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1 Guide to PEO Due Diligence John Iorillo, Ambrose Co Founder & Former Co CEO info@ambrosegroup.com

2 Guide to PEO Due Diligence Professional Employer Organizations partner with businesses to manage payroll, employee benefits, and back office HR administration. The PEO solution involves a legal arrangement called co employment which allows the PEO to make payroll, deposit employment taxes, and provide insurance benefits from its own account, ratherr than as an agent or on behalf of its client. In order to ensure that your PEO is fit to take on these responsibilities, you should understandd its operating history and financial strength. This paper will assist you in performing your due diligence on a PEO. As discussed in detail below, the five things thatt you should require of a PEO prior to signing a client service agreement include: (1) client references, (2) ESAC accreditation, (3) SAS No.. 70 (Type II) Report, (4) audited financial statements, and (5) state license (if applicable). 1. CLIENT REFERENCES The best way to evaluate the quality of a PEO s service is to speak with clients. If the PEO is willing, you should review a client list and pick the companiess to provide references rather than allowing the PEO to choose for you. In many cases, you will recognize clients that you know already and you should contact those companies on your own. In addition, you should reach out to your personal and professional networks (e. g., professional associations, online social media sites, etc.) to find others willing to give you a candid evaluation of their experience with the PEO. If you cannot find any of the PEO s clients on your own, it is customary for a PEO to arrange reference calls for prospective clients to speak directly with existing clients. 2. EMPLOYER SERVICES ASSURANCE CORPORATION The most rigorous compliance standardd in the PEO industry is accreditation by the Employer Services Assurance Corporation (ESAC). ESAC is an independent non profit corporation that verifies and monitors a PEO s compliance with state and federal employment tax laws, insurance regulations, and important industry operating and ethical standards. ESAC provides services and assurances similar to the FDIC for the banking industry, SIPC for the securities industry, and state insurance guaranty associations for the insurance industry. Among the various ESAC accreditation requirements, accredited PEOs must submit audited financial statements and quarterly verification by an independent CPA firm of the proper and timelyy payment of all employment taxes, benefit contributions and insurance premiums. The performance by accredited PEOs of their key responsibilities is backed by bonds providing financial assurance forr clients, employees, insurers and regulatory authorities. As of October 2013, 29 PEO Groups have attained ESAC accreditation (out of roughly 700 PEOs operating in the U.S.). You can check whether the PEO you are considering is ESAC accredited online at 3. SAS NO. 70 (TYPE II) REPORT In today's economy, a PEO must demonstrate that it has adequate internal controls and safeguards when it hosts or processes data belonging to its clients. The Statement on Auditing Standards No. 70, Service Organizations (SAS No. 70), is a widely recognized auditing standard developed by the American Institute of Certified Public Accountants. An auditor's examination performed in accordance with SAS No. 70 is widely recognized because it represents that a service organization has been through a rigorous audit of its operational control objectives and activities. In addition, the requirements of Section 404 of the Sarbanes Oxley Act of 2002 make SAS No. 70 audit reports even more important to the process of reporting on the effectiveness of internal control over financial reporting. 2

3 SAS No. 70 is the authoritative guidance that allows PEOs to disclose control activities relating to business operations and processes to clients and client financial auditors in a uniform reporting format. The SAS No. 70 (Type II) Report, which includes the auditor's opinion as to the effectiveness of the PEO s operational controls and control activities, is issued to the PEO at the conclusion of an annual examination. Prospective PEO clients should require a SAS No. 70 (Type II) Report of any PEO they consider hiring. 4. AUDITED FINANCIAL STATEMENTS Although a financial statement audit performed by a certified public accounting firm is one of the many requirements for ESAC accreditation, you may also want to review your PEO s audited financial statements to determine whether, in your opinion, it is adequately capitalized and not subject to dangerous levels of indebtedness. Any PEO that does not have up to date audited financial statements should not be considered as a vendor for your company. 5. STATE LICENSURE Many states require a PEO to obtain a license or registration in order to operate in the state. The chart in Exhibit A below lists states thatt require a PEO license or registration, and the contact informationn for the department in the state responsible for regulating PEOs. Where available, the chart provides a further link to those states publishingg a list of licensed PEOs. ABOUT JOHN IORILLO John Iorillo is the Co Founder and Former Co CEO of Ambrosee Employer Group, LLC, a New York City based Professional Employer Organization. Prior to co founding Ambrose Employer Group in 1996, he practiced tax law with the law firm Proskauer Rose and is the recipient of the Ernst & Young Entrepreneur of the Year award for New York City in ABOUT AMBROSE Ambrose delivers high touch human resources services to emerging financial services organizations. With the help of Ambrose s HR administration, payroll, and employee benefits solution, over 950 clients have been able to free resources to focus on their core activities. Headquartered in New York City s financial district, Ambrose currently serves over 650 financial services firms, including over 350 hedge funds and private equity firms. Crain's New York recently ranked Ambrose among the 50 fastest growing companies, and the New York State Society for Human Resource Management (NYS SHRM) named Ambrose one of the "Best Companies to Work For in New York. 3

4 Exhibit A State Organization Address Contact Website Link Arizona Secretary of State, Corporations Commission 1200 West Washington, 1st Floor, Phoenix, AZ (602) or Arkansas Department of Insurance, Property & 1200 West Third Street, Little Arkansas Casualty Rock, AR (501) PEO statute is currently California pending in California. Colorado Dept. of Labor & Contact Information: Colorado Employment ui.leasing@state.co.us. (303) Wage and Workplace Standards 200 Folly Brook Blvd. Connecticut Conn. Department of Labor Wethersfield, CT (860) Florida Department of Board of Employee Leasing Companies Business & Professional 1940 North Monroe Street, Florida Regulation Tallahassee, FL (850) =0&SID= Illinois Department of 320 West Washington Street, Illinois Insurance Springfield, IL (217) Indiana Department of 311 West Washington Street, STE Indiana Insurance 300, Indianapolis, IN (317) bin/idoi/ssdisplay 2.pl?file=PEO&letter=a Department of Workers 657 Chamberlain Avenue, Kentucky Claims, Coverage Branch Frankfort, KY (502) Louisiana Department of Louisiana Insurance, Agent Licensing P. O. Box 94214, Baton Rouge, LA (800) Insurance Company Examiner Financial Analysis Maine Bureau of Insurance 34 State House Station, Augusta, Maine PEO Link Maine Maine (207) Department of Labor and Workforce Development Massachusetts of Unemployment Assistance 19 Stanford Street, Boston, MA (617) Minnesota Minnesota Department of Commerce 85 7th Place E., Suite 500, St. Paul, MN (651) Department of Labor & Industry, Workers Compensation Regulation Montana Bureau, Carrier Compliance Unit 1805 Prospect Avenue Helena, MT (406) Montana PEO Link of Industrial Relations Industrial Insurance Regulations Section, Employer 400 West King Street, Suite 400, Nevada Compliance Unit Carson City, NV (775) New Jersey Department of New Jersey Labor, of Employer Accounts P. O. Box 110, Trenton, NJ (609) ext New Jersey PEO Link New Mexico Regulation and Licensing Department, 505 Marquette NW, Suite 1810, New Mexico Employee Leasing Program Albuquerque, New Mexico (505) New York Department of Labor, of Labor Building 12, Room 266A, State New York Standards, Permit & Certification Program Office Building Campus, Albany, NY (518) New York PEO Link North Carolina Department of Insurance, Financial Evaluation, Special 1201 Mail Servicee Center, North Carolina Entities Section Raleigh, NC (919) Secretary of State, of 600 East Boulevard Avenue, North Dakota Business Information & Registration Department 108, Bismarck, ND (701)

5 State Organization Address Contact Website Link Ohio Ohio Bureau of Workers Compensation 30 W. Spring Street, Columbus, OH (800) Oklahoma Oklahoma State Insurance Department, Financial Mail: P. O. Box 53408, Oklahoma City, OK or (405) Oregon Department of Consumer & Business Services, Workers Compensation 350 Winter Street, Northeast, Salem, OR (503) Oregon PEO Link Rhode Island Rhode Island Department of Administration, of Taxation One Capitol Hill, Providence, RI (401) South Carolina Department of Consumer Affairs, PEO Services P. O. Box 5757, Columbia, SC (803) Tennessee Tennessee Department of Commerce & Insurance, of Regulatory Boards, Employee Leasing Program 500 James Robertson Pkwy, 2 nd Floor, Nashville, TN (615) Texas Texas Department of Licensing and Regulation, Staff Leasing Services P. O. Box 12157, Austin, TX (512) Utah State of Utah Insurance Department, Company Licensing State Office Building, Room 3110, Salt Lake City, Utah pdf Vermont Vermont Department of Labor 5 Green Mountain Drive, P.O. Box 488, Montpelier, VT (802) Virginia Virginia Workers Compensation Commission 1000 DMV Drive, Richmond, VA (804) West Virginia West Virginia Offices of the Insurance Commissioner P.O. Box (1124 Smith Street), Charleston, WV Wisconsin Wisconsin Department of Regulation & Licensing PO Box 8935, Madison, WI Wisconsin PEO Link 5