PEO Problems: Three Serious Disadvantages of Using Professional Employer Organizations

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A Professional Employer Organization, or PEO, is a service that employers can use to outsource various human resource and employee management tasks. Some of the tasks that a PEO can assist a company with include payroll, benefits, taxes, recruiting, and more. Many startups and small to mid-sized companies rely on a PEO to take care of the human resource duties that so often bog down owners and company managers. While a PEO may seem like the perfect solution to HR struggles experienced by startups, there’s actually some serious disadvantages upon closer examination.

Some of the disadvantages of using a PEO to manage employees as a startup include:

  • Debilitating Decentralization – The use of PEOs to manage employees decentralizes human resources activities. A PEO “co-employs” your employees for tax and payroll purposes. While you maintain control and oversight over employee productivity and direction, the PEO has almost exclusive administrative control over your workforce. Flexibility and autonomy is essential for the success of a startup company. Working with a PEO strips management of any authority in regard to hiring/firing, workers compensation, and health care benefits.
  • Compromised Company Culture – Partnering with a PEO can often have a negative impact on a company’s culture, because the startup manager does not have full control over employee relations and benefits. A startup up company must have an inclusive company culture, because working at a startup is already stressful. The long days and nights, potentially tight finances, and other unforeseen obstacles can cause negativity among co-workers and co-managers. This negativity can cripple your startup company at a very critical time in its development. According to a TruPath survey, unhappy and undervalued employees take 15 more sick days per year than the average worker. Startups generally run very lean, especially when it comes to personnel. A company in its infancy cannot afford to have unhealthy and unhappy employees missing work during crucial periods of growth.
  • Financial Freights – Employees that are co-employed by a company and a PEO are paid by the PEO on payday. However, before the PEO can pay the employees, they expect to be paid their fee, employee wages, and payroll taxes. If the PEO goes out of business after collecting the company’s contributions, but before paying the employees, the company could lose the money they gave to the PEO while also being on the hook for the wages and payroll taxes owed to the employees. Cash flow is essential for any company, but it is even more essential for a new company or startup to continue its growth. Counting on a PEO that fails could start a domino effect of cashflow issues that leads to the eventual failure of an already potentially tenuous venture.

Entrepreneurship is an admirable, but scary undertaking. There is a lot at stake for managers, investors, employees, and clients alike. Partnering with a Professional Employer Organization may seem like a great way to alleviate some of the uncertainty that is inherent in the nature of a startup company, but any manager should seriously consider the potentially destabilizing nature of a co-employment partnership before signing any agreement.