What Does a PEO Do for Me?

Conversely, if you want to fire a worker, you need to call the PEO first. "I'm not telling the business owner who he can hire or fire. But I am saying, let's talk about it before he does the hiring and firing to make sure everything's done legally and in compliance with the relevant rules and regulations," says Daniel.

All this complexity makes the contract terms you sign with your PEO crucial. Examine the contract carefully, run it by your lawyer – preferrably someone with employment law experience. The contract should be long and detailed. It should specifically spell out the PEO's sole legal responsibilities, your company's sole legal responsibilities, and the shared responsibilities, and exactly how they are to be shared.

Rocky History and the NAPEO Solution

OK, so PEOs can help you navigate employment laws and guide you through major human-resources decisions. To address concerns over a PEO’s legitimacy and avoid contractual problems you need to investigate the company and your contract with them.

Another potential worry is the bad reputation that PEOs have gotten from some scoundrels in the business who absconded with their clients' money. "It seems to be a business that attracts quick-buck artists," says David West, executive director of The Center for a Changing Workforce, part of the National Alliance for Fair Employment, a network of unions and workers' rights organizations.

While that may be an exaggeration, there have been some egregious cases of fraud.

In early 2005, for example, two executives of Michigan-based Simplified Employment Services Inc., were sentenced to about five years in jail and ordered to pay $55 million in restitution after pleading guilty to tax fraud, bank fraud, and embezzlement of the employee benefit plan.

West urges businesses to be particularly wary of a PEO that offers extremely low rates on workers' comp. Some firms specialize in promoting cheap workers' comp to particularly high-risk industries like construction or nursing homes. The PEO may be able to offer the low rates because it has misrepresented to its insurance carrier how many high-risk employees are in its pool, says West. Once too many claims start coming, the insurer usually gets suspicious, discovers what's going on, and drops the PEO, leaving its employees in the lurch.

NAPEO, the PEO trade group, has taken steps to raise standards both by self-policing and urging legislation that requires PEOs to register with their states. It created The Certification Institute, a non-profit organization that inspects PEOs to ensure that they are following industry best practices.

There's also the Employer Services Assurance Corporation (ESAC) , an accreditation and surety group founded by former NAPEO executives. ESAC ensures the financial stability of the PEO and promises to reimburse clients, employees, tax authorities, and insurers if the PEO defaults and fails to pay wages, taxes, contributions to employee retirement plans, workers' comp premiums, group life and health insurance premiums, or plan contributions. They provide assurance through $1 million surety bonds held on behalf of each ESAC member plus a $5-million excess bond covering all program participants. So far, however, only about 25 PEOs have achieved ESAC certification (see our list, below).

Finally, NAPEO is encouraging states to pass legislation requiring PEO registration. So far 27 states have programs, which generally establish standards for the operation and regulation of PEOs. In addition, nine states recognize ESAC accreditation as an alternative for registration: Arizona, Arkansas, Indiana, Montana, North Carolina, Ohio, South Carolina, Rhode Island, and Vermont.