Industry Continues to Grow
Louis Basso and Barry Shorten
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.
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.
Services Assurance Corporation
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.
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
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
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
Once the initial certification or accreditation process
is complete, the PEO’s ongoing compliance is monitored
by comprehensive quarterly and annual procedures.
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.
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
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.
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.
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.
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.
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
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.
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.
Basso is president, and Barry Shorten
is vice president, both of the Alcott Group, Farmingdale,