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In a previous post, we discussed how a Professional Employer Organization (PEO) company works, its many benefits, and the tax implications you may face if you hire one.
As a recap, a PEO is a service that small or medium-sized businesses may use to outsource some of their human resource, payroll, benefits, taxes, recruiting, and other management tasks. As you might imagine, there are both pros and cons in hiring a PEO.
Here, we’ll discuss the disadvantages of using a PEO, along with the associated costs of a PEO.
Disadvantages of Using A PEO
Loss of Control
As we discussed in our previous post, because PEO companies assume the responsibility and liability for the human resource activities in their client’s businesses, they require that business owners adopt the PEO company’s policies and guidelines.
This co-employment relationship can result in a loss of control – not just of benefit plans, carriers, and risks – but possibly the company’s culture as well. It’s imperative for the business owner(s) to be mindful of this and to take care and allow for the proper attention during the PEO transition to ensure their company’s culture is not negatively impacted.
Decentralized Human Resource Activities and Inflexibility
Much of a startup’s success is dependent on its ability to be flexible and make spur-of-the-moment changes and decisions. Unfortunately, when a business hires a PEO, management loses much of their authority over workers compensation, health care benefits, etc., although management retains its authority over hiring and firing decisions.
In addition, all available insurance plans come from one or two carries, selected by the PEO. This means that companies and their employees don’t have a say in their benefits carrier, and are limited in the plans they may select. The PEO has complete control of the carrier (and has the freedom to change the carrier at any time).
PEO pricing can be subjective and negotiable, making it difficult to know what is a fair price.
Typically, a business is charged a percentage of their payroll. Invoices can be difficult to understand with payroll, taxes, workers’ comp, ELPI, and their administrative fee often lumped together as a “package.”
When shopping for a PEO, be sure you understand what they charge, including miscellaneous fees – and ask if these charges will be clearly itemized on your invoice. In fact, it’s best to ask the prospective PEO service provider to unbundle the quote before you agree to work with them.
PEOs support a large number of employees, which is what gives them the ability to offer affordable insurance plans and benefits that a small business might otherwise be unable to offer their employees – but it’s also what makes it more difficult to get immediate attention when it’s needed.
As a result, customer service can feel slow or impersonal, and often a business doesn’t have a dedicated support person, but rather must communicate with whichever representative is available.
Ask your prospective PEO if you will have a dedicated HR service representative for admin and another for your employees.
Resistance from Employees
Some employees may be difficult to sell on the idea, especially if they will have to change their current insurance policy. They may also dislike the idea of dealing with an outsourced company when it comes to HR needs, as they are currently accustomed to speaking with someone within the business with whom they have a personal relationship.
Questions to Ask Before Hiring A PEO Company
We want to be clear – we’re not advocating that you skip a PEO company altogether. We simply want to make sure you’re aware of the disadvantages associated with a PEO, and properly equip you to navigate those possibilities. Here are some questions to ask when deciding if a PEO company is right for you.
- Does the PEO make a commitment as to how many hours per week they will offer support to your business?
- Do they provide a dedicated contact for your business? Can they guarantee that you’ll always have access to your contact?
- Do they come on-site for an emergency?
- Do they itemize their invoice? What miscellaneous charges should you expect to see?
- Under what circumstances will they change their providers? How often does this happen? Will your business have any input in such a scenario?
- How large is the PEO company? How many other businesses do they serve?
- What services are included? Are there different level packages?
PEO companies can certainly be a cost-efficient option for a growing business. A PEO takes the guess-work out of all HR operations, and allows the business owner to focus on more important tasks, like expanding business operations. But understanding the potential PEO downsides and knowing the right questions to ask to mitigate these disadvantages will ensure you’re prepared to find the right fit for your business.
We moved 3 of our employees to a PEO for workman’s comp purposes. The PEO folks are telling me that they can keep their benefits with us still. Health, dental, 401(K) etc. I do not see how that is possible if those 3 our now under a different company and FEIN number. They still have not told me how this is possible. The year end tax forms and ACA reporting won’t match. Is it possible? Thank you
I don’t know how it would be possible because health and dental insurance policies are written under the group which is tied to the business EIN. If the employees are now working for the PEO, then the PEO has to provide those group health benefits.
I am not certain about the retirement benefits.
All the best…
I moved to Paychex PEO January 1, 2023. I hate it was lied to and the fees are phenomenal. How do I get out?
I am sorry this happened.
When you moved to the PEO, you would have signed an agreement with terms that should include a termination clause, among others.
They may have breached their contract with you.
I recommend you take the agreement to your business attorney to review it in the context of what has happened.
Hope it resolves quickly for you…
What is your experience with the pros/cons of hiring a PEO if you are planning on selling your company in the near future. (In my case, 2-3 years.) We are a manfuacturing company with 49 employees.
Great question, Belinda, we’re selling a manufacturer now who transitioned to a PEO about 2 years ago. All prospective buyers so far are looking at transitioning the employees as their own employees. As noted in the article, confirm there are no restrictions to transitioning the employees and related benefit plans to a new owner. At your size, I suspect a strategic buyer would want to have all employees as their employees on their benefit plans in the future. A pro to transitioning is not needing an HR leader to oversee and lead all the HR duties as the PEO will take up those responsibilities. Additionally, HR management is their core business so you should get excellent leadership in employee oversight. Just know at your size, I’ll bet most financial and strategic buyers will want to convert the employees to their employees in the future.