While PEOs can transform your HR operations and save significant money, choosing or managing a PEO partnership poorly can create serious problems. Understanding common mistakes helps you avoid them and ensures a successful relationship.
Mistake #1: Choosing Based on Price Alone
The lowest-priced PEO is rarely the best value. Cheap rates often mean:
- Limited benefits options with high deductibles
- Poor customer service and long response times
- Outdated technology platforms
- Lack of specialized expertise
- Hidden fees that inflate actual costs
Focus on total value—service quality, benefits options, technology, and expertise—not just the quoted rate. A PEO charging 20% more might save you money through better benefits, fewer errors, and superior compliance support.
Mistake #2: Not Reading the Contract Carefully
PEO contracts are complex legal documents with significant implications. Common contract issues include:
Auto-Renewal Clauses: Many contracts automatically renew annually unless you provide 60-90 days notice. Missing this deadline locks you in for another year even if you’re unhappy.
Early Termination Fees: Some PEOs charge substantial penalties for leaving before contract end. Understand these fees before signing.
Hidden Fee Provisions: Contracts may allow “annual adjustments,” “administrative surcharges,” or “regulatory compliance fees” that increase your costs without warning.
Service Level Ambiguity: Vague language about response times, account manager availability, or service standards makes it hard to hold the PEO accountable.
Have an attorney review your PEO contract before signing, especially termination provisions and fee structures.
Mistake #3: Inadequate Due Diligence
Many businesses sign with the first PEO they talk to without proper evaluation. Essential due diligence includes:
- Verifying CPEO or ESAC accreditation
- Checking BBB ratings and online reviews
- Contacting client references (not just those provided by the PEO)
- Confirming multi-state coverage capabilities
- Reviewing the technology platform thoroughly
- Understanding the service delivery model
- Comparing multiple proposals side-by-side
Inadequate research leads to partnerships with unsuitable providers.
Mistake #4: Failing to Communicate with Employees
Switching to a PEO or changing PEO providers affects employees directly through payroll, benefits, and HR processes. Common communication failures include:
- Not explaining what’s changing and why
- Failing to address co-employment concerns
- Providing insufficient information about benefits changes
- Not preparing employees for new systems or processes
- Leaving employees to figure out new technology on their own
Poor communication creates unnecessary anxiety, confusion, and resistance. Invest time in clear, proactive employee communications.
Mistake #5: Not Gathering Proper Documentation
PEO transitions require extensive documentation: employee files, payroll records, benefits information, workers’ comp history, tax records, and more. Businesses that don’t gather this information upfront experience:
- Delayed implementation timelines
- Payroll errors in initial cycles
- Benefits coverage gaps
- Incorrect workers’ comp classifications
- Tax filing problems
Start gathering documentation 60-90 days before your planned transition date.
Mistake #6: Assuming the PEO Handles Everything
While PEOs manage most HR functions, you still have important responsibilities:
- Making hiring and firing decisions
- Managing employee performance and conduct
- Providing accurate payroll information
- Communicating policy changes to employees
- Maintaining some employee records
- Ensuring workplace safety compliance
Businesses that completely “check out” of HR functions often experience problems because they’ve failed to handle their side of the partnership.
Mistake #7: Not Vetting the Account Manager
Your account manager largely determines your PEO experience. Before committing, meet your actual account manager (not just the sales rep) and evaluate:
- Their industry knowledge and experience
- Responsiveness and communication style
- Understanding of your business needs
- Availability and workload
- Problem-solving approach
If your assigned account manager doesn’t seem competent or responsive during the sales process, imagine how they’ll be once you’ve signed.
Mistake #8: Ignoring Technology Limitations
PEO platforms vary dramatically in capabilities, user-friendliness, and functionality. Test the actual platform before committing. Key technology considerations:
- Can employees easily access from mobile devices?
- Is the interface intuitive or confusing?
- Does it integrate with your existing systems?
- Are reporting capabilities adequate?
- How easy is time tracking and PTO management?
- Is there good employee self-service functionality?
Clunky technology creates daily frustration for both you and your employees.
Mistake #9: Not Monitoring Service Delivery
Once you’ve signed, don’t assume everything is running smoothly. Actively monitor:
- Payroll accuracy every cycle
- Benefits enrollment accuracy
- Response times to questions or issues
- Quarterly compliance updates
- Workers’ comp claims handling
- Tax filing confirmations
Early detection of problems allows for quick resolution before they escalate.
Mistake #10: Staying Too Long with a Bad PEO
Many businesses tolerate poor service, rising costs, or inadequate support for years because switching seems difficult. In reality, transitioning between PEOs is straightforward when managed properly.
If your PEO consistently underdelivers, don’t wait years hoping things improve. Evaluate alternatives and make a change. The transition inconvenience is minimal compared to ongoing dissatisfaction and higher costs.
How to Avoid These Mistakes
The common thread in most PEO mistakes is insufficient planning, research, and expertise. Business owners understandably don’t have time to become PEO experts, which is why many make costly errors.
Working with a PEO consultant eliminates most of these mistakes through:
- Thorough vetting of PEO options before you waste time
- Contract review and negotiation support
- Implementation planning and documentation assistance
- Ongoing advocacy if service issues arise
Ready to avoid these common pitfalls?Contact PEO Consulting Partners for expert guidance. We help businesses choose the right PEO from the start, ensuring successful partnerships that deliver real value—and we manage the entire process at no cost to you.Title: Common PEO Mistakes to Avoid