Mark Pahmer, president of 22-employee Graphics for Industry, in New York City, is a big fan of employee leasing. That's because employee leasing results in less expensive health care premiums and a broader range of benefits choices for the employees of his company, which provides 3-D graphic services to ad agencies and film production companies.

What's employee leasing? An employee leasing company -- often known as a "professional employer organization" (PEO) -- takes over technical human resources administration for the company that hires it. In doing so, the PEO becomes a coemployer of the company's workers, charging a per-person fee based on the client's employee count.

The arrangement is a win-win situation. Often PEOs can offer a broad range of benefits at lower cost because they are the coemployers of so many workers -- and that means employees win. Graphics for Industry also wins, says Pahmer, because his accounting staff can focus on collecting receivables instead of, say, doing payroll and sorting out insurance claims. He explains that the PEO his company works with takes care of those tasks and nearly every other technical and legal human resource task as well.

Pahmer, who began using employee leasing in the early 1990s, has had a happy and profitable experience, but had he been dealing with a less reliable PEO, things might have turned out differently. The employee leasing industry has seen some spectacular flameouts, owing to everything from bad risks and poor management to outright fraud. When a PEO goes under, its client companies often discover that their payroll cash and insurance coverage also vanish. If you're considering a PEO, here are some criteria to help you decide if the one you're looking at -- or the one that's seeking your business -- is right for you.

  • Financial strength. Zero in on the company's economics. Demand to see audited financial statements, and have an accountant dissect them for you. Some PEOs, in rushing to lock up as many clients as possible, take on risky accounts that can undermine their financial stability. The soundest PEOs are selective in accepting new business.

    Find out if your state licenses PEOs that meet certain standards. Also check with the Institute for the Accreditation of Professional Employer Organizations, in Little Rock, Ark. This self-regulating industry group has accredited only 21 or so PEOs to date, but it represents workers in 50 states. Find out more at the institute's Web site,

  • References. Request a long list of the PEO's clients. When you call them, concentrate on details: With whom inside the PEO do you deal? How often do the PEO's staffers visit your site? What happens if there's an injury? A lengthy list of clients helps ensure that you won't get just references who are schooled in the "right" answers, and offers a wider look at the PEO's customer base.
  • The comfort zone. When you take on a PEO, you're taking on a partner. Check for a personality fit. You and your employees need to feel comfortable with the switch. Employees are invariably skeptical at first, but a good PEO will offer orientations to alleviate their concerns. Also, make sure the PEO's executives have clean records.
  • Services. Ask if the PEO will customize a program to your requirements. If you want to administer your own 401(k), for instance, the PEO shouldn't object. But if you want to use only one of its services -- say, only workers' compensation insurance -- the PEO might not want you.
Miriam McKendall, an employment lawyer in the Boston office of Holland & McKnight, advises that you ask if the PEO will defend and indemnify you against employee lawsuits relating to the services for which it is responsible.

  • The merger possibilty. Be aware of the potential for a merger. Several years ago, the employee leasing firm that Mark Pahmer worked with was acquired; he now works with the successor PEO. "It wasn't a problem," Pahmer says. And he notes that mergers make sense in the industry because "it's a high-volume-buying business."
  • The contract. If the PEO hands you a standard contract, remember that "everything is negotiable," says McKendall. Be wary of signing anything that broadly insulates the PEO from liability.
Some PEOs, McKendall says, will try to slip in potentially pernicious clauses. It's a good idea to have an employment lawyer review the contract.