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Investigate Contract HR Companies Before Committing

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Professional employer organizations can help you navigate employment laws and guide you through major human-resources decisions. But first you need to check your potential PEO’s legitimacy to avoid contractual problems.

PEOs may have gotten a bad reputation because of some scoundrels who have absconded with their clients' money. 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 an employee benefit plan.

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, 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 such as 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 in, the insurer usually gets suspicious, discovers what's going on, and drops the PEO, leaving its employees in the lurch.

The National Association of Professional Employer Organizations, 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 nonprofit organization that inspects PEOs to ensure that they are following industry best practices.

There's also the Employer Services Assurance Corporation, 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. It provides assurance through $1 million surety bonds held on behalf of each ESAC member plus a $5 million excess bond covering all program participants. The following PEOs have achieved ESAC certification:

  • Adams Keegan Inc.
  • Administaff Inc.
  • ADP TotalSource Inc.
  • Alcott Group Inc.
  • Allstaff Personnel Management Inc.
  • AlphaStaff Inc.
  • ALTRES Inc.
  • Ambrose Employer Group LLC
  • Amsource
  • AmStaff Human Resources Inc.
  • Better Business Systems Inc.
  • Brumley Professional Employer Services Inc.
  • CU Personnel Solutions
  • Doherty Employer Services Inc.
  • Genesis Consolidated Services Inc.
  • LMC Resources Inc.
  • Nextep Inc.
  • Selective HR Solutions Inc.
  • Staff One Inc.
  • Staff Resources Inc.
  • Tandem Professional Employer Services Inc.
  • TriNet Group
  • Unique Staffing

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. If your state doesn't specifically regulate PEOs, you can check with your state's insurance commission to see if a company has been involved in any workers’ comp or health insurance problems.

In addition to checking with your state government, the following are some things to keep in mind when looking for a responsible PEO:

  • Conduct a thorough legal search of the principals in the firm to see if they've ever been accused of or convicted of any crimes.
  • Make sure the PEO is bonded. The amount required will depend on the size of the PEO but it should be enough to cover at least two to four weeks of payroll, benefits, and any other liabilities the firm would handle for both you and its other clients. 
  • Be careful if the PEO is growing fast and acquiring other PEOs or staffing firms. Fast growth could stretch resources too thin. Check out the histories of the acquisitions to see if they have been involved in any shady activity. 
  •  Ask the PEO for the names of its third-party providers, such as health insurers or benefit providers. Then call the actual providers to check on the PEOs' history with them. 
  •  Ask the PEO for proof that it is paying payroll taxes and insurance premiums. 
  •  Understand how the employee benefits are funded. Is the PEO fully insured, or partially self-funded? Who is the third-party administrator or carrier? Is this carrier authorized to do business in your state?
  • Is the PEO a member of NAPEO? 
  • Has the PEO been certified by the Certification Institute? 
  • Does the PEO have ESAC accreditation?

Profile: Tam Harbert