Many small and mid-sized businesses find it challenging to manage a human resources department and all of the tasks that come with it. Tasks such as employee onboarding, benefit analysis and payroll management requires a high level of skill and attention. To be proficient in all these areas, you’ll need extensive information and support that can be tough to obtain. To aid with this, many businesses collaborate with a professional employer organization (PEO).

No doubt, the PEO model has helped businesses to focus on their core business function and growth by taking these HR burdens off of their shoulders. However, despite the evidence and statistics supporting that PEOs can provide numerous benefits to businesses, there are also certain drawbacks to take into account.

Before turning over your HR functions to an outside service, it is important to understand the risk associated with using a professional employer organization (PEO). Here are 5 of those risks to carefully consider before choosing a PEO.

1.  Employees may have limited access to HR

No matter the size of a business or industry, employees within an organization may likely face difficulties in the workplace ranging from issues associated with employee safety, to withheld benefits and so on. When that happens, employees may feel the need to reach out to the HR department to help them navigate through those issues.

Recent studies have shown the importance of the role of HR in clarifying employee identity within the work environment. Outsourcing HR functions to a professional employer organization (PEO) may result in very limited access to HR by the employees since the PEO may be serving several clients with various employees.

Your employees may have to endure communication delays when the human resources department –in this case, the PEO– is not immediately accessible. You could risk making them feel frustrated and insignificant to your organization. Employee morale is usually affected as a result of this.

In cases like this, the employer’s reputation is perceived as bad, and so does your company’s. In fact, 50 percent of employees say they wouldn’t work for a company with a bad employer reputation, even for an increase in pay. Similarly, more than 80 percent of job seekers admit that a company’s reputation factors into their decision to apply for a job.

So, working with a negligent or hard-to-reach PEO may limit your access to the best talents out there. Ironically, that’s the reason you hired a PEO in the first place.

2.  Loss of control over essential employee paperwork and processes

The best PEOs can manage practically every human resource responsibility, saving you time and effort. However, it may come at the expense of your ability to control the narrative of your workforce.

Executives may relinquish too much control over the business’ human resource responsibilities after outsourcing to a PEO, or the business may become overly reliant on the PEO service provider. This can be disturbing to some business owners who are particular about how their employees are treated. 

For businesses that seek complete control over their HR processes, PEOs aren’t the best option. However, partnering with a PEO solution that allows customization rather than predefined service bundles is one approach to get around this. This allows you to keep control of some procedures while getting the assistance you need in other areas.

3.  Delayed communication and issue resolution

PEOs serve a big number of employees which allows them to provide reasonable insurance plans and perks that small businesses might not be able to provide. According to NAPEO, PEOs provide services to over 173,000 small and mid-sized businesses, employing 4 million people in the U.S.  This large number of employees and clients makes it difficult for them to pay quick and close attention to certain employees and clients when needed. As a result, communication and conflict resolution are delayed and, oftentimes, ineffective.

50 percent of employees say they wouldn’t work for a company with a bad employer reputation, even for an increase in pay.

Some PEOs do not offer client-dedicated support. Instead, client companies have to communicate with whichever representative is available at the moment. This can cause a huge gap in communication. Also, time-sensitive matters can get really complicated with this approach. 

To avoid this, it is important to clarify with your prospective PEO if you will be assigned a dedicated HR service representative upon contract agreement.

4.  Risks of Information Leaks

Leading PEO brands are compliant with several data privacy laws, including GDPR and CDPA. However, they are required to share employee and client data with third-party organizations to ensure effective integration and interoperability with other software providers. While this is done with the utmost caution, there is still the risk of employee information leakage.

In HR, privacy and confidentiality are crucial for many reasons. For one, not a lot of people are comfortable disclosing their salaries, bonuses, and benefits. Their personal address and medical records may also reach public eyes in the case of a leak. This can severely damage the reputation of your company as well as the PEO’s.

Nevertheless, these leakages and privacy breaches are not entirely the PEO’s fault nor is it your company’s. Hacks happen, even to the most fortified tech companies. And when such catastrophic hacks hit a PEO for reasons that may not be directly linked to you, your employee data will be accessible to people with a wide range of malicious intentions. Studies have shown that keeping these hackers at bay is a growing challenge in this age.

There is no doubt that the PEO will be responsible for any data breaches and may have to pace the regulatory penalties solely. However, your employees will be negatively affected and you may lose their trust and loyalty.

5.  Resistance from Employees

New studies have shown that employees are more resistant to change than managers and business owners initially imagined. . When you find out that you may need to hire a PEO to handle the growing HR needs of your business, some employees may find this change a bit distressing.

When your business is growing and encountering several HR challenges, you may have to sell the idea of a PEO to your employees. This will require some effort on your part. You will have to educate them about how PEO can help them as well as the business.

Giving them the assurance that they can still come to you with their concerns can significantly ease the tension. However, you should keep that chip for the last because the reason you are hiring a PEO in the first place is to take them off your shoulders. So, only give them that assurance when you really have to.

Also, you may need to make the difficult decision of letting some ununderstanding and troublesome employees go, especially if they are not worth the trouble.


Businesses opt for the best PEO services to relieve some of the burdens of HR management., That makes it  easier to focus on keeping your business running smoothly. By partnering with a PEO, you gain access to a team of seasoned HR professionals and a wide range of support that would otherwise be out of reach for small businesses.

When choosing a PEO, however, you need to clean your spectacles and measure the risks that you might face. Are the rewards (cost, talent access, compliance, and time saved) worth the huge risks addressed above?

Business needs vary. You understand your business better than anyone. So, that’s up to you to figure out. This is where I get to wish you good luck.


But before you go, take a moment to check out our list of top recommended Domestic and Global PEO providers as well as a guide on how to choose the right PEO for your business.