It’s easy to see why so many business owners misunderstand PEOs (Professional Employer Organizations). On the surface, they sound like a smart outsourcing solution, but the reality is more complicated.
They’re not inherently bad. In fact, for startups and lean teams, a PEO can simplify operations by bundling payroll, HR support, and access to big-league benefits into one clean package. But it’s important to understand what you’re really signing up for.
What Is Co-Employment?
When you enter a PEO relationship, your employees technically become co-employed. In other words, they’re under your management but they’re on the PEO’s books. That means their W-2s show the PEO’s tax ID, not yours. In exchange, the PEO takes on responsibilities like benefit administration and compliance. Sounds efficient, right? It can be, until it’s not.
The Hidden Trade-Offs
Here’s how it often unfolds:
- Your business is staring down a hefty insurance renewal.
- A PEO offers a significantly lower rate that’s too good to pass up.
- You join, and for the first year, everything runs smoothly.
- Then comes the renewal. And that’s where the trade-offs emerge.
Because now, your health insurance rates are tied to the entire PEO’s claims history, not just your team’s. That means someone else’s costly treatments or out-of-network expenses can drive up your rates, even if your own usage was minimal.
And if you were previously protected by small-group community rating (typically available to companies with fewer than 50 employees), that protection likely disappears. You’re now exposed to the full volatility of the broader pool.
Loss of Control
Beyond the benefit piece, many employers don’t realize they’re trading autonomy for support. Need to make a personnel change? Some PEOs require coordination before you terminate or discipline an employee to ensure legal compliance and reduce liability. That layer of approval can be frustrating, especially for entrepreneurs who are used to acting fast.
Exiting Isn’t Simple
By the time you realize the arrangement isn’t working, leaving can feel like unraveling a spiderweb. It requires detailed planning and may involve:
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Re-registering your state and federal tax accounts (like EINs for payroll)
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Transitioning to a standalone benefits broker
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Setting up a new payroll system
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Handling COBRA and compliance transitions
Break Free from the Limitations of a PEO with Commonwealth Payroll & HR’s Guidance
As our President and Founder, Jeff Plakans, often explains: “A PEO might work for early-stage teams. In lots of cases, it’s the best option. But if you’re using it to avoid rising health costs, you’re trading short-term savings for long-term pain.”
At Commonwealth Payroll & HR, we offer a more flexible and transparent solution for growing businesses. With us, you retain full control of your operations while gaining access to expert HR guidance, modern employee self-service tools, and powerful compliance support. We’ll connect you with benefits providers that offer customizable options tailored to your workforce, and we’ll guide you through registering and managing your own tax accounts to help ensure ongoing compliance.
What truly sets us apart is our human-to-human approach. We get to know you, your team, and your goals, so we can build an HR and payroll strategy that grows alongside your business, on your terms. Ready to explore what’s possible beyond a PEO? Let’s talk.
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