What is ESAC Accreditation and Why Is It Important for PEO?

9 July 2024 ExtensisHR6 minute read

Quick look: PEOs can help small companies stay compliant, save money, and free up time. However, the sheer number of PEOs available can make it daunting for business leaders and brokers to thoroughly evaluate each one. This is where ESAC accreditation proves invaluable. It signals that a PEO consistently complies with state and federal regulations, maintains financial reliability, and adheres to industry best practices.

The professional employer organization (PEO) industry has rapidly grown over the last several decades. An increasingly dispersed workforce, a competitive labor market, and evolving employment laws have increased interest in PEO and HR outsourcing solutions.

PEOs help businesses manage various aspects of their human resources (HR), employee benefits, payroll, risk and compliance, and other employee-related tasks. This can enable companies to streamline their operations, significantly saving both time and money.

According to the National Association of Professional Employer Organizations (NAPEO), the PEO industry has experienced an average annual growth rate of 7.5% from 2008 to 2022. NAPEO’s latest data found that at the end of 2022, there were 523 U.S. PEOs, which employed 4.5 million worksite employees (WSEs) at over 208,000 client companies. These workers were collectively paid $308 billion, and 17% of all businesses with 10-99 employees were involved in a PEO partnership.

Small business leaders and benefits brokers exploring potential PEO partners may feel overwhelmed by the industry’s size. However, they can simplify their search by evaluating a PEO’s certifications, including ESAC accreditation.

Below, discover why ESAC accreditation is an essential benchmark for brokers and clients to refer to during the PEO evaluation process.

What is ESAC accreditation?

The PEO concept originated in the 1960s, and as the number of PEOs grew over time, there emerged a critical need for integrity, trust, and assurance within the market.

As a result, the Employer Services Assurance Corporation (ESAC) was established in 1995. An independent, non-profit organization, ESAC became the official accreditation and financial assurance association for the PEO industry.

The purpose of ESAC is “to build integrity and trust and provide assurance for the PEO industry.” To achieve this, ESAC:

Establishes standards for ethical conduct, professional competency, and financial and operational reliability;
Provides a credible program of accreditation based on independent verification of standards compliance;
Provides financial assurance and notification programs to assure the clients, employees, and insurers of accredited PEOs and government agencies that accredited PEOs comply with ESAC’s standards; and
Provides services to make PEO compliance with state and federal laws and regulations more time- and cost-efficient and reliable.

Click here to learn more about ESAC’s standards and procedures.

ESAC maintains over $15 million in surety bonds that protect the payment of employee wages, insurance premiums, retirement plan contributions, and federal, state, and local employment taxes. Additionally, ESAC routinely monitors PEOs for adherence to:

Federal employment tax payments
State unemployment tax payments
Retirement plan contributions
Health insurance premiums
Workers’ compensation premiums
Background checks of the controlling person
An annual independent CPA financial audit
Compliance with over 40 industry financial, ethical, and operational standards
Licensing and registration in all states of operation

ESAC is managed by a board of directors that includes industry attorneys, certified public accounts (CPAs), and independent directors. These individuals have more than 100 years of combined PEO industry experience.

Click here to browse ESAC-accredited PEOs in your state.

Why is it important for PEOs to be ESAC-accredited?

ESAC accreditation is a critical measure of a PEO’s financial reliability. Similar to how FDIC is the standard for banks, ESAC is the standard for PEOs. Approximately 10% of PEOs are ESAC-accredited, meaning many may be risky partners (or require a lot of time and resources to evaluate).

To date, ESAC accreditation is the only way to confirm a PEO’s:

Ongoing financial reliability and payment of key employer liabilities,
Compliance with state and federal regulations, and
Adherence to industry financial, ethical, and operational best practices.

Additionally, ESAC proactively notifies clients if their PEO’s accreditation is terminated.

Other notable PEO certifications

ESAC accreditation is crucial, but it’s also important for brokers and business leaders to consider other industry certifications when researching a PEO. These include:

IRS Certified PEO (CPEO)

A certified PEO (CPEO) routinely passes strict audits and is certified by the IRS. CPEOs must maintain tax compliance, pass rigorous financial standards, and complete routine background checks. Less than 10% of U.S. PEOs have passed the CPEO IRS certification process.

Certification Institute (CI)

CI certification demonstrates that a PEO meets all industry professional risk management best practices, strives to create safe work environments, and effectively manages workers’ compensation losses. (Note: Only 1% of PEOs hold CPEO, ESAC, and CI certifications.)

System and Organization Controls (SOC) 1 Type 2

SOC 1 Type 2 certification is an internationally recognized standard developed by the American Institute of Certified Public Accountants (AICPA) that assures clients, partners, and stakeholders that an organization has established and maintained effective internal controls for financial reporting and data security.

Company culture awards

Accolades from institutes like Great Place to Work®, Energage Top Workplaces, and Comparably indicate that a PEO provides an engaging, enjoyable workplace. Happy employees have been shown to be 13% more productive, meaning your daily points of contact will likely be friendly and efficient.

Credential(s) Verified	ESAC Accredited & Bonded	IRS Certified	Financial Audit	State Licensed	SSAE	ISO	WC Risk Mgt Cert.
Federal employment tax payments	X	X
State employment tax payments	X
Retirement plan contributions	X
Health insurance premiums	X
Workers’ compensation premiums	X
Controlling person background check	X	X
Annual independent CPA financial audit	X	X	X
Compliance with >40 industry financial, ethical, operational standards	X
Licensing/registration in all states of operations	X			X
>$15M bond for payment of employee wages, insurance premiums, retirement plan contributions, and federal, state, and local employment taxes	X
$50K to $1M bond for payment of federal taxes		X
Internal controls effectiveness					X
Quality management systems conformity						X
Workers’ compensation risk management best practices compliance							X

Source: https://www.esac.org/Business/business-frequently-asked-questions

Choose your PEO partner wisely

Your PEO matters. It’s crucial for brokers to offer trusted solutions to their clients, and for small businesses to share their HR responsibilities and sensitive information with a reliable, professional partner.

Confirming a PEO’s ESAC accreditation (and more) saves time and resources during the evaluation process and ensures its adherence to government regulations and industry best practices.

One reputable example is ExtensisHR, a nationally recognized HR outsourcing firm. ExtensisHR proudly maintains several industry certifications, including:

Additionally, ExtensisHR’s renowned work environment is underscored by numerous company culture awards, which resonate through its best-in-class customer service model. With comprehensive HR solutions, a people-centric approach, and steadfast compliance, ExtensisHR enables brokers and small businesses to fully enjoy the benefits of a PEO partnership—worry-free.

Looking to learn more about PEO? Download the free eBook, “How Well Do You Know PEO?” or contact ExtensisHR today to discuss our trusted PEO solution.