When the Employer Services Assurance Corporation (ESAC)
was founded in 1995, the professional employer organization (PEO) industry began to move into a more regulated direction. Being accredited by ESAC and meeting its rigorous financial and operating guidelines, established a PEO as being held to the highest standards within the industry. Currently only 5% of PEOs have ESAC accreditation.
But in June 2017, an even greater regulatory update took place in the PEO industry. The Internal Revenue Service (I.R.S.)
designated a select few PEOs as Certified Professional Employer Organizations (CPEO)
, the first group to ever be certified. In total, less than 3% of U.S. PEOs have been designated as a CPEO.
We have written in the past about what certified PEOs are and the rigorous process
professional employer organizations go through in order to be recognized by the I.R.S. If you are unfamiliar about CPEOs, the article is a great educational resource.
Working with a certified PEO has a few significant differences compared to a non-certified PEO. But one benefit in particular stands out the most, and is incredibly important for both brokers and small business owners alike.
What is the Number One Benefit a Certified PEO Provides to Clients?
What separates a CPEO from a non-certified PEO is that a CPEO provides clients with financial peace of mind by minimizing financial liability. When dealing with a non-certified professional employer organization, the I.R.S. views that both the PEO and the client are jointly liable
for the payment of payroll taxes.
This means that if a non-certified PEO fails to pay a clients’ payroll taxes, the I.R.S. can go after the client for taxes owed, even if that client has already remitted the payroll taxes to the PEO. This places a great deal of financial risk on a client, who may not be aware of any unpaid taxes or penalties until the I.R.S. sends a notice and a bill.
Working with a CPEO, however, significantly reduces this risk. As mandated in the Small Business Efficiency Act (SBEA)
– which created the PEO certification program – a CPEO is solely liable for federal employment tax payments. This means that the I.R.S. cannot go after a client to collect any unpaid payroll taxes. That liability falls completely on the certified PEO (as long as the client has remitted the payroll taxes to the CPEO).
Clients who partner with CPEOs can sleep better at night, not having to worry about whether or not the PEO is properly remitting the client’s payroll taxes.
This Added Assurance Makes Working with a Certified PEO an Obvious Choice
Choosing to work with a Certified PEO provides the same business benefits as a non-certified PEO, but with the added assurance regarding the proper remittance of payroll taxes. What are some of these benefits
These statistics, which the National Association of Professional Employer Organizations (NAPEO
) has researched and reported, show just how valuable PEOs can be for small businesses in today’s market:
- Small Businesses Grow 7% to 9% Faster – working with a PEO allows small business leaders to focus their time and attention away from HR, and instead use it to grow other areas of the business. This is why PEO clients grow faster than non-PEO clients.
- Companies Save 35% on Human Resource Administration Costs – Not only is HR a time-consuming function, but it is also very expensive. These costs can rise significantly if a small business makes a mistake that causes them to run into compliance issues. By outsourcing their HR admin activities to a PEO, a small business can actually save money, especially as the business grows over time.
- Employee Turnover Lowers by 10% to 14% - One of the biggest challenges facing all employers, but especially small businesses, is employee turnover. The costs associated with employees leaving can be substantial, which is why focusing on talent retention is so important. Working with a PEO provides many benefits not only to a small business, but also their employees (more on that in a second). These benefits help to significantly lower employee turnover.
- Gain Access to Better Employee Benefit Offerings – While not a statistic from NAPEO, one of the areas where a small business stands to gain the most from a PEO partnership is gaining access to improved employee benefits offerings. From large-group level health insurance, 401(k) options, and a wide-range of voluntary and complimentary benefits, small businesses can greatly expand their employee benefits packages. This plays a major role in employee retention and recruiting, which help to grow a small business.
Working with a certified PEO who is also ESAC accredited not only opens a small business to the above benefits, but does so with significantly less risk than a non-certified and non-ESAC accredited PEO. Small business owners and benefits brokers looking into PEOs need to consider this when researching potential partners.
To Reduce Financial Risk and Liability when Outsourcing HR, Look for a Certified PEO
Choosing to work with a professional employer organization is a major business decision. This is true for both small business owners and brokers alike. A PEO partnership can yield business growth and success that otherwise may not have been achievable.
However, not all PEOs are created equal anymore. Knowing what to look for in a potential PEO partner is critical. Checking to see if a PEO is ESAC accredited and is certified by the I.R.S. instills more confidence in the final decision. Ultimately, if you think a PEO solution is a fit for your business or client, why wouldn’t you choose to go with a certified PEO?
Want to learn more about PEOs? Check out our eBook, How Well Do You Know PEO? This eBook provides an overview of the PEO industry as well as helpful information for brokers and employers!