- There are three major accreditation agencies in the PEO industry: the ESAC, the IRS and the Certification Institute.
- PEOs that earn accreditation from the ESAC are among the top 5% of PEOs in the industry.
- Accreditation from these three agencies guarantees ironclad financials, good risk management programs and ethical HR practices to ensure your business is partnering with the right company.
- This article is for small business owners who are considering working with a PEO and want to know why accreditation is vital in the PEO industry.
If you decide to work with a professional employer organization (PEO) to offload some of your HR-related tasks, it can be hard to find the right one. There are hundreds of PEOs offering thousands of services to small businesses nationwide. Finding the right fit can mean the difference between taking your business’s HR 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 PEO work is highly sensitive. You’re trusting a third-party company to collect and store customer data, accurately process payroll each pay period, and develop HR policy that can dictate your company’s culture. While deciding to work with a PEO may be simple, finding the right one requires time and attention.
When searching for the best PEO provider, you have to consider a number of factors. Defining your business’s requirements is the first step, followed by working with a few different PEOs to understand which services fit your business’s needs the best.
One important factor is accreditation. While there are many PEOs throughout the United States, only some are accredited by top PEO accreditation agencies. These agencies rigorously review PEOs and their services on a yearly basis to ensure that services are up to par.
The Employer Services Assurance Corporation (ESAC) is one of these agencies. It’s an organization that consists of top PEO attorneys and CPAs committed to establishing integrity and trust in the PEO industry. Other accreditation agencies for PEO include the IRS, the Certification Institute and the National Association of Professional Employer Organizations (NAPEO). While the 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’s common to confuse PEO services with ASO services, but there are big differences in how each will support your business. Learn more in our PEO vs. ASO guide.
What is PEO accreditation?
Accreditation agencies rigorously review PEO offerings to ensure the businesses are providing services that are of an exemplary standard. There are several different agencies. While accreditation is not the be-all and end-all of good PEO services, it is an important factor, especially for the larger companies that provide professional employment services to thousands of businesses nationwide.
The ESAC is the gold standard of PEO accrediting agencies. As the official accrediting agency of the PEO industry, the 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. PEOs that earn this level of accreditation are certified businesses that are financially stable and offer ethical services to small businesses nationwide.
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 non-accredited PEOs pose more of a risk. It also allows small business owners to shop for PEO services in a more economical way. By comparing prices, services and other practices among accredited PEOs, business owners can ensure that no matter which company they decide to partner with, they’re getting quality services.
A PEO that is certified by the IRS is known as a certified professional employer organization (CPEO). These companies can work directly with the IRS when handling small business tax information. Keep in mind that while the IRS is “accrediting” agencies, the CPEO designation is reflective of 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, bonding, and other requirements described in the statute and regulations,” according to the IRS. This process verifies the PEO’s financials and ensures that the company is qualified to submit financial information on behalf of small businesses.
The Certification Institute, like the ESAC, specializes in reviewing PEO practices to ensure ethical business operation and stable financial situations in the PEO industry. It also specializes in risk management reviewal for PEOs, specifically regarding workers’ compensation. Certification from this organization is especially relevant for small businesses that need extensive risk management and workers’ compensation offerings, like construction companies. This organization benefits both small businesses and PEOs by reviewing PEO practices and ensuring that overall processes lead to the lowest possible workers’ compensation losses. Of the three certification bodies we looked at, the Certification Institute has the most transparent and extensive review processes.
Did you know? The NAPEO offers a simple and intuitive tool to find local PEOs and understand their accreditations.
What standards do accredited PEOs have to meet?
Much of the overall reviewal application and process for these three accrediting bodies is not officially known. All of these organizations examine processes from a high-level view, and as a small business owner, this may be the only understanding necessary to ensure you’re getting quality services.
While these organizations certify gold-standard services, they’re not an ironclad defense against mistakes, customer service problems or any other issues you may face. Instead, a certification should be viewed as base-level assurance that you’re working with an honest, reputable company.
While there are several factors in ensuring high-quality services, the 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 detected business practices issues among PEOs before they caused default. ESAC standards are so rigorous that states have begun entrusting the 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 regulations as well as ESAC standards. Many states even accept ESAC certification in lieu of licensing requirements. The agency also provides over $15 million in financial backing to PEOs nationwide, which is unmatched by any other agency.
In terms of specific requirements, the ESAC has more than 40 industry best practices, and it 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 plan programs.
FYI: Of all the PEOs operating nationwide, less than 5% of the industry achieves the ESAC’s standard for reliability.
The IRS has a host of regulations that PEOs must meet to become a CPEO. Nominally, PEOs 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 based on the services they offer.
The Certification Institute has an extensive list of qualifications and requirements for PEOs, as well as an application and review process. The focus of this certification, however, is risk management. Some examples of the Certification Institute’s requirements are a written risk management plan, client services agreements, 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 Institute.
Specific requirements and practices are outlined in the Certification Institute’s application manual, but the overall review process involves a detailed look at a PEO’s overall risk management program.
FYI: PEOs can help protect companies from common business liabilities by instilling high-level risk management plans to address any problems that come up.
Why is it important to work with an accredited PEO?
There are thousands of PEOs nationwide, and working with an accredited one means you’re partnering with a company that is willing to have its business practices reviewed by third parties. If the PEO you’re interested in has earned ESAC accreditation, it is among the top 5% of all PEOs in the country. If it has earned IRS and Certification Institute accreditation as well, then it is among an elite group of PEOs.
The nature of PEO work is sensitive: A third-party company will handle important employee information, vital HR tasks and key compensation programs. You need to partner with companies you can trust, and that means taking things like third-party accreditation into account. Choosing the right PEO means understanding your business’s needs, but even if a PEO meets all of your business’s requirements, if it’s not accredited, you could be exposing your company to additional risk. By doing the research, working with multiple PEOs to find the right one and prioritizing accreditation, you can set your business up for success.