PEO's Appeals vs. Reality

Created by Jay Kuri, Modified on Sun, 26 Mar 2023 at 11:41 AM by Jay Kuri

PEO's Appeals vs. Reality

What PEO’s do is also termed a “co-employer” arrangement, where the small business outsources these key functions. If you are the small business owner, your employees would work under the PEO company while the PEO leases your workers back to you for a fee while providing HR, benefits, and whatnot. That sounds like it could take care of so many things for you, right?

Well, the reality of PEO’s, like everything, is that there are good ones and bad ones. We want you to be well informed before making any decisions that seem too good to be true, so let’s take a look at some of the appeals of a PEO and some realities that come with it and compare it to Journey Payroll and HR and what we offer.

In general, the appeal of a PEO is that the owner will have fewer responsibilities on their plate so they can focus on other parts of being a business owner, and there will be less turnover because employees will have access to better benefits. But could there really be a sense of belonging to a company that, as an employee, you technically don’t work for? In the shoes of an employee, if your benefits and pay are coming from the PEO’s name and not from the small business you work for, that could get confusing in the line of authority and benefactors. This is true regarding loyalty as well: it could be perceived that the PEO is the one who provides the most for their employees, while the business owner is not pitching in as much. The line is blurred between who the business owner is, who signs the paychecks, and who provides the benefits. Sounds pretty confusing for all parties involved. Here at Journey, we offer HR and payroll – without stepping on your toes. An HR expert is just a call or email away throughout your workday with Journey’s HRNOW.

Speaking of HR, another factor that attracts people to PEO’s is because they allege they take responsibility and full liability when it comes to your HR needs. In reality, that responsibility still falls on you, the small business owner. Sure, they will provide HR assistance by phone or in person when needed, but you’re still legally liable if anything should happen. Legally, both parties can be implicated in the event of an employment practice or workers’ comp claim, and if you are completely reliant on your PEO’s insurance policy, you may lose control over the way the claim is handled – or, depending on your contract, you might have to hire and pay your own counsel. If you choose to partner with Journey, we can provide HR support for small business owners and include the best of both worlds — quality HR experts at a great value. Our HRNOW human resources services is the best of both worlds for your company’s HR needs — all the perks of having a dedicated human resource specialist without the price tag.

Another huge and intimidating process PEO’s will tell you they take care of is workers’ comp. If you are a small business owner with more than one employee, you will have to carry workers’ compensation insurance. To some people, it sounds so appealing to let someone else to handle because, once again, who has time for that worry? They will sell you that you will pay less in workers’ comp because you will pool with all the PEO clients. Now here you need to do your research because in most states, you can only pool a self-insured portion of workers’ comp. All states have different regulations when it comes to workers’ comp, and the PEO you choose might not cover all the state regulations where your company operates. Researching your state regulation is one thing, but another is researching the PEO for you and your company’s safety. There have been many reports of questionable practices with PEO’s and this type of coverage: wire fraud, money laundering, and dividing up overpayments for their own pockets. Journey can also help you in workers’ compensation with our pay-as-you-go method. Not only will this save you money, but it is more accurate as well. We integrate with many workers’ comp insurance brokers and seamlessly incorporate it into your payroll processing.

Payroll is another important duty that PEO’s will tell you they take over after all the employees technically work for them. You, however, still need to send them hours, calculate overtime, employees’ wages, and bonuses. If you get any of them incorrect, you are the one who will be responsible. Payroll is one of the many things Journey does best. Not only do we take care of your complete payroll operations, but you also get your own dedicated payroll specialist that is readily available to give you the customer service you deserve! You’ll receive payroll submission reminders and cash requirement notifications each payroll, so you never have to scramble at the last minute.

This article was not to bash PEO’s, there are some good ones out there that might be perfect for you and your company, and we love to see it! At the end of the day, we root for small business owners to win, regardless of who they are working with. We just want to make sure everyone has a chance to make a well-informed decision on such a big part of their small business.

Annual Audit PEO Checklist

If you are already in a PEO, then there is a chance that you are your only advocate. Audits can be a bother, but if you are using a PEO, then it is probably in your best interest to practice an annual audit to make sure you are getting the value you signed on for. It sounds like a lot of work, but if you don’t get into the nitty-gritty details, you could be getting taken advantage of. A few areas that should be addressed in your audit:

Identify Workers’ Comp Responsibilities

If you are unaware of your workers’ comp policy, make sure you get and keep a copy of it. You should also do some digging and find out how your workers’ comp is funded and who holds the contract. Make sure that your business is covered and classifications are correct. Double check for claims that have been filed by your employees or if there are any pending hearings. Similarly, confirm if a portion of the premium is self-insured, and if so, how much and what you could be at risk for. You should also find out if there has been premium adjustment, refunds, dividends, or pending increases.

PEO Completing Taxes and Payroll Accurately

Taxes should be filed under the PEO’s tax ID, and you should make sure each quarterly tax filing was completed and the taxes deposited with the State and IRS on time. If they were late or incorrect, you could be liable for fines, interest, and penalties. Your PEO could be capping FUTA, SUTA, and OASDI, so check to make sure the caps were properly applied. Make sure W2’s were provided on time, and ensure that the PEO is current on all your tax and deposits. Also, to keep them honest, ask how they are holding deposits and whether you were credited for employee taxes withheld from the employees. Check into processed payrolls as well, and make certain that employees have been compensated as agreed upon. Be sure that your employees’ overtime has been managed and applied, and review proper deductions have been applied for each employee. If you are being charged in full for employee benefits and your employees also contribute to the plans, then make sure you are not also being charged in full for payroll — you should be getting a credit. This is where they don’t expect you to look.

Double Check Your HR Services

One of the main reasons small businesses sign on with PEO’s is for the Human Resource aspect of things. A lot of these services are active at the onset of the contract, but if you don’t do your homework, you might have to seek out even more outside resources. Those resources might not be knowledgeable about your business. Review your contract to determine what HR services are covered by your agreement. Does your PEO assist with recruiting? Onboarding? Conflict resolutions? What about managing the employee lifecycle? Do they help with setting compensation? Do they provide any training? Do they help advise termination services and workers’ comp claims? Those are all issues that come with the HR world. Make sure you are getting the right bang for your buck!

Compare Their Handbook With Yours!

You should definitely obtain a copy of your PEO’s employee handbook and make sure it is compatible with your state and consistent with the handbook you created. Ask them what can be done about the differences. This one is important: check the leave and return to work provisions, as this could become crucial if you decide to separate from your PEO.

Get Acquainted With the PEO’s 401k

You and your employees will be contributing to the PEO’s 401k. You could still be held partially liable, so familiarize yourself with the 401k, including their policies, practices, advisors, customer service, ratings, and the transferability in the event of your termination.

Review Benefits Offered by Your PEO to Your Employees

You should be provided with a copy of all the benefits offered to your employees. Make sure you familiarize yourself with the eligibility rules for employees and dependents, including:

  • Waiting periods
  • Effective dates
  • Age limits/restrictions
  • Participation requirements
  • Contribution

Cross-reference these policies with your state to make sure they are complying and that networks are adequate. You wouldn’t want to be paying for benefits that don’t work with your state.

Understand the PEO’s leave of absence or disability policies and how that impacts your business. Something you should be careful to check is the PEO’s leave policy. You should familiarize yourself with vacation, sick leave, disability, FMLA, and other forms of leave and how they will impact your employees. If you have a company of less than 50 employees, it might not be subject to full FMLA requirements; however, the PEO will surely have full FMLA policy and regulations that you must operate by. In a lot of cases, you could be stuck between a rock and a hard place if your PEO starts changing the rules and rates. As stated earlier in this article, audits are hard, and they take up a lot of time. You should look at your PEO yearly to make sure that this is still the most cost-effective way to run your business, and to make sure your business isn’t getting taken advantage of.

Exiting Your PEO

The thing about PEO’s is, once you are in a contract with one, there are most likely going to be substantial consequences involved in getting out. We would like to provide you with a guide to help you manage your way out. We all hope for a smooth transition, but that could take some planning and preparing before you jump ship. Journey can also help you with most, if not all, of what you will need once you leave your PEO. Take a look at our checklist provided to make sure your bases are all covered.


If you terminate mid-year, your PEO will have to complete final taxes up to that date and provide W2’s for that period. Don’t forget that your employees will be considered new hires once you take them back. That means that you will need to make sure you still have a federal and state tax ID and that you are responsible for W2’s for the rest of that year. As a result, your employees will have two W2 forms at the end of the year from two different employers.

Workers’ Comp

This one is tricky because there can be no time lapse in coverage, so you need to carefully time this transition. At Journey Payroll and HR, we utilize a pay-as-you-go system, which will not only save you money but will be more accurate as well. No surprise bills from us, so that takes the edge off worrying about this coverage.


Payroll is also an aspect that you will need to time right so that the transition won’t interrupt your employees’ paychecks. This could need some lead time for setup, but with Journey, we are able to coordinate with your benefits and avoid coverage lapses or deduction problems.

Employee Handbook

You should still have a copy of your PEO’s handbook and will need to coordinate some policies with that of the PEO, such as leave, to keep consistency. Journey Payroll can help you create an employee handbook that you can reissue to your employees.


In most cases, the PEO will be responsible for maintaining COBRA for qualified participants prior to your termination. This could be a positive, because bringing COBRA participants into a situation where the carrier might see you as a startup could create problems.


Each employee might have to arrange for the transfer of their PEO 401k into an individual IRA, and if rules permit, later transfer it into your 401K one you have established one. Once again, plan the timing right so that hopefully this can be a smooth transition. Once you get a 401k established, chances are that Journey can work with them to make things even easier on you.

Leave of Absence or Disability

This is a big one. Be sure to carefully check the PEO’s policy regarding leave BEFORE signing up and terminating. You need to know what their policies are for vacation, sick leave, disability, FMLA, and other forms of leave, and how that might impact your break from the PEO. It’s suggested that you might be responsible for anyone on disability leave at the time of your PEO termination. You might have agreed in the PEO contract to job restoration or other leave guarantees or rights, which could come at a hefty price tag for your business.

Employee Benefits

Before termination, you should start looking for good benefit brokers, which we can help recommend! Some carriers might consider you a startup company because you have not had payroll and benefits under your name. This could impact your risk rating and other considerations. If the plan under the PEO was fully or partially self-insured, you may have issues with continuing claims paid that were incurred prior to termination, so please be prepared for this. You may even be required to continue paying administration fees until all claims are cleared.

Terminating with a PEO causes a lot of jumping through hoops. This just makes me double down on getting ALL the facts before signing a contract. There are times when PEO salesmen are not actually selling you what they are telling you. In our experience seeing clients move away from PEO, we have seen some clients save anywhere from $50,000–$150,000 in one year! Now, your business may or may not have the same options for cost savings in making a transition, but that’s why you should fully evaluate your options.

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