positioned to help their small and midsize business clients identify if there’s a strategic opportunity in utilizing a PEO. “CPAs are a business’s trusted advisors,” he says. “We’re usually the first call a CEO makes when there’s an issue.”

In Butler’s view, CPAs should be proactively determining if a PEO is right for their clients’ businesses by evaluating if, and how, a PEO will offer better benefits for employee retention, reduce payroll costs, address compliance issues, or offer other strategic advantages. “A CPA can easily evaluate the costs and needs for their clients,” he says.

At the same time, CPAs may find their own firms could benefit from a PEO partnership. Butler says bringing in a PEO can help CPA firm leaders focus on their growth strategies instead of getting bogged down in the day-to-day activities of firm administration. “After all, a PEO is already set up to do all that,” he notes, pointing out that turning to a PEO for its insight is just like a client turning to a CPA for their unique expertise.

“Every day, clients entrust their financial management decisions to us as CPAs because they know we’re the experts,” he says. “A PEO offers CPAs access to specialized expertise in administration, benefits, and HR. Why not look to the people who are experts in what they do? Let’s use those people to help manage and grow our own businesses, too.”