Home > Ask SmallBizClub > Human Resources > What are the down sides about using a PEO (Professional Employer Organization)?

What are the down sides about using a PEO (Professional Employer Organization)?

By: Bill Wortman

What are the down sides about using a PEO (Professional Employer Organization)? What are the limitations and what issues might come back to haunt us over time if we contract with a PEO?

Answer: Disadvantages of Using Professional Employer Organizations for Staffing: Many small businesses have been utilizing Professional Employer Organizations (PEOs) for insurance savings and other staffing cost management solutions. While there are potential advantages to contracting with a PEO, there are also potential disadvantages that you need to thoroughly analyze and consider. For example, if you have been aggressive at obtaining good pricing for employee benefits and otherwise controlling your payroll costs and the PEO proposal does not offer any current cost savings, then a PEO may not be advantage for your business at this time. As to employee management issues, when a small business contracts with a PEO for staffing purposes, the business loses much flexibility, autonomy, and essentially takes what that PEO gives them in regards to hiring/firing situations, health benefits plans, etc.

We have listed out some specific disadvantages of contracting with a PEO and areas of concern that are worth your consideration below:

•   Control over employees
•   Group health insurance and PEO purchasing power
•   Workers’ compensation and PEO purchasing power
•   PEO Cost versus true value
•   Loss of control of essential processes
•   Outside influence on your company culture
•   Loss of institutional knowledge
•   Resistance from employees

Often the disadvantages and advantages alike are contingent upon your service agreement contract and negotiations with the PEO you work with.

Published: January 3, 2014
6812 Views

Bill Wortman

As the Chief Business Consultant at BizCoachingOnDemand.com, Bill has over 40 years of business experience. He's held multiple executive-level positions and fulfilled the role of CFO at large, publicly-held (NYSE, NASDAQA, and AMEX) corporations. In addition, he's also been an owner of several successful private ventures in real estate and in the automotive industry.