15 Oct Top Five PEO Compliance Pitfalls

Professional Employer Organizations (PEOs) thrive on compliance. But even seasoned providers stumble on common errors. Here are the five most frequent—and costly—compliance pitfalls:

• Worker Misclassification (The Big One): Treating employees as independent contractors or mislabeling exempt vs. non-exempt workers under the Fair Labor Standards Act (FLSA). This leads to unpaid overtime, back wages, lawsuits, and Department of Labor (DOL) fines.

• Payroll Tax Errors: Missing tax deposit deadlines, filing incorrect returns, or misreporting taxable wages. The IRS holds PEOs liable even if the client provides wrong data. Penalties can exceed the original tax owed.

• Benefits & ACA Compliance Failures: Failing to comply with Affordable Care Act (ACA) reporting (Forms 1094/1095), COBRA continuation, or state-mandated benefits like paid family leave. These errors can result in thousands in per-employee penalties and employee lawsuits.

• Employment Law Violations: Overlooking state/local wage-and-hour rules, meal/rest breaks, anti-harassment training mandates, or ‘ban the box’ hiring laws. Non-compliance costs more in lawsuits than proactive policy updates.

• Incomplete Recordkeeping & Documentation: Not keeping accurate personnel files, I-9s, or time records. In an audit or lawsuit, ‘if it isn’t documented, it didn’t happen.’ Fines for missing I-9s are now in the $2,000+ per violation range.

Bottom Line: PEOs succeed or fail on compliance. The most common slip is misclassification, but tax, benefits, labor laws, and recordkeeping all create costly risks if ignored.