A Professional Employer Organization (PEO) acts as a co-employer, handling a significant portion of your organization’s human resource services. By partnering with a PEO, businesses can streamline operations and focus on their core objectives while outsourcing essential HR functions such as payroll processing, workers’ compensation, and employee recruitment. Best of all, companies retain full control over their HR functions while benefiting from the cost-effective, time-saving advantages of accredited PEOs.
However, choosing the wrong PEO can have serious consequences. An incompetent PEO can strain relationships between the employer, co-employer, and client employees. Partnering with an unfit PEO solution may ultimately damage your company’s reputation and hinder its growth.
It is worth exploring the potential risks of choosing the unqualified PEO and how to avoid them.
The risks of choosing the wrong Professional Employer Organization (PEO)
Non-compliance with local regulations
Compliance with legal laws is one of the primary duties of a PEO. However, a wrong co-employer may fail to ensure compliance.
When you partner with accredited PEOs, both entities share legal obligations and responsibilities. So, you want your co-employer to follow practices that adhere to local laws and regulations. Non-compliance not only results in hefty fines and complex lawsuits but can also threaten your business’s reputation and data security or may even result in imprisonment in some cases.
For instance, all employees must possess a valid work permit and a legally compliant employment contract. Additionally, employers must comply with the Wage Protection System (WPS) to ensure salaries are paid accurately and on time through a government-monitored system. Delayed payments can lead to a business ban, blacklisting or legal action. Similarly, health and safety compliance is necessary to ensure a safe workplace and avoid criminal liabilities, fines, and shutdowns. Certified PEO companies are responsible for ensuring compliance with laws and regulations in their jurisdictions.
How to avoid the risk of non-compliance with your PEO?
Before you initiate the PEO service, check the following things:
- Necessary licenses and accreditations;
- A strong track record of compliance;
- Well-documented policies covering employment contract structures, payroll processing, visa sponsorship regulations, and regulatory reporting;
- Gratuity and End-of-Service benefits policies;
- Measures to ensure Workplace Health and Safety Standards and Wage Protection System (WPS) Compliance
- Cybersecurity and data storage protocols
- Inquire about visa processing timelines, renewals, and compliance with quota rules.
The contract should clearly define the PEO’s compliance clauses and responsibilities.
Poor communication and customer support
Clear communication and responsive customer service are essential for a successful employer-co-employer relationship. When partnering with a PEO, you’re effectively extending your team across borders to a third-party service provider. Lack of proper communication often leads to misunderstandings, missed timelines, and poor service quality. This ultimately results in issues like low job satisfaction and poor employee retention. On the other hand, effective communication ensures that your PEO service aligns with your business objectives and upholds your company’s values.
How to avoid the risks with a certified PEO?
Emphasize the necessity of effective communication right from the first interaction with your PEO. Both parties can collaboratively implement effective communication strategies and acknowledge potential pitfalls promptly.
The following tips can help cultivate a productive and healthy environment for communication with PEO partners:
- Be open about your company’s values, goals, and expectations to facilitate a smoother collaboration.
- Keep the PEO in the loop about your organization’s updates so that they can align their services with your evolving business goals.
- Pay attention to your co-employee’s feedback, suggestions, and concerns for timely resolutions and to encourage mutual respect.
- Establish key performance metrics to ensure both parties are on track and can acknowledge deviations promptly.
Lack of PEO industry expertise
You hire a PEO because you need an expert in areas such as payroll tax laws, workers’ compensation, talent management, HR compliance, and safety and risk mitigation.
However, cooperation with a PEO that has little to no industry expertise can cause severe consequences, such as legal violations, fines, operational shutdowns, and reputational damage. Errors in payroll and tax withholdings, employment law violations, and lack of industry-specific HR compliance can result in government audits, financial losses, or even operational bans.
How can you avoid the risk with reputable PEO companies?
Keep the following tips in mind when vetting a PEO’s expertise and credentials:
- Ensure they are licensed and accredited by relevant regulatory bodies, such as the Ministry of Human Resources and Emiratisation (MOHRE).
- Verify their knowledge of industry-specific labor laws, compliance requirements, payroll structures, and wage protection regulations.
- Confirm they comply with the Wage Protection System (WPS) and ensure accurate tax withholdings.
- Review PEO’s HR policies, onboarding procedures, and strategies for workforce management
The best PEO companies with expertise in your industry can ensure smooth human resource services for your organization.
Hidden PEO service fees and cost overruns
HR outsourcing solutions like PEOs are particularly suitable for small to medium enterprises (SMEs). Such companies often have limited budgets, and they want to make informed financial decisions. However, unqualified PEO services can add unexpected financial strain on the client company, while a reputable PEO does the best to cut down your costs.
Unprofessional PEOs often advertise low rates and disclose additional fees when you’re about to sign the contract or after you’ve signed it. Deceptive co-employers may impose hidden charges for late processing penalties, tax amendments, employee onboarding/offboarding, HR reporting tools, etc, without clarifying these costs upfront. Incorrect cost allocation is another practice that can lead to financial overruns.
How do you spot the hidden PEO solution cost?
Follow these tips to identify hidden costs and avoid potential risks:
- Request a fully itemized price list for all services, from payroll and tax filing to technology.
- Carefully review the price structure for a clear breakdown to ensure transparency.
- Determine your most suitable price model: Percentage-based fees, fixed-fee vs. per-employee pricing models.
- Clarify any extra charges upfront.
By taking all measures to avoid hidden costs, you can predict HR expenses and ensure the financial health of your business.
Threats to data security with wrong PEO arrangement
Your chain of trust extends to all your co-employers, including reputable PEO and HR outsourcing providers. You entrust confidential business data and employee records to certified PEO companies.
However, an incompetent service provider makes your business vulnerable to data breaches, ransomware attacks, identity theft, payroll fraud, and social engineering scams. Such unprofessional PEOs employ weak cybersecurity measures and mishandle sensitive employee information.
How can you protect your business from data security risks?
- Ensure that your certified PEO complies with the UAE’s PDPL (Personal Data Protection Law) and other relevant authorities’ data security certifications.
- Review their cybersecurity measures, such as fully encrypted servers and firewalls.
- Provide access to limited data only to authorized personnel.
- Request a clear and comprehensive data breach response plan from your PEO.
- Regularly audit your payroll and HR reports to identify any discrepancies.
Limited scalability for growing businesses
A growing business requires skilled talent, the ability to retain employees, seamless payroll and tax management, and international support. However, these benefits are unattainable with a PEO that lacks industry expertise or is unable to manage cross-border compliance effectively.
Rather than fostering growth, a weak PEO service obstructs your business’s scalability due to outdated systems, lack of international support, and compliance risks. It falls short in all key areas, from sourcing top talent to managing payroll and adhering to relevant laws and regulations.
How to avoid the risk?
The simplest answer is to find quality PEO companies that can help avoid all the risks discussed here. When these issues are addressed and risks are avoided, your growing business will naturally scale and thrive.
Important things to consider when choosing the right PEO for your business
By following expert guidelines to select the best PEO provider, you can find the right partner that helps grow your business ethically and legally:
Red flags to watch for when choosing a PEO
As you see, a wrong PEO can be a huge trouble rather than help. So, watch out for these warning signs when evaluating an ESAC-accredited PEO service:
- Lack of proper certifications and accreditation
- Hesitates sharing service and pricing details
- Using outdated or weak technology solutions
- Compliance issues with previous clients
- Unprofessional behavior and contract structure
- Limited employee benefits options
- Inflexible contracts and high termination fees
- Negative reviews
- No regular reporting
- Frequent audits and penalties from the government
- Poor support to the client company
If you notice these signs after starting the services, you can change your PEO successfully with a proper transition plan.
11 Most important questions to ask your PEO
Answers to the following questions can help you get a clear idea of the quality of a PEO service:
- What kind of certifications and accreditations do they have? The PEO should be accredited to the relevant authority in the target region.
- What services does the PEO offer? Their services should accommodate all your needs.
- How experienced is the PEO in your industry?
- What is and is not included in the price? Clear all costs and hidden charges upfront.
- How are employee benefits funded?
- What technology and cybersecurity measures the PEO uses?
- What are their compliance procedures and policies? A certified PEO ensures compliance with all applicable laws.
- How do you handle employee onboarding and termination, contracts, visas, and work permits?
- What training and development programs does the PEO offer to your employees?
- What are their risk mitigation and response procedures?
- Will you assign a dedicated account manager to my company?
Ask any question and clear any doubt you might have in your mind. Hiring a PEO is a major investment, and you want to make the most of it. So, don’t hesitate to clarify everything before moving forward with the PEO service.
Find a PEO to help your business thrive
The bottom line is that you should partner with an ESAC-accredited PEO service that aligns with your company’s values and goals. Choosing poor PEO services means losing valuable employees and customers, lawsuits, financial loss, reputation damage, and more harm. Check out their reviews and previous works, and watch for red flags to protect your business from falling into the wrong hands.
If you are looking to build a team in the UAE and are searching for quality PEO companies, you can contact Connect Resources. We provide tailored PEO services in the UAE that simplify your expansion plans and support business growth with certified, reputable professional employer organizations.
