By Mark J. Burger, CPA — Employer‑Side PEO Advisor
37 years advising companies on HR outsourcing, compliance, and cost transparency.
Introduction
Before you sign or renew your PEO agreement, make sure you know where the hidden costs and risks are buried. This guide outlines the five most common red flags I find in contracts from every major provider — and how to protect your business.
1. The SUTA Markup
Many PEOs mark up state unemployment tax (SUTA) rates by 1–2 % without disclosing it as profit. Ask for the base rate by state and compare to what your company would pay directly.
2. Benefit Load Inflation
PEO quotes often bundle benefit costs with administrative fees. Always request separate line items for employer premiums, employee contributions, and administrative load factors.
3. Renewal Escalators
Automatic renewal clauses can increase rates 10–20 % annually. Negotiate an annual review with cap, and ensure termination notice periods are realistic.
4. Liability Transfer Clauses
Some contracts shift employment liability or audit responsibility back to the client. Review indemnification language carefully — it should protect you, not the provider.
5. Lack of Audit Rights
Without audit or reporting rights, you lose transparency over payroll taxes, benefits, and compliance performance. Insist on periodic reporting and the ability to review key metrics quarterly.
Summary
These red flags are avoidable — but only if you know where to look. Before you sign your next PEO contract, get a CPA‑level review from an independent advisor who works for you, not the vendor.
