- There are three major accreditation agencies in the PEO industry: ESAC, the IRS, and the Certification Institute.
- ESAC-accredited PEOs are among the top 5% of PEOs in the industry.
- Accreditation from these three agencies guarantees Ironclad financials, good risk management programs and ethical human resource practices to ensure your business is partnering with the right company.
- This article is for small business owners who are trying to understand why recognition is important in the PEO industry.
If you've decided to work with a professional employer organization (PEO) to offload some of your HR-related work, it can sometimes be difficult to find the right one. There are hundreds of PEOs across the country who provide thousands of services to small businesses. Finding the right fit can mean the difference between taking your business's human resources department to the next level and using a one-size-fits-all service suite that doesn't match your company's needs.
More importantly, the nature of the work of PEOs is highly sensitive. You are relying on a third-party company to collect and store customer data, accurately process payroll each pay period, and develop an HR policy that may determine your company culture . While making the decision to work with a PEO can be easy, finding the right one requires time and attention.
When searching for the best PEO provider, you need to consider several factors. Defining your business needs is the first step, then working with a few different PEOs to understand which services are best for your business needs.
One important factor is recognition. While there are many PEOs throughout the United States, only a few are accredited by the top PEO accreditation agencies. These agencies strictly review the PEOs and their services on an annual basis to ensure that the services are up to par.
Employer Service Assurance Corporation (ESAC) is one of these agencies. It is an organization consisting of top PEO lawyers and CPAs committed to building integrity and trust in the PEO industry. Other accreditation agencies for PEOs include the IRS, the Certification Institute, and the National Association of Professional Employer Organizations (NAPEO). While NAPEO is a special interest group that represents the PEO industry, it also confirms with PEOs that they have audited financial statements reviewed by an independent CPA.
did you know? It is common to confuse PEO services with ASO services, but there are major differences in how each will support your business. Learn more in our PEO vs. ASO guide.
What is PEO Recognition?
Accreditation agencies rigorously review PEO's proposals to ensure that businesses are providing services of an exemplary standard. There are many different agencies. While accreditation is not the paramount and end of good PEO services, it is an important factor, especially for large companies that provide professional employment services to thousands of businesses nationwide.
ESAC is the gold standard of PEO accreditation agencies. As the official accreditation agency of the PEO industry, ESAC has a board of PEO industry attorneys, CPAs and independent directors. These professionals have over 100 years of combined experience in the PEO industry. This agency reviews financial information, general business practices, software offerings and regulatory standards. Earning this level of recognition are PEOs certified businesses that are financially stable and provide ethical services to small businesses across the country.
Companies with this accreditation have a competitive advantage over other PEOs. In the eyes of a small business owner, working with a certified PEO guarantees quality services, while unaccredited PEOs pose more risk. This allows small business owners to shop for PEO services in a more affordable way. By comparing prices, services, and other practices among accredited PEOs, business owners can ensure they are getting quality services with whichever company they decide to partner with.
A PEO that is certified by the IRS is known as a Certified Professional Employer Organization (CPEO). These companies may work directly with the IRS when handling small business tax information. Keep in mind that while the IRS is “accredited” agencies, the CPEO designation refers to an overall IRS program to streamline tax filing practices among PEOs and small businesses.
To be listed as a CPEO, a PEO must meet “tax status, background, experience, business location, financial reporting, relationships, and other requirements described in statutes and regulations” according to the IRS. This process verifies the financial status of the PEO and ensures that the company is qualified to submit financial information on behalf of small businesses.
The Certification Institute, like ESAC, specializes in reviewing PEO practices to ensure ethical business operations and stable financial conditions in the PEO industry. It also specializes in risk management reviews for PEOs, particularly in relation to workers' compensation. Certification from this organization is particularly relevant to small businesses that require comprehensive risk management and workers' compensation offerings, such as construction companies. This organization benefits both small businesses and PEOs by reviewing PEO practices and ensuring that workers' compensation losses can be minimized through holistic processes. Of the three certification bodies we looked at, the certification institute has the most transparent and comprehensive review processes.
did you know? NAPEO provides a simple and intuitive tool to find local PEOs and understand their accreditation.
What are the standards that an accredited PEO has to meet?
Most of the overall review application and process for these three accrediting bodies are not officially known. All of these organizations examine processes from a high-level perspective, and as a small business owner, it may be the only understanding needed to ensure that you are getting quality services.
While these organizations certify gold-standard services, they don't protect against mistakes, customer service problems, or any other problems you may encounter. Instead, certification should be viewed as a base-level assurance that you are dealing with an honest, reputable company.
While there are many factors involved in ensuring high quality services, ESAC highlights regulatory practices to ensure that PEOs are operating in a safe and ethical manner. The agency, which has been reviewing PEOs since 1995, has effectively addressed business practices issues among PEOs before they default. ESAC standards are so stringent that states have begun entrusting ESAC to review and certify viable businesses based on state-specific regulations. When a company is reviewed and approved, it is considered to be in good standing with its state's regulations as well as ESAC standards. Many states also accept ESAC certification in lieu of licensing requirements. The agency provides more than $15 million in financial assistance to PEOs nationwide, which is unmatched by any other agency.
In terms of specific requirements, ESAC has over 40 industry best practices, and reviews accredited businesses on a quarterly basis. This review process includes analyzing employer payments, such as federal and state employment taxes, health and workers' compensation premiums, and retirement planning programs.
FYI: Less than 5% of all PEOs operating across the country meet ESAC's standard for industry reliability.
The IRS has several rules that a PEO must meet in order to become a CPEO. Generally, a PEO must meet certain tax status, background and financial reporting requirements to earn this status. PEOs have to apply independently and are reviewed by the IRS to reach the certification level. Keep in mind that some businesses may not qualify for CPEO status depending on the services they provide.
The Certification Institute has a comprehensive list of qualifications and requirements for a PEO, as well as an application and review process. However, the focus of this certification is risk management. Some examples of certification institution requirements are a written risk management plan, customer service agreement, an employee handbook, written policies and procedures for workers' compensation programs, and written policies and procedures for claims management practices. Some of these processes also need to be reviewed and updated annually, according to the certification body.
Specific requirements and practices are outlined in the certification institution's application manual, but the overall review process includes a detailed look at the PEO's overall risk management program.
FYI: PEOs can help protect companies from common business liabilities by establishing high-level risk management plans to address any problems that arise.
Why is it important to work with an accredited PEO?
There are thousands of PEOs across the country, and working with an accredited one means you are partnering with a company that is prepared to have its business practices reviewed by third parties. If the PEO you are interested in has obtained ESAC accreditation, it is one of the top 5% of all PEOs in the country. If it has also earned the accreditation of the IRS and Certification Institute, it is one of a distinguished group of PEOs.
The nature of PEO work is sensitive: a third-party company will handle critical employee information, critical human resources functions, and major compensation programs. You need to partner with companies you can trust, and that means taking into account things like third party accreditation. Choosing the right PEO means understanding the needs of your business, but even if a PEO meets all of your business needs, if it's not accredited, you can put your company at additional risk. By doing research, working with multiple PEOs to find the right PEO, and prioritizing recognition, you can set your business up for success.