The Biggest Drawback of Using a PEO for Payroll and Benefits

Professional employer organizations (PEOs) can be very helpful to startup companies. But there is one major drawback to using a PEO for payroll and benefits. PEOs are organizations that provide a range of services through outsourcing human resources, meaning they act as a co-employer in your company.  

PEOs became really popular post-COVID for a number of reasons:

  1. A lot of companies have their employees scattered across many different states, something that can cause a lot of complexity but PEOs can help organize.
  2. PEOs are able to pool employees across clients (by bringing many companies together).
  3. By pooling clients they can get better deals on benefit plans with their negotiation leverage.  

Many startup founders appreciate the benefits of PEOs and work with them to simplify their payroll and human resources. But even with all these positives, there is one large and simple drawback: once you engage with a PEO you are tightly locked in and it is then very hard to get out or change PEOas.

This is because they are now the employer of record. Although it is your startup, technically your employees work directly for the PEO, since that is who signs their paychecks and submits the payroll taxes. Therefore, switching off or out of a PEO can be really complex, especially administratively.

You’ve Got Less Leverage

What makes this issue worse is that, after a couple of years, it’s very easy for your PEO to bump up the renewal rates to a fee that is much higher than when you first signed up. Currently, we’re hitting a period of significant PEO price hikes, and we are getting a lot of reports from our startup clients saying they have had their first or second renewal and the rates with their PEO have gone up considerably this year.

Part of that price rise is inflation, which is hitting every part of the economy right now and benefit inflation always happens. But it seems like we are seeing something else here, which is that most PEOs are feeling like they can take advantage of their clients. They know how difficult it will be for their clients to change to a different provider for benefits and payroll, and so they are deciding to really bump up the renewal prices.  

Facing a Price Hike

Not every PEO is raising rates, and there are inflationary pressures in the economy to remember, but price hikes is happening. efore you switch to a PEO  you should consider how you may be locked in for a few years. You can talk to your  reps and see if you can get a couple of years guaranteed at a certain rate. So think about how difficult it will be to switch off the PEO before you sign on the dotted line. It may save you a lot of money in the long run!

If you have any questions on payroll or benefits, startup accounting, taxes, or venture capital please contact us. You can also follow our youtube channel and our blog for more information on accounting, finance, HR, and tax for startups!