8 Professional Employer Organization Disadvantages Debunked

With the explosion of global business expansion, HR management across a business has become a more complicated and costly affair — or, at least, that is a common perception. Business owners and investors are continually looking for alternatives to traditional market entry channels. One such channel which has become increasingly popular worldwide is the PEO or Professional Employer Organization.

While a lot has been said about the benefits of global PEO solutions, there is less discussion of the disadvantages of PEO services. Here we explore 8 perceived Professional Employer Organization disadvantages, and explain whether these perceived downsides of PEO reflect reality or not.

1. PEOs Are Suitable Only for Large Companies

PEO is sometimes perceived as an outsourcing solution for large organizations that wish to stay more closely focused on their core business. The idea is that large corporates use Professional Employer Organization services to reduce their operational costs and free up their HR team for core HR activities. In reality, PEO solutions can be just as useful for startups and small to medium-sized enterprises, as they are for large businesses. Ensuring employment law, income tax and payroll compliance is time-consuming and costly for non-specialists. Small organizations attempting to do this in-house can quickly end up spending more potentially billable hours on this activity than they expected. In addition, PEO solutions are easily ‘scaleable’: By paying per employee, the cost of a PEO service is generally relative to the size of the business. And as the business grows, the organization can quickly employ new staff through the PEO without having to significantly rearrange their payroll processing.

2. PEOs Take Control Of Your Business

Using a PEO solution means engaging a third party to be the employer of your workforce. To some, this sounds like sharing control of the business. This is incorrect, however. With a global PEO’s Employer of Record solution, it is only specific administrative and compliance tasks that are transferred to the global PEO: The global PEO is responsible for hiring staff under compliant employment contracts, processing payroll and remitting necessary taxes. However, in all these activities, the PEO only acts as permitted under the terms of the engagement contract with the client business. Furthermore, the global PEO does not direct the day-to-activity of a client’s workforce. They remain at your direction, and the PEO will only carry out disciplinary action/terminate contracts, or renew contracts, at the explicit direction of the client business. Some would argue that a global PEO means that the client acquires greater control over their business. By reducing the amount of HR and payroll activities that must be carried out in-house, the business is able to ‘re-direct’ its attention on its core money-making activities.

3. A Professional Employer Organization Disadvantages the HR Team

Some companies assume that if they hire a PEO, they will no longer require an HR team for their in-house administration. This is not correct. Rather, a PEO takes away the need for the company’s HR department to engage in, what some would consider, repetitive and redundant tasks. This way, senior HR professionals can focus on more strategic activities, developing in-house policies and better HR operations in the company. HR departments swamped with administrative and clerical tasks may lose focus on their real value-added activities. Arguably, with a PEO and in-house HR team working in tandem, the company can efficiently manage its HR functions and compliance responsibilities, while still focussing on core level improvements. Performance management, employee relations, and training are some of the tasks which can be achieved  by HR, while the PEO handles the administrative functions. When you opt for PEO services, you get access to a large team of professionals from the HR, business, tax, and legal fields. This way, you can implement the best HR and compliance practices while operating an in-house HR team.

4. Employees Hired By PEOs Are Temporary

Some believe that Professional Employer Organization solutions are only staffing solutions, and that staff hired are not fulltime or permanent employees. This is false. Global PEOs become the legal employer of staff in your target country, and can enter into many different types of employment relationship with staff. A global PEO can hire employees on permanent contracts, temporary contracts, fixed term contracts, full-time contracts, part-time contracts and casual contracts, as long as those types of employment are legally permitted in-country.

5. PEOs Take Over Hiring and Terminations

It is sometimes claimed that a PEO is able to hire and fire staff at will, irrespective of what the client company would like. In reality, the terms of the engagement contract between the global PEO and the client company provide that staff will only be hired and fired in consultation with the client company. Before doing so, the global PEO will ensure that the hiring or termination is compliant under local laws (many countries do not allow staff to be terminated ‘at will’). Global PEOs that provide a recruitment service will select the optimal staff for a business, in an international location. However, in those cases, final decisions will still be made by the client company

6. Employees Do Not Accept PEOs Easily

It might be thought that employees are reluctant to enter into employment contracts with a PEO. The perception is that the employee would prefer to contract with the client business who they actually perform work for. However, the reverse is often the case. As PEOs are payroll and compliance specialists, employees have assurance that they will be paid their full entitlements promptly. They also have confidence that any problems that arise will be dealt with promptly by the PEO with dedicated support staff, rather than ‘laggy’ internal payment and error correction processes.

7. PEO Services Simply Mean Payroll Outsourcing or Management

Many consider a PEO as only a payroll management company. However, in reality, a PEO offers a wide variety of solutions such as:
  • Hiring, contract management, and terminations
  • Employee benefits management
  • Compliance management
  • Employee administration
  • Leave management
All these functions have one goal — to simplify the company’s HR functions. Experienced PEOs are more than payroll managers and can customize their solutions as per their clients’ requirements. While it is not a Professional Employer Organization disadvantage per se, companies using a PEO should check exactly which compliance responsibilities a PEO is taking on. In the United States there is a voluntary certification process with the Internal Revenue Service for businesses that take on tax reporting obligations.

8. PEOs are Expensive

Sometimes it is also suggested that a core Professional Employer Organization disadvantage is that they are an expensive payroll and employment option. This is incorrect, however. Through economies of scale, specialization, and standardizing international payment, global PEO services, can reduce your HR and expansion costs by up to 90%. In the long run, it is generally more expensive for an organization to recruit, compliantly hire, and process payroll across all their international locations in-house.

New Horizons PEO Solutions

While it is true that PEOs are not the expansion solution for everyone (see, for example, Should you Switch from a Global PEO to a Local Entity?), most of the supposed Professional Employer Organization disadvantages are, in fact, misconceptions. New Horizons are an international team of experienced professionals from various industries, who can simplify your HR and marker entry functions so that you can focus on your core operations. To know more about our tailor-made PEO solutions, contact us today.

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