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  • Tom Boyd

Outsourcing HR

25 Questions To Ask Before You Outsource HR

Kate Lister, OPEN Forum.  Powering small business success, August 9, 2011

When you decided to start a business, it probably wasn’t the fun of keeping up with the latest employment regulations, tax issues, and OSHA requirements that lit your fire. Nevertheless, if you have even a single employee, you’re stuck with all that and more. You’re not alone and fortunately, where there is opportunity there are generally  entrepreneurs with a solution. Enter the world of professional employer organizations (PEOs). For the folks who run these companies, HR is their passion.

Professional employer organizations

In a nutshell, a PEO acts as a co-employer and assumes many of the HR administrative functions that frustrate small business owners. These can include:

  1. Payroll

  2. Benefit administration (including health care)

  3. Workers compensation

  4. Recruiting

  5. Background checks for new employees

  6. Development of employee manuals

  7. Safety management

  8. Training (particularly in HR-related matters)

  9. Drug screening

  10. Employment assistance programs

  11. Employment practices liability insurance

My first-hand experience with PEOs came 15 years ago when I was running a vintage airplane ride business in San Diego. The business was, er, taking off, but the payroll and other compliance issues were dragging it—or at least, me down. Just figuring out which posters I was supposed to have on what walls was enough to bring on migraine. A company called  Employers-Resource was my salvation.


As a co-employer, the PEO becomes the employer of record for tax purposes. They do all the payroll administration and reporting under their own tax identification numbers. Their fees run between 3 percent and 15 percent of payroll.

For some businesses, particularly new ones, an experienced PEO can offer big savings in workers compensation by virtue of their group rates. Group health insurance rates can be lower too, but it pays to check around. Some PEOs, due to their particular client base, may experience higher insurance rates.

But before you wash your hands of all that annoying HR administrative stuff, it’s important to note that using a PEO doesn’t mean you’re entirely off the hook. If the PEO fails to pay the taxes for your employees, you’re still liable. Similarly, they are no get-out-of-jail-free cards for any violation of employee rights, wage or similar disputes.

What to ask a prospective PEO

According to the  National Association of Professional Employer Organizations, while the industry is relatively young—less than 30 years old—there are more than 700 PEOs across the U.S. So how do you pick a good one? Here are some questions to get you started on your search:

  1. Does the PEO offer all the services you need or are likely to need in the near future?

  2. How does each specific service work?

  3. What options will you have for supplying payroll data?  E-mail, fax, phone, website, hand delivery?

  4. Do they offer performance guarantees and what do they cover?

  5. What will you receive regarding payroll, claims, filings, etc.?  When will you receive it?  Will you have online access?

  6. What hours will they be available by phone, e-mail, or instant chat?  What is their standard for returning phone calls?

  7. What options will you have for reaching them in an emergency such as an on-the-job injury?

  8. What assurances will you receive that all tax and other liabilities are being met?

  9. What are their upfront and ongoing fees and how are they determined?

  10. Will they charge an average tax rate based on all their clients or will it be calculated for your organization?

  11. What rates will they be quoting for workers compensation?  Health insurance?

  12. How long have they been with their workers compensation and health insurance carriers?

  13. Do they have experience with similar size companies in your industry?

  14. Are they licensed and operating in all the states where your employees reside, not just where they work?

  15. Will they assist you in the event of an audit?

  16. What is their customer retention rate?

  17. How long have they been in business?

  18. Are their financial statements audited by a CPA?

  19. Who is their third-party benefits administrator?

  20. How are their benefit liabilities funded?

  21. What insurance do they carry and what protections does it provide for you?

  22. What makes them better than other PEOs?

  23. How are employee or company disputes handled?

  24. What is their track record on lawsuits

  25. What are their cancellation terms?  To what extent will they cooperate with supplying information to a new PEO?

Naturally, you’ll also want to check a prospective PEO’s references with particular attention aimed at clients of a similar size and in similar industries.

The big players in the field include companies such as ADP Total Source, Administaff Inc., TriNet Group Inc., and Paychex. While they may offer the most comprehensive services, if you don’t need all of them, you may be paying for the extra overhead. Lots of smaller PEOs stand ready to take the HR burden off your shoulders, too. You can start your search for a PEO on the  Employer Services Assurance Corporation’s website.

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