Employee leasing is a growing practice in American businesses. It offers both advantages and disadvantages.

It is important as a business professional to understand the pros and cons of a PEO. Here is a brief introduction and seven disadvantages of using a PEO.

The first question is what does PEO stand for?
A PEO is Professional Employer Organization.

How does a PEO work?
Under employee leasing arrangements, a company can transfer some or all of its employee to the payroll of the PEO. The PEO leases the clients back to the company and administers the payroll.

What else does a PEO administer?
They provide administrators benefits, holds personal records and performs the duties that are usually preformed by a HR department.

Disadvantages for Employers:

1. Changes in tax laws. The tax benefits under the Tax Equity and Fiscal Responsibility Act, could be taken away by Congress, if employee leasing was used a as a method of skirting pension responsibilities.

2. There can be the concern of whether employee leasing is right for the certain type of business and if the leasing firm is legitimate.

3. The fees could be high. Cost of leasing fees may have a fixed fee of 2-5% of payroll and have a markup of 9-20% of gross wages.

4. There can be image and human relations issues with your company. Employee leasing reduces personal contact between employees and their employer.

Disadvantages to Employees:

1. Employee leasing can cause confusion and role uncertainty, because employees are hired and compensated by one firm, but supervised by another.

2. When the loyalty is divided personal relationships and opportunities are reduced, therefore, the loyalty and job commitment may be less.

3. There may be a reduced motivation and lack of a close tie between pay and performance, which could lead to less enthusiasm within the workplace.

It’s important to understand the disadvantages of a PEO and perhaps it is not right for your company.