Topic Outsourcing HR / PEO

9 Steps to Choosing the Right PEO

9 Steps to Choosing the Right PEO

HR outsourcing is a great way for small businesses to get help and support for their HR needs. The most comprehensive HR outsourcing solution available is a Professional Employer Organization (PEO).  

Deciding to partner with a PEO is a simple choice.   

But which one?   

That requires intense research and evaluation, including whether to partner with a certified PEO. Many companies claim to be a PEO but don't offer the services a best-in-class PEO does. Follow this guide to ensure you make the right choice when deciding between PEOs. 

1_4 - 9 Steps to Choosing the Right PEO


What should you look for in a PEO? 

Knowing what to look for in a PEO is just the beginning. At a bare minimum, a PEO should offer your company the following services:  

  • Affordable employee benefits 
  • Risk management 
  • Pay-as-you-go workers' compensation insurance 
  • Remitting employment taxes 
  • Payroll and benefits administration 
  • Best-in-class HR technology 
  • HR compliance 

If a PEO doesn't offer at least these essential services, walk away. They're not going to give you what you need. 

How to Choose a PEO 

The decision to outsource some or all of your HR needs is straightforward. But choosing a trusted and reliable HR outsourcing partner is another story. Here are our best tips on what to look for when choosing a PEO. 

Do a Needs Assessment 

Before you start looking for a PEO, conduct an internal needs assessment. Ask questions like: 

  • Where are the gaps in your HR department? 
  • Are your employee benefits competitive? If not, what steps can you take to make them more competitive? 
  • How would outsourcing some HR functions increase your internal HR team's bandwidth? 

Answering these questions will be vital to ensuring you partner with the right PEO. You cannot choose a PEO to support your needs if you don't know your needs. 

Look for NAPEO Membership 

The National Association of Professional Employer Organizations (NAPEO) lists every credible PEO in the country. On their website, you can search their database to find a PEO that serves companies in your state, and you can learn more about them from an objective source. 

Filter by IRS Certified 

On the NAPEO website, you can filter down PEOs to narrow your options. You can even filter by certified status. A Certified PEO (CPEO) is a classification of PEO made by the IRS. When a PEO gets this certification, it gives small businesses like yours extra peace of mind that their HR outsourcing partner has the skills and experience necessary to manage financial responsibility and tax compliance effectively. 

Filter by Audited by an Independent CPA 

When searching the NAPEO website for the right PEO for you, you can also filter by PEOs who have undergone independent audits by a CPA. This ensures that a PEO has accurate financials in accordance with generally accepted accounting principles. This will substantially reduce the number of PEOs you have to filter through to find the right one for your company. 

Match Needs to Capabilities 

Now that you've narrowed down your PEO options, look at their websites. See what services they offer and if they match your list of needs. Review their expertise and how long they've been in business. Check the about page and look to see how many employees they have with expert level HR experience. These are the people who are going to be handling your HR needs. 

Read Case Studies 

A PEO's website will highlight case studies that put them in a positive light. Take these case studies at face value but do read them — it can give you insight into the industries this particular PEO operates. Look for a PEO with extensive experience in your industry or an adjacent one. 

Ask for Client References 

When you've narrowed down your choices even further, ask for references, just like you do when you look to hire new employees. The references of a PEO will tell you what it's like to be a client, both the good and the bad.  

Examine Pricing Structure 

Part of the reason you may want to outsource some of your HR needs is to save money. Ensure the PEO has a pricing structure that matches your budget by reviewing the PEO fees. There are typically three pricing models you should know: 

  • Per Employee Per Month (PEPM)  
  • Percentage of Payroll (POP) 
  • Fee Inclusive Billing 

PEPM is ideal for most companies because charging a percentage of payroll disincentivizes giving raises or establishing high-paying jobs. Paying on a fee-inclusive basis may lead to underutilization since your company won't use every service a PEO offers. 

Get a Quote 

At this point, your list of potential PEOs should be down to just a handful. Contact each PEO and get a quote. This will require a bit of time and information since they won't be able to give you an accurate quote without understanding some specifics about your company. 

Choosing the Right PEO 

Once you've completed the above steps, you have all the information you need to make an informed decision about which PEO is right for your company. Don't choose a PEO solely by their cost — sometimes, you really do get what you pay for. The right PEO for you is out there, you just need to do your research and make an informed decision. 

Grade Your Current PEO Scorecard

Esther Ellington

Esther Ellington

Esther Ellington is the Director of Client Services at Questco Companies. Leading the Client Services and Onboarding Teams to deliver an exceptional client experience from the beginning of the client relationship and beyond.