PEO Disadvantages: 5 Reasons Companies Say Good-Bye
Professional employer organizations can bring a lot of value to a company, from increased payroll accuracy to lowered health and legal costs. It can also deliver less tangible but still significant value like lowered absenteeism and increased employee morale.
But is it the right fit for every company?
The Covid-19 pandemic created do-or-die scenarios for many small business owners. Talent shortages, supply chain disruptions, mandatory business closures and other unforeseeable hurdles left businesses scrambling to keep their doors open.
For some businesses, budget cuts required that they pull all work in-house, including HR. Others, however, found that their PEO helped keep the business solvent by guiding them through small business relief legislation, compliance issues, loans, and more. In fact, according to a recent NAPEO report, PEO revenue, gross profits, and number of clients grew from 2020 to 2021.
The report also found that small businesses were were 58% less likely to have closed during the pandemic if they worked with a PEO.
Despite the strong evidence that PEOs benefit small businesses, there are still times when a PEO isn't the right fit. Here are the explanations most commonly given by business owners and managers for giving up their PEO relationship.
More Internal Control
It is a rare business owner who does not struggle to some extent with giving up a portion of control within their company. Under a PEO, the employer gives up the ability to choose the vendors that he partners with, mainly health and workers comp carriers. If the PEO selects an unfit provider, the business owner suffers the consequences even though they didn’t have input in the decision. Also, in the eyes of the IRS and insurance carriers, your business isn’t seen as a “unique entity” and therefore fails to establish workers' comp experience and unemployment ratings of its own. The upside is that you are lowering your costs and gaining access to better plans and services under the PEO umbrella.
Talent management can also create friction between a business owner and the PEO. Since the owner works with his people on a daily basis, he somewhat justifiably feels that he is the best qualified person to oversee their hiring, training, discipline and firing. However, the PEO will provide strict policy to enforce compliance and business owners must follow procedures as instructed to remove themselves from any liability. Even if your cultural differences are not aligned with the PEO policies and procedures, you still need to comply. While this may feel like a loss of control, in reality it is a risk management mesaure that protects the business from legal or financial ramifications of non-compliance.
Unfortunately, many owners don't realize that they bring a level of subjectivity to the process that a PEO does not. This lack of objectivity can result in some serious problems if compliance guidelines are not followed.
Not Enough Perceived Value
When the internal HR budget is buried in the operating costs line on the P&L, many owners do not pay it as much attention as they do the line item cost for a PEO. The truth, however, is that the cost of the PEO is offset by added value and savings like lowered insurance premiums and decreased legal costs. For many small or startup companies, working with a PEO is the best financial scenario.
As businesses grow, however, the equation may change. For businesses over 100 employees, the costs of maintaining employees actually decreases, yet PEO fees do not. This is when it may make sense to consider hiring an internal staff to take on the HR responsibilities.
Disruptions in Process and Technology
Working with a PEO may require you to change your current technology platform or alter processes that work well for your team. Technology expectations can be a dealbreaker for some workers, and may cost you a promising candidate if the technology you use is outdated or difficult to navigate.
This issue is rightly placed at the door of the PEO that does not take it seriously. If a PEO does not properly evaluate the needs of a company – now and for the future – they may not be in a position to meet your accounting demands as your business grows. Most small businesses don’t require complex reporting or need to interface with third party applications. But, once the employer reaches a certain size, the CFO may request an HRIS with self-service capabilities, automation, and easy operation by management and employees. PEOs can be challenged to deliver custom HR software because they need a platform that will work for the majority of their clients.
A business owner rightfully expects that a PEO – as the expert – can recommend a system that will meet their current needs and that is reasonably affordable to expand when the business needs increase. The key to remember is that a PEO is not a one-size-fits-all solution. You may be unhappy with the technology and process requirements of one vendor, but another may be an excellent fit for your culture and team. Before giving up on PEOs altogether, it's beneficial to survey the landscape to see if another provider may offer a better solution.
Healthcare, Workers Comp, and Administrative Costs
Healthcare costs can vary widely based on the needs of your business as well as the group plan offered by the PEO. In many cases, you'll get better rates with the PEO than you could on your own (this is one of the big benefits of making the switch). However, in certain scenarios you may not qualify for the PEO's group plan or your premiums may be higher than they would be otherwise. For example, if you have a young, healthy workforce, you may be able to qualify for lower rates.
The same is true for workers compensation. The hope is that the PEO will be able to offer you a cost savings on each of the codes you utilize, but it is not always the case. A PEO’s rate may increase due to their number of claims, and they may pass that increased rate along to you in the form of added fees. Other administrative fees may also be charged as a flat fee per employee or as a percentage of payroll, so it always pays to ask for an itemized quote before choosing a PEO.
The HR Team Doesn't Get It
Instead of treating the PEO as a resource, many in-house HR staffs consider the vendor a usurper of their power. For these reasons, they may not give the PEO the support and cooperation it deserves within the organization. In addition, the HR team may negatively influence the business owner's decisions and cause them to prematurely dismiss the PEO.
Like any other vendor, a PEO will take time to understand the culture and the procedures of a new client. It is imperative that a business owner give them sufficient time to do so. Otherwise, the entire endeavor is doomed to failure and a waste of everyone's time, effort and money.
Conclusion
The bottom line is that 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 for exploring their options, however. The vast majority of small business will experience benefits in the form of cost savings, time and energy savings, added resources, and stress relief when they partner with a PEO. By offloading administrative HR tasks to an external provider, you'll be free to spend more time working on the things that matter most: developing your products and services, serving your customers, and growing your business.
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