All the Reasons You Shouldn’t Work with a PEO

If working with a PEO (Professional Employer Organization) can boost business growth by 7-9%, lower turnover by 10-14% and make it more likely that a company will increase YOY profits and stay in business from one year to the next, all without adding more work to anyone’s plate (and actually taking a lot of it away), why isn’t every small business using one?

It comes down to this: reputation. A quick search of the Internet will result in some pretty compelling arguments against PEOs. Some of the claims are true, some aren’t. Here are a few examples and whether they’re true, false or something else entirely:

PEO didn’t pay clients’ employment taxes.

TRUE. In 2011, an executive in San Antonio, Texas, was accused of failing to pay more than $66 million in payroll taxes and workers’ compensation insurance collected from his PEOs’ clients between 1999 and 2005. The cash was instead pocketed by the executive and his co-conspirators, who went so far as to create fake insurance certificates and set up fake phone numbers that clients’ could call to speak to their insurance provider. The company operated numerous PEOs in the area all with the same mailing address, each of which participated in the scam. Similar situations are rare, but companies can protect themselves by learning more about the PEO’s history and finding out if they’re in the business long-term or for a short-term win.

PEO workers’ comp fraud.

TRUE. In a $100 million scam, owners of multiple PEOs were selling fake worker’s compensation insurance to clients. The activities, which took place between 2001 and 2004, resulted in charges of conspiracy, wire fraud, mail fraud and money laundering for the owners of the PEOs and multiple indictments. You can learn more about the case from the Department of Justice in U.S.A. v Jerry M. Brewer et al., and protect yourself by researching the history and reputation of any PEO you’re considering working with.

The fine print of the PEO agreement was a little sketchy.

Likely TRUE (but maybe only part of the story). A Forbes contributor tells the tale of a small business that handed over its HR to one of the biggest PEOs in the nation, Insperity. A day before the small business’s first payroll was scheduled, says the post, Insperity let them know that they required double funding of the first payroll, which left the small business cash strapped — and incredibly stressed about the PEO relationship it had just entered. The takeaway? PEOs that have this requirement need to clearly communicate it with clients, and client companies need to be fully aware of the implementation process to avoid any stressful surprises.

Paying a PEO to use your own workers.

FALSE. Countless posts warn against employee leasing, with claims ranging from paying a PEO to use your own employees to the need to fire your staff so the PEO can hire them and charge you more to use the same employees. Fortunately, employee leasing (co-employment) doesn’t actually work that way. Employees are paid the wage that you set and negotiate with the employee, while the PEO is compensated for the services it provides (i.e. the HR functions and any benefits that the company negotiates for its employees). Since some PEOs calculate service fees on a per-employee basis and need funding in advance from clients to cover payroll, some people may misconstrue this as “renting back their own employees from the PEO” rather than paying for the HR services the PEO provides.

PEO employee data gets hacked.

TRUE. Another big-name PEO, ADP, was the subject of a serious data breach. Thousands of employees of ADP clients had personal data compromised in 2016, which enabled criminals to set up fraudulent accounts, steal W-2s and file false tax returns. While this security breach was completely preventable, it serves as a reminder to always ask a PEO what security measures they have in place to ensure data breaches won’t happen with your employee data.

Leased employees are re-assigned to a different employer.

FALSE. Plain and simple, this isn’t the way a PEO operates. A full-service PEO is really just like an in-house HR team that splits its time among several companies. For example, at Stratus.hr, we ensure our clients’ employee hours are tracked, time off is calculated, employment taxes are paid, and employees receive their paychecks on time. We also negotiate and administer benefits packages at competitive rates, ensure clients are in compliance with all federal employment regulations, onboard new employees, handle new hire orientation, termination and retirement, conduct people-management trainings, administer worker’s compensation claims, provide a portal for employees to log in to access their HR info, pay stubs, benefits enrollments and cards, and act as advisors whenever needed. While we can help clients post job announcements and access an Applicant Tracking System (ATS) to make the process easier, we don’t determine who gets hired, promoted, transferred, reassigned or terminated. And we definitely don’t shift employees of one client to another client.

Why a PEO’s reputation matters to your business

Why are we telling you all of the bad? Because there’s a lot of information and misconceptions about PEOs out there — and the list we’ve compiled doesn’t cover the half of it. Overall, PEOs can provide invaluable services to businesses — HR skills and tools, advice and expertise, risk management, access to benefit plans that keep a company competitive in terms of hiring and retention — and a very affordable way to have the equivalent of a fully staffed team of HR experts keeping the people side of your business running smoothly. But, like any business relationship, you have to check each one out carefully.

The lesson is this: do your homework. Research the PEO you’re considering online. Request a face-to-face demo of their tools. Find out what happens when you have a “why” or “how” question — something beyond “what’s my password?” Be nosy. It’s the best way to protect yourself and ensure you’re getting the right solution for the long-haul, too.

At Stratus.hr, we work primarily with businesses that want a full-service option; love technology for their employee and manager self-service needs; desire online tools to get HR done quickly, accurately and securely; need benefits to keep them competitive in their industry and market; and are looking for a custom-fit HR plan (our HR-outsourcing approach isn’t cookie-cutter). Our PEO clients also want staff and expertise to answer their questions, who know their employees’ names and how to prevent costly errors, omissions and mistakes — the same service our clients would get from a large, in-house team.

Not every PEO operates the way we do; larger PEOs may focus on tech tools and benefits without providing personal support; others exist mostly as a means of providing lower-cost benefits plans. What’s important is that you find a PEO or other HR-outsourcing solution, such as an ASO, that gives you the services you need — nothing more and nothing less — that will be available to support you both now and in the future.

Reasons to not use a PEO

If you’ve searched online for reasons to not outsource to a PEO, you’ve probably found some fairly compelling stories. Our advice: do your homework on the PEO. Don’t let apprehension keep you from missing out on all the benefits a PEO offers.
Image credits

Questions to ask before you work with a PEO

Ask the following questions to any PEO you’re considering before making a final decision:

  • Can I get an in-person demo of your services?
  • When my company has a question, how will I get an answer?
  • How long have you been in business?
  • What’s your company’s employee turnover like?
  • Will I be working with one HR rep or will I be handed off to any available rep when I call?
  • Why did you start a PEO rather than a payroll outsourcing service or other business?
  • Are your original owners still involved with the PEO? If not, why not?
  • What types and sizes of companies do you serve?
  • Are there different benefits and service options for clients, or do you have a one-size-fits-all business model?
  • What’s the ratio of the tech team (developers, project managers, etc.) to HR experts at your company?
  • Will my questions be answered by an HR expert, a phone tree, or a customer service rep?
  • How does implementation work? Will my employees notice a difference?
  • What is a typical pay period process like? What is my role in the process?
  • How can your business support me as my company grows?
  • Why is your PEO [so big/so small]?
  • What other fees will my company pay?
  • What type of data security do you offer? How do I know my employees’ info will be protected?
  • How will your team ensure I’m not fielding employee questions about HR? What do you do beyond provide me with software?
  • Why are you the [lowest price PEO option/highest price PEO option]?
  • Will I need to invest in other HR tools, too? If so, how can I get a big-picture view of how my HR and business come together?
  • Are you a member of NAPEO?

Having been in business since 1999, we can tell you there’s no single PEO that’s right for every business. But there is a PEO that’s right for your business.







    John Farnsworth, Chief Executive Officer

    Author John Farnsworth, Chief Executive Officer

    John learned at an early age the value of hard work, forming his first company before his 18th birthday. He co-founded Stratus.hr (originally “Innovative Staffing”) in 1999 and has an established reputation for his expertise, work ethic, and love for traveling.

    More posts by John Farnsworth, Chief Executive Officer