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What Are the Downsides of a PEO?

Professional Employer Organizations (PEO) assist small and medium-sized businesses in streamlining their human resources and administrative functions. PEOs have some drawbacks, despite the benefits they provide, such as payroll management, tax filing, employee benefits, and risk management. Businesses must carefully weigh the benefits and drawbacks of using a PEO to determine whether it is the best fit for their needs. This article will go over the major disadvantages of PEOs.

What is a PEO?

Professional Employer Organizations (PEOs) are companies that provide HR and administrative services to other businesses, primarily small and medium-sized businesses. Companies can reduce the burden of HR and administrative tasks by outsourcing these functions to a PEO, freeing up time and resources to focus on their core business operations. Payroll processing, tax filing, employee benefits administration, risk management, and compliance with HR regulations are common services provided by PEOs. Companies that partner with a PEO can gain access to a variety of HR expertise and resources that may not be available in-house.

What are the downsides of a PEO?

All businesses including PEOs will come with a few disadvantages. 

Loss of control:

Because PEO firms assume responsibility and liability for their clients’ human resource activities, they require business owners to follow the PEO company’s policies and guidelines. 

PEOs, as they take on the responsibility and risk of their client’s HR functions, enforce adherence to their own policies and procedures. This co-employment setup may cause a loss of control over a company’s risks, insurance, benefits, and culture. PEOs also take control of all of the company’s employees and claiming them as their own. This makes the company not have any control on who they are able to hire. As PEOs can significantly impact an organization’s culture, leaders should be aware of this and take steps to minimize any potential negative effects.

When working with a PEO, a company must surrender some control over its HR and administrative functions, which can be difficult for business owners who prefer to manage these tasks independently. Additionally, if a company has unique circumstances or requirements, a PEO may not be able to offer the necessary level of customization.

Might not be worth the cost:

It can be challenging to figure out whether the services of a PEO are worthwhile. Your fee will typically be determined by the number of workers you have and which services you use. To determine whether a PEO is a good investment for your company, you’ll need to do some math. When shopping for a PEO, be sure you understand what they charge, including miscellaneous fees – and ask if these charades will be clearly itemized on your invoice. 

Compliance isn't guaranteed:

PEOs are meant to support businesses in complying with labor regulations, however, this assistance is not guaranteed. There is still a risk of them making mistakes or overlooking important tasks, which could result in negative impacts for both the business and its owners. Despite their aim to aid in adhering to labor laws, there is no assurance that this will always be achieved.

Less flexibility:

Flexibility and the ability to make quick decisions are essential for the success of startups. However, when using a PEO, the management sacrifices control over benefits such as health insurance and workers’ compensation and must rely on the PEO’s pre-selected insurance providers. This limits the options and reduces the flexibility for both the business and its employees. If you work with a PEO, you must use the designated benefits providers, limiting your ability to make changes on the fly, which is so important to the success of a startup. The PEO has control over the benefits carrier and can change it at any time, leaving the business with no say in the matter. While the management still has authority over hiring and firing decisions, they give up much control over important benefits.

Bottom Line:

While PEOs are an excellent choice for many small business owners, there will always be special cases where it makes sense to choose another solution. That shouldn’t discourage business owners from exploring their options. Superior Trucking Payroll Service can help you get out of a PEO as well but don’t just take our word for it, we have a testimonial video up on our YouTube page explaining a company’s situation with their PEO before switching payroll services to us. There is a link to the video below. Contact us if you need anymore information.

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Written by Mike Ritzema

Before founding Superior Trucking Payroll Service, Mike was the CFO of a trucking company with 80 trucks and a thriving brokerage. This experience gave him the perspective that a payroll solution has to make the lives of the office people better.  All the solutions he has designed are to benefit everyone.  Our company mission is to help trucking families and that includes the company owners, the drivers, and the office.

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