How to Choose a PEO: The Essential Guide for Smart Business Decisions

By Jeanette Coleman, SPHR & SHRM-SCP on May 24, 2024
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How To Choose a Reliable PEO for Your Business

Navigating the complex world of professional employer organizations (PEOs) can be daunting for any business. Whether you're a small startup or an established enterprise, understanding how to choose a PEO that aligns with your business needs is crucial. 

This ultimate guide demystifies the process, offering a comprehensive roadmap with eight essential steps to identify the right PEO for your company. Additionally, we'll highlight the five warning signs to watch out for, signaling an unreliable PEO, and explain the advantages of partnering with a local professional employer organization.

With the right knowledge and approach, selecting a PEO can transform how you manage HR, payroll, benefits and compliance, allowing you to focus more on your core business activities.

Let's embark on this journey to empower your business with the perfect PEO partnership, keeping our focus on how to choose a PEO as we navigate through the selection process.

How to Choose a PEO: 8 Key Steps

There’s a high return on investment for small and mid-sized businesses that work with professional employer organizations – if they know how to choose a PEO partner that is trustworthy and aligns with your smaller company’s interests.

The right PEO service provider for your company will be a good fit for your budget, your company vision and your culture. Focusing on the criteria that are most important to your business will make the vetting process much easier. 

1. Start with an Online Search 

This important first step involves more than simply googling “How to choose a PEO” or “find a PEO near me” – although that’s a decent starting point to find an initial set of candidates. Once you have narrowed the field to three or four PEO providers, an in-depth evaluation of each company’s online footprint should give you a good sense of their expertise, services, depth and breadth of HR knowledge and approach to serving clients. 

A thorough search might take the form of checking out their social media accounts, such as Facebook, Twitter and LinkedIn. You can see how clients respond to them and how the PEOs respond to clients. You might also search for what each company’s own employees have to say about working for that firm. And, of course, explore business review sites to see what information is available on each professional employer organization. 

A reputable PEO will have a consistent online presence, a thorough website and a clear HR leadership voice. 

2. Conduct Further Due Diligence  

The more information you have on each PEO company, the better prepared you will be to select the preferred PEO partner for your business. You also will be confident about moving forward because you will understand how the PEO operates, its client service philosophy and its approach to HR matters.  

In addition to online research, check out news stories and review any available court records on the professional employer organization. 

In doing your due diligence, investigate the: 

    • Number of employees 
    • History of the business
    • Number and industries of clients 
    • Mission/vision/values statements 
    • Numbers of PEO professionals physically located in your region 
    • Location and availability of your account representative 
    • Number of satellite offices, if any 

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3. Insist on PEO and Staff Certifications 

Find out if the company you’re considering is a certified PEO (CPEO). A CPEO has undergone a rigorous IRS assessment process. The voluntary certification process is exhaustive, and not all PEOs qualify. In fact, fewer than 10% of all PEOs in the country are certified. 

To earn certified PEO status, a PEO must include background verifications, a review of tax compliance history, annual audited financial statements and an independent surety bond guaranteeing payment of federal employment taxes.

An independent accountant must submit quarterly assertions that declare the PEO’s taxes are paid and the company reflects a positive financial condition.

Because the CPEO has been fully vetted by the IRS, you’re assured greater financial protection than you would have when working with a non-certified PEO. 

The IRS does not endorse any particular certified professional employer organization. For more information on certified PEOs, visit the IRS website

RELATED: PEO vs CPEO - How a Certified PEO Protects and Safeguards Your Business >> 

Another gauge for any PEO candidate is having highly qualified staff. Professional human resources certifications indicate that the PEO you’re considering is staffed with experienced HR experts. Look for PEO team members with designations such as:  

    • SPHR/PHR (Senior Professional in Human Resources/Professional in Human Resources) from the Human Resource Certification Institute; 
    • SHRM-SCP/SHRM-CP (Society for Human Resource Management Senior Certified Professional/Certified Professional); and 
    • CPP (Certified Payroll Professional) from the American Payroll Association. 

For added value, ask if each PEO you’re considering offers training opportunities, such as workshops on popular topics like safety, diversity, conflict resolution and curbing harassment

4. Get and Check References 

A highly regarded professional employer organization with a solid track record will not hesitate to share a list of references with you. Ask, specifically, for clients that have worked with the PEO for at least a year. Once you have that list in hand, contact the references to learn about their experiences with the PEO. 

One way to start the conversation is to request that the reference rate the PEO on a scale of 1-10 (with 1 meaning they are going to cancel the agreement and 10 meaning they would never leave the relationship). Ask why they gave the rating and, if the rating isn’t a 10, ask why it isn’t higher. 

Among other questions to ask a PEO reference:  

    • Why did you choose this particular PEO? 
    • What would it have helped you to know before hiring this PEO? 
    • How has the PEO helped your business? 
    • How easy it is to reach and communicate with the PEO’s account service teams? 
    • What are the PEO’s strengths and weaknesses? 

RELATED:Jerry Moore, President of Kansas City-Based Grass Pad Shares His Experience with Axcet >> 

5. Assess the PEO’s Financial Soundness 

In your journey on how to choose a PEO, it's crucial to consider that the PEO you hire will be managing some employment-related financial responsibilities, such as filing federal employment taxes, for your business. Therefore, it’s important to ensure that the PEO has adequate working capital as well as money in reserve.  

PEOs often – and should – have financial audits performed by an independent party. You can request a copy of this audit. It will provide insight into where the company stands financially and show whether the PEO maintains up-to-date and accurate financial records – essential for any reliable PEO. 

6. Confirm Cost Models 

Using a PEO for HR, benefits, employment law compliance and payroll services saves time, optimizes your business processes and increases profitability, making a PEO’s administrative fees a worthwhile investment. 

PEOs fees typically are a percent of payroll or a set amount per employee. The “per-employee-per-month,” or PEPM, model is increasingly common because it offers more competitive pricing and greater transparency. In other words, you always know what you’re paying. 

If PEOs charge a percent of payroll, on the other hand, clients end up paying more for the same services when they give employee raises. The incongruity of such an approach is why PEPM has become the de facto way to structure PEO agreements. 

Some PEOs also offer packages that include a full-service HR solution for a flat rate. Known as an all-inclusive administrative fee, such arrangements provide clients with fixed costs and usually cover services such as: 

    • Human resources expertise, including hiring process tracking 
    • Employee relations 
    • Labor law compliance 
    • Strategic planning 
    • Payroll processing, payroll tax administration and payroll compliance 
    • Direct deposit, pay card or paper checks 
    • Fortune 500-style benefits, benefit plan administration and Affordable Care Act management 
    • Risk management 
    • Mock OSHA inspection walk-throughs 
    • Workplace safety expertise and safety program development 

Make sure the PEOs you’re considering explain exactly what services you’ll receive for your administrative fee. You should have clarity about whether the fee is all-inclusive or if you’ll be charged separately for separate services. Ask for a sample invoice to make sure the fee is transparent. 

7. Verify Benefits Packages Offered 

PEOs can help your small business gain access to the types of health benefits and lower premiums that larger companies enjoy, making your company more attractive to top talent. Benefits extend beyond just quality health insurance, however.

Find out what each potential PEO partner offers, such as vision and dental coverage, life insurance, 401(k)s and short- and long-term disability, which are all important parts of a comprehensive employee benefits package. This list is by no means exhaustive.  

RELATED: Why You Should Hire a PEO to Save on Employee Health Insurance >>

8. Confirm Quality and Ease of Communication 

For the relationship to be beneficial to your small company, your PEO partner must listen and respond to what your business needs. You can assess this quality of service when you talk to references and representatives of each candidate company. 

Having a dedicated point person from a team of certified professionals and experts to contact for questions or concerns is the best way to avoid wasted time and frustration when trying to communicate with your PEO partner.

Make sure the professional employer organization can provide direct telephone numbers and email addresses for your assigned HR consultant, payroll administrator and safety consultant and that these individuals are readily available if you would like to meet in person.  

One way to gauge a PEO’s level of responsiveness is through the contract negotiation process. After ensuring that the services the PEO will provide are clearly described, verify the terms of cancellation and renewal. Follow up with any outstanding questions. The PEO’s response at each stage can be a good indicator of how you will be treated as a client.  

For the relationship to be beneficial to your small company, and as a final step in how to choose a PEO, your partner must listen and respond to what your business needs.

What to look for when searching for a PEO

Identifying Red Flags: How to Choose a PEO with Confidence

When embarking on the journey of choosing a PEO, it’s crucial to remember that not every professional employer organization offers the same level of service or reliability. The choice you make can significantly influence your business's operational effectiveness and financial health.

Here are five warning signs of an unreliable PEO that you should be on the lookout for when choosing a PEO:

1. Refusal To Provide Client References

A trustworthy PEO should be able to quickly and comfortably hand over names and contact information for several current clients. In fact, the PEO you want as your partner will welcome your due diligence, because it is confident about what you’ll hear from its references. 

2. Hiding Financial Details

Most PEOs are private companies and, unlike public companies, aren’t required to share financial information. But you should still be able to receive audited financial statements, which will provide you with a fair assessment of the organization’s financial health.

Audited financials also may reveal vulnerabilities, such as weak internal controls and insufficient cash reserves. 

Audited statements cannot reflect the entire financial picture, but a sound PEO’s information will demonstrate that the company is stable and that its financial statements are complete and accurate according to accepted accounting conventions. 

The IRS certification process includes a review of the PEO’s audited financial statements, so you can be confident in a CPEO’s fiduciary responsibility and steadfastness even without seeing its financials. 

3. A Short History 

A McBassi and Associates study released in 2018 showed that the PEO industry grew between 2008 and 2017 by a compounded annual rate of 8.3% – 14 times higher than that of employment in the U.S. economy as a whole.

That trajectory has enticed some startup PEOs to jump on the growth bandwagon. These PEOs may not have the same staying power or deliver the same quality of work as those that already have stood the test of time. 

Make sure you know the tenure of each PEO partner you’re considering. Ask: 

    • When the company was founded 
    • How long the PEO has offered the specific services your company needs 
    • What the PEO’s business and client service philosophies are 
    • Whether it has experienced consistent leadership 
    • Whether it has an office in your geographic area staffed by HR professionals 
    • How many clients and client company employees the PEO has 
    • Whether its staff size is adequate to handle your needs 

The PEO you choose should have not only a durable history but also business practices and values that align with your company’s. This includes honesty and transparency when there’s less-than-favorable information to communicate. A trustworthy PEO is committed to a no-surprises, mutually beneficial relationship that will help your company grow

4. Lax Data Security Measures

Hackers are increasingly sophisticated, and securing data is a constant fight. The PEO you choose should have multiple levels of security in place to protect your company’s data. It should be able to explain the encryption, firewall, password protection, identity validation and other cybersecurity measures it takes. The PEO also should maintain and retain full control over its own cloud environment and multi-layered cloud security. 

Further, the PEO should require its employees to undergo intensive security training and randomly test them afterward to ensure they’re meticulously following cybersecurity protocols. 

RELATED: Scared to Outsource Payroll? 6 Reasons to Trust Axcet HR Solutions >> 

5. Lack of IRS Certification 

Of more than 900 PEOs in the United States, only about 90 have met the IRS requirements, which include a documented history of federal, state and local tax compliance, financial responsibility and organizational integrity.  

The PEO you partner with will process payroll, manage your employee benefits, provide workers’ compensation coverage and handle numerous other financial and human resources tasks. If the PEO drops the ball or, even worse, goes out of business because it isn’t financially stable, the negative impact on your business and your employees could be enormous. 

CPEOs have met the requirements of the industry’s most rigorous background check. The certified PEO designation assures your company that it will receive the highest-quality guidance, expertise and reliability. 

Making an informed decision on "how to choose a PEO" involves a careful examination of these warning signs. By doing so, you'll be able to better align your business with a PEO that not only meets your immediate needs but also supports your long-term growth and success strategies. 

RELATED: How a PEO Helps Reduce Your Small Business Liability >> 

Choosing a PEO: The Local Advantage 

In the process of how to choose a PEO, the value of selecting a local provider cannot be overstated. Opting for a PEO that operates within your geographical area offers unparalleled benefits, especially for small businesses looking to navigate the complex landscape of HR management with a personal touch.

What Is a Local Business (and What Isn't)? 

Because working with a local PEO is a significantly better arrangement for small businesses, some national PEOs are jumping on the “local” bandwagon and marketing satellite sales offices as local.

Unfortunately, when you partner with one of these PEOs, and an emergency comes up at your small business, you’ll be forced to call a toll-free customer service number and wait on hold in hopes the national customer service representative will be able to provide the help you need. That doesn’t feel local. 

A local business typically refers to a company that operates in a specific geographic area, often owned and run by members of the community. It provides goods or services to the local population and is influenced by the needs and culture of that area.

Local businesses are integral to the local economy, contributing to job creation and keeping money circulating within the community. Here are some characteristics that define a local business:

Let's take a look at the defining characteristics that make up what is a local business and those that indicate the business is not truly local:

  • Geographic proximity

    It is situated in the community it serves, making its products or services accessible to local customers.

  • Ownership 

    It is usually owned by people who live in the community, allowing for decisions to be made by those who understand and are invested in the local area.
  • Economic impact 

    It circulates money within the local economy, supporting other local businesses and contributing to the area's financial health.
  • Community focus 

    It tends to be involved in community activities and may tailor its offerings to meet the unique needs and preferences of local residents.

On the other hand, a business that isn't considered local typically has the following characteristics:

  • Wide geographic spread

    These businesses operate in multiple locations or nationwide, without a specific focus on a single community.
  • Corporate ownership 

    They are often owned and operated by larger corporations that may not be based in the communities where they operate.
  • Economic dynamics

    While they contribute to the economy, their profits are more likely to be distributed among shareholders or invested back into the corporation, possibly outside the local economy.
  • Standardized offerings

    Their products or services are usually standardized to ensure consistency across all locations, which might not always meet the unique needs of each local community they serve.

Understanding the distinction between local and non-local businesses is crucial when choosing services, including a professional employer organization, as it influences the level of personalized service, understanding of local regulations and community involvement you can expect.

The Local PEO Advantage: How to Choose a PEO That Understands Your Community

Here are a few reasons why working with a local PEO is advantageous for small companies: 

  • Highly personalized service 

With a local PEO, small business owners are provided with their own dedicated consultants. Business owners and their employees can expect to speak with the same people every time they call or email, as opposed to a different customer service representative each time, reached through a toll-free number – or worse, accessed only via impersonal, complicated online forms.

And if your employees have payroll and benefits questions, they can expect a timely response and a fast turnaround when you partner with a PEO partner that is local. This is a critical consideration in how to choose a PEO that truly supports your business.

  • The power of in-person 

A local PEO’s close proximity means that if something urgent comes up at your workplace and you need expert guidance, the PEO’s team can show up quickly and in person. There’s no need for phone call after phone call. When the PEO’s experts are on site, you can directly explain and show what happened, providing the most accurate details to get the most effective guidance.

Most of Axcet HR Solutions’ clients, for example, are within 100 miles of our office—a quick drive for us. This nearness also means if businesses need help with onboarding, manager training, safety workshops or benefits enrollment, the PEO partner is able to offer these services live and in person.

And let’s face it, in-person training is far more engaging and helpful than the online training typically offered by national PEOs. 

RELATED: The Quagmire of HR Compliance Can Make or Break Smaller Companies >> 

  • Greater knowledge of local laws 

The U.S. Department of Labor administers and enforces more than 180 federal laws protecting workers. Additionally, each state and some municipalities have their own sets of employment laws. Employers must comply with all of these rules. 

When business owners select a local PEO, they partner with a team of experts who are vigilant about staying on top of the complicated and constantly changing compliance laws at every level of government. This vigilance ensures that the PEO’s clients are prepared and compliant ahead of schedule. 

  • Local marketplace expertise 

Just as every company has its own unique culture, so does each city – as defined by its inhabitants, industries and cultural institutions. A local PEO has first-hand knowledge of the same local marketplace where your business operates.

Its team of experts is on the ground with you, responding to hot local issues. In Kansas City, where Axcet HR Solutions is based, examples of issues are medical marijuana in Missouri, Ban the Box in Kansas City and how to prepare your business for incoming severe Midwestern storms.  

Although we're local, we are fully capable of providing full-service HR to our Kansas City metro clients with offices in other states. In fact, we process payroll for client employees in 37 states. 

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Partner with Axcet HR Solutions: Your Local PEO Experts

Since 1988, Axcet HR Solutions has proudly served as Kansas City's premier local PEO, dedicated to enriching the businesses within our community. Founded by Jerry Diddle, our team of experienced professionals in human resources, payroll, and risk management has committed to supporting the unique needs of Kansas City's businesses and their surrounding areas.

Emphasizing personal connections, our approach to business is all about building and nurturing relationships with our neighbors, offering the invaluable benefit of in-person consultations and assistance.

Choosing a PEO partner that's right for your business involves more than just evaluating services; it's about ensuring a perfect fit between you and your PEO representative.

The ideal partnership fosters comfort, responsiveness and a deep understanding of your business and HR needs, all aimed at prioritizing your company's best interests.

This understanding is crucial in knowing how to choose a PEO that aligns with your goals.

Axcet stands out not just for our local focus but also for our recognition as a continuously certified PEO by the IRS since the inception of its certification program in 2017. This certification underscores our commitment to excellence and trustworthiness in serving your needs.

If "how to choose a PEO" or "choosing a PEO" has led you here, you're in the right place for a partnership that values and supports your business goals.

Discover the Axcet difference and how we can tailor our services to fit your needs—schedule a consultation today!

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