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Considering a PEO? Be sure to consider their potential pitfalls too.

Posted on: September 14th, 2017 | Category: Employee Relations, Government Regulatory & Compliance Issues, HR Outsourcing, HR Support & Project Work, Human Resources, myHR DirectLink, Our Blog, Payroll/Benefits

PEO companies lease employees back to businessesEEOC, FLMA, FLSA, ACA, ADA, DOL, DACA…employers sure do have to deal with a ton of abbreviated terms just to get through their human resources functions. It’s as if you need a cheat sheet of terms just to have a basic conversation about HR. (Good grief! Yet another acronym!)

We’d like to take this opportunity to talk about a particular abbreviation that business owners may run into: the PEO. Unlike the aforementioned acronyms, this one is not a government agency, regulation or executive order. It is a type of employment arrangement that should not be taken on without careful consideration.

When you contract with a professional employer organization (PEO), they basically hire your employees to work for your business. On the surface, that sounds like a weird concept, and that’s because it is a complicated arrangement that has some murky control issues.

Professional employer organizations, explained

When you use a PEO, your staff technically becomes their employees. The PEO then leases your former employees back to you. The PEO becomes the employer of record for tax purposes, and it will file W2s for the employees. You continue to handle the employee-relations aspects of the work arrangement. The concept is that you and the PEO become co-employers and manage the workforce together. That being said, you still maintain compliance and regulatory risks as you did before the PEO stepped in.

To a degree, the PEO alleviates the need to manage HR administration, benefits, payroll and workers’ compensation. You pay one fee, which includes employee benefits and insurances, which are purchased by the PEO as part of a larger pool that includes all its clients’ employees. However, claims made by all of a PEO’s clients are also bulked together, which can increase costs to your company. Plus, you pay the PEO provider based on a percentage of salaries. The more your employees earn, the more you pay.

Forbes has a few thoughts on the pitfalls of PEOs

There’s a great Forbes article on the history and realities of PEOs written by Cameron Keng that we think is a worthwhile read for anyone considering this service. While these companies have been around since the 1960s, the implementation of Obamacare has led a lot of small companies to try PEOs for the first time as a means of containing costs.

Unfortunately, there are some serious drawbacks to using a PEO that are often not understood or fully considered by these business owners before they sign on the dotted line.

The Forbes article concisely sums up ways a PEO relationship can go dreadfully wrong. For starters, Keng tells the story of Horizon Health Center’s nightmare surprise the day before its new plan was rolled out. The company had to close operations the day before to prepare, and when they did they were hit with an expensive 11th-hour surprise (emphasis ours):

…the night before rolling-out the co-employment plan, Horizon received an email stating that they would be required to pre-fund or pre-pay the payroll period in advance by two weeks. On a cash flow basis, this requires Horizon to pay 200% of their normal payroll expenses in a single period. Thus, this causes a significant cash flow disruption to the business.
Horizon was incensed to learn that [the PEO] changed the terms of their contract without advance notice the night before the co-employment rollout was scheduled. Essentially, Horizon felt they [were] coerced to accept the new terms of the contract without the opportunity to review or negotiate the terms without disrupting the company’s operations or their employee’s payroll

Horizon was notified that its 100 employees would have their health insurance plans terminated. The PEO refused to accept phone calls, only communicating through email, during the entire tense back-and-forth regarding the issue. Seeing the writing on the wall, Horizon decided in the end that it was best for their employees and their company to return payroll in-house.


Who does that to a new client? Not companies with your business’s best interests in mind, that’s for sure. Sadly, the co-employment risks do not stop there. Other potential issue to keep in mind:

  • Risk of a PEO failing to properly file or remit taxes on behalf of your business: Guess what? You’re still on the hook legally and financially for any the mistakes made.
  • Your company’s workforce become part of a larger pool of employees all getting the same bulk of services: When there is a problem, be prepared to take a number and wait in line, and hope that the customer service representative you get understands the issue (and urgency) you are dealing with.
  • The Voluntary Certification Program for Professional Employer Organizations is just that—voluntary: Certification to offer PEO services is not mandatory, therefore you need to specifically look for it while shopping around. HR credentials are also not mandatory.
  • A negative impact on your employees’ morale, satisfaction and loyalty to your business: Who wouldn’t feel badly about their workplace if their HR services are handled in a thoughtless or incompetent way?

What makes an HR outsourcing company different from PEO?

With an HR outsourcing company, like myHR Partner, no third party gets between you and your employees. Your employees are still yours. The outsourcing firm supports your people and the culture in a way that drew them to you in the first place, while offering you only the HR services you need. Professional HR experts can manage all of your vendors—and be a single-step solution if you like—while giving you total flexibility.

HR outsourcing is all we do here at myHR Partner. We offer myHR DirectLink services and add-on services to fit your unique needs and help boost your bottom line. To find out more about how we can help you improve your company’s ROI and productivity by contacting us at 610-443-0119, or by emailing us today.

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myHR Partner’s periodic publication, MODERN EMPLOYER, is created for business executives, owners and HR professionals who want to maximize their human resource functions using progressive hiring and HR strategies. It’s informative, fun and practical. Oh, and it’s FREE too!

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