Starting a High Tech Business: The Dark Side of Using a PEO


Seal of the Internal Revenue Service

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I'm starting a new business called Kynetx. As I go through some of the things I do, I'm planning to blog them. The whole series will be here. This is the twenty-third installment. You may find my efforts instructive. Or you may know a better way---if so, please let me know!

At Kynetx we use a professional employee organization (PEO) to reduce the overhead we have with managing all the details surrounding having employees. The way it works is that your employees officially work for the PEO and you "lease" them back. This works very well and takes most of the hassle out of employee HR for a small business...except when it doesn't.

Kynetx used a company called Workforce Solutions (WFS). I say used because we now use someone else. On Apr 2, the IRS seized Workforce Solutions assets, including bank accounts that contained money we'd paid WFS that they were to pass on to our health insurance. I don't know what beef the IRS has with WFS, but I do know that we've got employees now that for all intents and purposes weren't covered for the month of April. Imagine having had major surgery in April that isn't covered even though you thought it was. That's not hypothetical.

We're working multiple angles to try and solve the problem, including sending this letter to Rep. Chaffetz (PDF) (and a similar one to Senator Hatch).

This is the dark side of using a PEO. You're in bed with them and things that affect their company can drastically affect yours. You can do all the checking you want, but we didn't uncover anything wrong in our due diligence. These kinds of things can be hard to discover. When you use a PEO, understand that you aren't just contracting for services. You are entering into a very close partnership.

The good news is that this isn't a problem that threatens our company and it's hard to imagine a PEO scenario that would. We'll work through it and I'm confident that in the end everyone will be made whole. But it takes it's toll.