PEO Industry Continues to Grow

By Louis Basso and Barry Shorten

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AUGUST 2006 - Professional employer organizations (PEO) have developed over the years toward higher standards, more-complete services, and electronic solutions. For companies using or considering a PEO, today’s PEOs represent less risk and more resourcefulness than before. Potential customers and their advisors should understand how the industry has changed and what new standards of criteria should be used when considering a PEO.

The PEO industry has matured to a $51 billion industry serving an estimated 100,000 small to mid-sized businesses and 2 million to 3 million workers. With strong annual growth rates, about 700 PEOs offering a wide array of employment services and benefits are operating in 50 states.

Employer Services Assurance Corporation

In the past year, the PEO industry has suffered a setback due to some unscrupulous companies that, instead of effectively managing a client’s employee-related services (i.e., payroll, taxes, benefits administration, and other services), mismanaged them by leaving unpaid taxes and other liabilities for their clients. The PEO industry, under the leadership of the National Association of Professional Employer Organizations (NAPEO) and its state chapters, has responded by initiating various checks nationwide.

Perhaps the most important of these measures has been the formation of the Employer Services Assurance Corporation (ESAC), an independent, nonprofit organization led by experienced regulatory professionals.

ESAC serves the PEO industry as an accreditation and financial assurance governing entity, and protects the interests of those being served by PEOs: employers and their employees. ESAC’s seal of approval indicates that a PEO’s level of service quality, operations, and financial responsibility meet ESAC’s ethical, financial, and operational standards. In addition, each ESAC-accredited PEO is covered by a $1 million surety bond held in trust by a national bank serving as trustee. The trust also holds a $5 million umbrella bond to cover claims in excess of the $1 million bond held for each PEO.


PEOs can also earn other certifications to demonstrate their expertise and effectiveness in areas such as worker’s compensation risk management. These certifications are issued by the Certification Institute, an independent nonprofit organization whose programs were developed with the support of NAPEO and ESAC. The PEO Worker’s Compensation Risk Management Certification Program provides independent, professional verification that a PEO’s risk management program meets proven insurance risk-management best practices to reduce work-related accidents and control worker’s compensation insurance losses. For both ESAC and the Certification Institute’s worker’s compensation program, the certification process includes the following steps:

  • A PEO submits a confidential online application, executes a participation agreement, pays the application fee, completes the management attestation, and provides documentation of various aspects of its operations. These are required for independent verification of compliance with established standards and best practices.
  • The staff and professional advisors of the accrediting or certification entity review the application and documentation, and implement procedures to provide third-party verification of the PEO’s compliance. For example, independent CPAs verify the timely payment of payroll taxes, contributions to employee retirement plans, and group insurance premiums; experienced, independent risk managers audit client files to ensure that safety and claims management best practices are being consistently applied; an independent attorney verifies compliance with state and federal employment-related laws and regulations; and an independent national accounting firm reviews all audited financial statements to ensure compliance with net worth and liquidity standards.
  • Following completion of the application review and compliance verification process, the application and results are submitted for final action by a certification committee or accreditation board composed of retired state and federal regulators, insurance industry executives, and other independent experts.
  • Once the initial certification or accreditation process is complete, the PEO’s ongoing compliance is monitored by comprehensive quarterly and annual procedures.

As an example of the verification procedures used by ESAC and the Certification Institute, ESAC requires each accredited PEO to provide quarterly verification of the timely payment of payroll taxes and employee benefits. This procedure includes the following steps:

  • The PEO engages an independent CPA to perform the required tax and benefit payment verification procedures as of the last day of each calendar quarter. The PEO may elect to use the PEO’s auditor or another CPA who is a member in good standing with the AICPA.

The PEO and the independent auditor can use three different verification options. They are: an examination-level attestation, which is performed in accordance with AICPA standards; agreed-upon procedures, which are performed in lieu of an examination-level attestation and following a format prescribed by the AICPA, including the tracing of tax and benefit liability amounts or payments for a selected period; or written confirmation from the payee of the PEO’s appropriate and timely payment of specified employer liabilities, which would substitute for all or part of the above procedures.

  • The certifying staff then reviews the documentation and notes any discrepancies or exceptions documented by the independent CPA. If no discrepancies exist, the PEO will be certified for the quarter by a committee comprising three recently retired regulators. If additional information is required (e.g., where exceptions or discrepancies exist), the committee can request it.
  • If a PEO must respond to a request for additional information, the PEO will receive the electronic worksheet requesting that the discrepancies be addressed or additional information be provided. Once the committee is satisfied that its requests have been satisfactorily met, the PEO will be certified.
  • A PEO’s payment status is maintained via quarterly reporting. Within 45 days after the end of each calendar quarter, PEOs submit updated management attestations, and ensure the completion and submission of the independent-CPA payment verification for the previous quarter. Automated reminders of this requirement are sent to each PEO on the last day of each calendar quarter.

State Licensing

Some states have enacted legislation requiring PEOs to meet certain registration or licensing requirements. The following states have licensing laws: Arkansas, Florida, Illinois, Montana, New Hampshire, New Mexico, Oregon, South Carolina, Tennessee, Texas, Utah, and Vermont. The following states have registration laws in place: Kentucky, Louisiana, Maine, Minnesota, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Rhode Island, and Virginia. Depending upon the state, various state agencies are responsible for executing these laws, such as the agencies also responsible for insurance, labor, business and professional regulation, worker’s compensation, regulation and licensing, and consumer affairs.

The New York Professional Employer Act, signed into law on March 23, 2004, by Governor Pataki, is one of the more comprehensive state laws governing PEOs. The law requires PEOs operating in New York to be registered with the New York State Department of Labor (DOL). In addition, the law prohibits unregistered organizations from referring to themselves as PEOs or other associated terms (e.g., staff leasing company), or from operating as a PEO within the state.

PEOs register by providing required information to the DOL, including reviewed financial statements accompanied by a letter from an independent CPA attesting that the PEO has satisfied minimum net worth requirements. The law also has certain bonding and reporting requirements (e.g., proof of New York State workers’ compensation and disability insurance; certification of the payment of taxes; and proof of a minimum net worth of $75,000 or of a bond of that value). PEOs operating in New York had to complete their initial registration within 180 days of the law becoming effective. Subsequently, PEOs must renew their license annually by providing a statement, prepared by a CPA within 60 days after the end of each calendar year, that attests to the PEO’s timely payment of all federal and state payroll taxes.

Expanding Services

Some of the industry’s most progressive PEOs are embracing the Internet to better serve both employers and their employees. Web-based information systems can allow secure online access to payroll records and personnel information from any compatible location.

PEOs are also adding more employee benefits to better address today’s workforce needs. For example, more PEOs are offering college tuition reimbursement and scholarship programs. There has also been an expansion in other employee benefits, such as travel discounts and new forms of healthcare coverage, such as health savings accounts.
In addition to giving presentations at professional association meetings, PEOs are sponsoring CPE-credit courses on PEO operations and regulation, in order to disseminate information directly to accountants.

As attendance at these programs grows, so does the accounting profession’s understanding and appreciation of how PEOs can be an important resource in the areas of employee services and regulatory compliance.

Louis Basso is president, and Barry Shorten is vice president, both of the Alcott Group, Farmingdale, N.Y.




















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