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How To Choose a PEO: Top 14 Questions To Ask & Features To Consider Before You Decide

  • Human Resources
  • Article
  • 6 min. Read
  • Last Updated: 02/06/2024


business owner using a peo for hr administrative tasks

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HR is complicated, but you don't have to do it alone. Have you ever heard of a Professional Employer Organization (or PEO for short)? If you haven't, a PEO could be the secret to simplifying HR for your business.

A PEO provides outsourced solutions for everyday HR administrative tasks that are conducted to support businesses throughout the entire employee life cycle. But how do you choose a PEO that's right for your business? Consider if you need help finding and keeping talent, payroll processing, employee benefits administration, and legislative and regulatory compliance support. Spending a lot of time completing these tasks can have HR creating its own cost center. Maybe it's time to choose help from a PEO.

The time and money spent on HR administration tasks, such as processing payroll, administering benefits, and managing workers' compensation claims, can be staggering. Sixty-four percent of companies spend over 570 hours a year on HR administration, and annual spending for bigger businesses with up to 500 employees is as high as $375,000.1

Choosing a PEO can help you to save time and money for your business2, including:

  • Up to $1,775 per employee per year in HR-related costs
  • Savings averaging 37% on employee health benefit costs
  • Savings averaging 30% related to unemployment insurance
  • And generally having fewer concerns about hiring, retaining, and motivating employees

The PEO Selection Process

We suggest eight important steps to complete in the PEO selection process to help you choose the right PEO for your business. These being:

  1. Assess your workplace needs to determine your HR and risk management support requirements and align these with your business goals.
  2. Ask for references to fine-tune your assessment for fit and determine if a PEO is right for your specific business and working style.
  3. Research their online presence, including social media and third-party reviews, to assess their culture, brand, and working relationships to investigate the company's administrative and management expertise and competence.
  4. Check for membership in the National Association of Professional Employer Organizations (NAPEO) representing the PEO industry.
  5. Research company history to assess certifications, such as being IRS certified, and if a CPA independently audits their financial statements.
  6. Review contracts and service agreements carefully to ensure clear and realistic responsibilities and liabilities.
  7. Know what the service model includes; not all models are created equally.
  8. Know what technology is available and how easily it may integrate with your business and meet your goals for manager and employee self-service, among other things.

 

Features To Look For When Selecting a Reliable PEO

At least half of the business leaders surveyed1 said they achieved their HR administration objectives by leaning on a third-party service to help with payroll, recruiting and onboarding, retirement plans, administering employee benefits, risk management, and workers' compensation. It's a proven success strategy. That's probably why 78% percent say it's extremely or very likely that they will choose a PEO to outsource HR administration tasks in the next 12 months, up from 17% last year.

Where do business and HR leaders perceive the most value when choosing a PEO? The leaders in our survey ranked these PEO features as most helpful:

  1. HR management support
  2. Recruiting and onboarding tools
  3. Payroll administration
  4. Benefits administration
  5. 401(k) administration
  6. Managing employee performance
  7. Risk management/workers' compensation
  8. Maintaining regulatory compliance
  9. HR technology

The HR tasks that leaders outsource to a PEO can vary dramatically by the age of the business leader, according to the survey.3 Baby Boomers and Millennials focus on payroll, while close to half of Gen Z leaders emphasize recruiting and onboarding.

Outsourcing Priorities by generation

Typically, a PEO is designed to help make bringing on talent for your organization easier. Once you have hired a new employee, it doesn't stop there. The PEO you choose can help to make you an employer of choice by offering Fortune 500-type benefits and employee services, along with assisting you with retaining your best performers. Additionally, your PEO of choice should work to ensure you continue maximizing the productivity of each employee with practical performance management tools. Finally, when it comes time for transition, PEO HR advisors can often help you through replacing employees and continuing to strengthen your company.

Below is a list of the most common features provided by a PEO to help you in your process of choosing the right PEO for your business:

Payroll Administration

PEOs take on the task of handling payroll and reporting and remitting payroll taxes for you. If you don't partner with a certified PEO, you might be liable for unpaid taxes, late penalties, or interest.

Employee Recruiting, Hiring and Onboarding/Offboarding

PEOs can help you find and keep employees by streamlining the hiring process and providing new hire onboarding programs to help you make a good first impression with employees. PEOs can also help when it's time to transition employees out of the organization, providing support for the entire employee lifecycle.

Benefits and 401(k) Administration

Apart from offering top-notch benefits like those from Fortune 500 companies, PEOs usually handle tasks like plan enrollment, claims management, and answering employee questions. They may also assist with Affordable Care Act paperwork, including annual employer-provided health insurance offers and coverage information returns (IRS Forms 1094-C and 1095-C) and the Form W-2 value of health insurance coverage.

Staff Training, Development, and Performance Management

Skill-based training programs and career pathing services are also typically offered by PEOs to help you develop your employees as they grow with your business.

Attracting and Keeping Talent

Competing for talent means delivering on what employees want. Successful leaders understand that developing and supporting employees is their number one job. Given this, it makes sense that more than half of all business leaders in our survey said that employee career planning and skill-building are top priorities for the next 12 months.1

People management priorities in the next 12 months by company size

Workers’ Compensation Administration

A PEO can help protect your business and employees by developing worksite safety programs, onsite employee safety training, and claims management while supporting workers' compensation coverage. It can also help you administer the program and provide safety assistance with the backing of professional underwriters, loss control specialists, and claims managers. In addition, some PEOs may offer a pay-as-you-go workers' compensation option that allows you to pay premiums based on actual wages — not estimates — to help eliminate large up-front premium deposits, improve your cash flow, and reduce the risk of additional premiums due at audit.

Unemployment Insurance

When you choose to work with a PEO, you can leave your state unemployment tax concerns in the PEO's hands. Typically, the PEO will calculate and pay your State Unemployment Tax Act (SUTA) for you.

Regulatory Compliance Support

When you work with a PEO, you can tap into the expertise of compliance professionals. They stay updated on changes to employment regulations. This includes tax reporting, unemployment insurance, workers' compensation, the Affordable Care Act (ACA), employee benefits compliance, leave, disability laws, and more.

HR Technology

PEOs often provide HR technology to help streamline and automate everyday tasks and self-service tools for managers and employees. Robust technology can also help with meaningful workforce insights and analytics.

 

14 Questions To Ask When Choosing a PEO

We've compiled a list of frequently asked questions leaders often consider when choosing a PEO. Questions you may need to be answered as part of your PEO evaluation include:

  • 1. What Is/Isn’t Included in the Price?

    1. What Is/Isn’t Included in the Price?

    Since every PEO is unique, their service costs can vary. Understanding what services your PEO will provide is crucial to see if they match your business needs. A reliable PEO should offer ample support, strategic advice, and access to benefits.

    The cost of a PEO depends on factors like the business size, the HR services outsourced, and the number and type of employees. PEOs usually charge either a fixed fee per employee or a percentage of the total payroll.

  • 2. What Services Do PEOs Offer?

    2. What Services Do PEOs Offer?

    A PEO provides HR outsourcing services. This typically includes payroll processing, employee benefits administration, compliance support, risk management, and other HR-related services.

  • 3. What Kind of Technology Is Available?

    3. What Kind of Technology Is Available?

    When you team up with the right PEO, you get access to a reliable HR platform that lets you handle various aspects of HR from your computer or mobile device, which supports manager and employee self-service. Administrators gain efficiency from having routine tasks automated and prompts and dashboards to know what priorities are next in line quickly. Always inquire about the technology or software offered by potential PEOs and ask if you can preview the platform. This helps you see if the technology can easily integrate into your business operations.

  • 4. What Training and Development Is Available for My Employees?

    4. What Training and Development Is Available for My Employees?

    PEOs often offer training and tools for professional development to enhance employee skills. This helps companies attract new talent and maximize the existing workforce's potential. Ongoing training is crucial for businesses to achieve their goals and boost employee satisfaction. Providing personal development opportunities demonstrates your care for your employees' efforts and long-term success.

  • 5. How Do PEOs Handle Taxes?

    5. How Do PEOs Handle Taxes?

    When selecting a PEO, the PEO remits payroll tax payments and files required tax returns according to various federal, state and local rules, reducing concerns about tax administration compliance issues and risks.

  • 6. What Security Measures Do PEOs Take To Protect Client Data?

    6. What Security Measures Do PEOs Take To Protect Client Data?

    Most small to medium-sized businesses are concerned about data security. When you team up with a PEO, you and your employees may need to share sensitive personal information for the PEO to provide its services. PEOs are dedicated to keeping personal information safe and use technologies and privacy practices to protect the information you provide.

  • 7. What Kind of Accreditations Should a PEO Have?

    7. What Kind of Accreditations Should a PEO Have?

    Choosing a PEO with a proven track record and strong finances is crucial. If you're unsure about a potential PEO, inquire about their accreditation status. PEOs meeting specific guidelines are accredited by the Employer Services Assurance Corporation (ESAC) or the Internal Revenue Service (IRS) as a Certified Professional Employer Organization (CPEO).

  • 8. Are PEOs Audited by a Third Party?

    8. Are PEOs Audited by a Third Party?

    Check if independent accountants (CPAs) or the Certification Institute have reviewed financial statements or assessed risk management practices. Audits of PEOs are typically conducted annually by a CPA. ESAC and the IRS oversee accredited PEOs to ensure they are financially reliable and follow best practices.

  • 9. Can a PEO Support Multiple Locations?

    9. Can a PEO Support Multiple Locations?

    The right PEO should have services that can be delivered wherever you need them, whether virtual or physical, depending on the type of service required.

  • 10. How Familiar Will a PEO Be With My Company’s Industry?

    10. How Familiar Will a PEO Be With My Company’s Industry?

    If your business is unique or not very common, working with a PEO with experience with similar companies is crucial. Request references, testimonials, or examples of similar organizations regarding revenue, workforce size, and industry details.

  • 11. What Does Customer Support Look Like?

    11. What Does Customer Support Look Like?

    Support from a PEO can vary widely. You will want to ask a PEO to see if you generally have access to a representative who can support areas of HR growth and strategy. In addition, you will typically want to have support from a day-to-day contact who handles payroll-related activities and subject matter experts to help with specific responsibilities.

  • 12. How Are Employee Benefits Funded?

    12. How Are Employee Benefits Funded?

    Benefits can be funded in many ways depending on the plan and preferences. Some may be employer-paid, some are employee-paid, and others could be a combination.

  • 13. How Long Are Contracts, and What Does Your Renewal Look Like?

    13. How Long Are Contracts, and What Does Your Renewal Look Like?

    Some PEO providers may ask for a commitment of one year, while others might prefer a longer term. Make sure to inquire about the cancellation policy and any associated fees.

  • 14. Who Would Be My Main Point of Contact?

    14. Who Would Be My Main Point of Contact?

    When you work with a PEO, you will likely have access to a dedicated HR business professional or team of professionals whom you can contact as you need support for HR-related tasks and guidance.

Why Choose a PEO?

Choosing a PEO can help you address the complex HR issues facing you and your employees by allowing you to:

  • Focus on your core business with proactive HR advice from dedicated HR professionals and guidance from a team of subject matter experts so you can better navigate business challenges.
  • Find and keep talent by streamlining the hiring process, efficiently onboarding employees, offering development opportunities, and creating a culture that delivers a positive employee experience.

The Go-To Retention Tactics Leaders Are Using

Keeping valued team members is also a focus for people management. Leaders say their go-to retention tactic in the next year is improving benefits; last year, boosting pay was the top approach.1

Top retention tactics for next 12 months and 2023

  • Offer world-class benefits and gain a competitive edge over other employers by offering benefits that rival Fortune 500 companies, supported by seamless enrollment and administration.
  • Reduce risk and stay in compliance with help to stay up to date with the regulations in your industry and support to keep employees safe at work with tailored action plans from a team of specialists.
  • HR technology to efficiently manage HR, payroll, and benefits with self-service tools and insights for you and your employees.

According to the business leaders surveyed, they recognize the competitive edge and increased effectiveness of working with a PEO.Areas of greatest value emerged when we asked business leaders to reveal the top strategic and tactical payback they receive, including:

  1. Improved employee retention
  2. Increased productivity
  3. Improved regulatory compliance
  4. Better analytics and reporting
  5. More effective employee recruiting

There were variations in the perceived benefits of working with a PEO and outsourcing HR tasks as perceived by leaders of different company sizes.1

Benefits from outsourcing for different business sizes

PEOs Can Help Your Business Thrive

By working with a PEO, you can receive dedicated HR support for your business, as well as specialized content-specific support from a team of experts.

Employees are at the core of every business, and if you can ensure that they are healthy across aspects of their lives, they can help drive a strong and healthy business, which is critical to being a part of a thriving community. NAPEO reported that companies that use a PEO, compared to those that do not work with a PEO, experience:

  • Growth that is 7.6% faster4
  • Are 16% more likely to report increased profitability2
  • Are 50% more likely to stay in business2

Is the time right for you to choose a PEO for your business?


2024 Priorities for Business Leaders, Paychex

2 The ROI of Using a PEO, September 2019, napeo.org

Gen Z to Baby Boomers: Business Priorities for 2024, Paychex

4 The PEO Industry Footprint, 2021, napeo.org

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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