Time to Leave Your PEO? How to Transition Smoothly

Many startups and businesses benefit from Professional Employer Organizations (PEOs). PEOs offer companies plenty of outsourced human resources (HR) services during the early stages, such as benefits, payroll, workers’ compensation, and retirement plan administration. In a good fit, PEOs can reduce healthcare insurance costs and stress from managing an in-house HR team. However, it’s not uncommon for businesses to outgrow their PEO. Here’s a look at knowing it’s time to leave your PEO and how to navigate it savvily.

Why Companies Leave PEOs?

It’s no surprise that companies change as they develop and expand — and their needs change, as well. Whether it’s new products, services, employees, or board members, professional development revolves around transition. That said, most companies are always on the lookout for a cost-effective HR program that fits their unique needs. 

Non-Conformal Programs

One primary reason many businesses leave their PEO is that the one-size-fits-all approach no longer applies. PEOs are fantastic for startups and small businesses at the beginning stages. No matter the industry, businesses in their infancy have many of the same necessities. As companies grow and scale-up, though, they need a more tailored approach. 

Also, different industries require distinct scaling-up strategies. Consider a SaaS business vs. a pharmaceutical company; they each have individual needs. PEOs specialize in providing out-of-the-box provisions but fall short when it comes to offering customized solutions.

Cost Efficiency

Most PEOs base their pricing on the employee pool, either a percentage of the total payroll or per employee. As a result, the per-employee cost can increase significantly if the company undergoes a hiring wave. Additionally, the price of a PEO isn’t as advantageous; the more highly compensated workers in a specific organization. 

In short, PEO fees can become very expensive. Paying hundreds of thousands of dollars seems unfortunate when the point of the relationship is to land cheap health insurance — but companies frequently stay with PEOs for far too long every day.

Duplicate Services

It’s only natural for fast-growing companies to eventually establish their HR departments, hiring an HR or People Operations manager. Most times, these new hires replace some of the PEO’s built-in support services. 

Paying for a manager’s salary and PEO fees isn’t cost-efficient. This overlook frequently happens when company leaders don’t complete regular check-ins on their employee benefit programs. It’s a common oversight — but one that will alter your company’s bottom line significantly. 

5 Things to Do Before Leaving Your PEO

Leaders of high-growth companies must take calculated risks to maintain momentum. That said, when the time comes to leave your PEO, there’s a haphazard way and a savvy way to do it. Let’s review a few considerations before saying goodbye to your PEO. 

1. Confirm Cost Benefits

Most of the time, leaving a PEO is based primarily on the company’s budget. Sure, a PEO provides a way for companies to offer low-cost health benefits to employees. But many businesses want the tailored approach of an in-house HR team in addition to the cost savings. As mentioned, hiring an HR or People Operations manager handles many of the same responsibilities as a PEO. Still, it’s never a bad idea to run your numbers twice.

According to the National Association of Professional Employers Organization (NAPEO), the cost savings based on expected the return on investment (ROI) is 27.2% for PEO clients. This figure works out to be about $272 on every $1,000 spent on PEO services. 

If you’re not reaping the rewards of a PEO as much as you once did, it’s time to move on. Also, when an in-house HR team benefits you in more ways than merely dollars and cents, it’s likely time to make your move.

2. Establish New Services 

Many times, businesses considering a full-time in-house HR team already have duplicate services established. What’s more, duplicate services are a telltale sign that you have one foot out the PEO’s door. Strangely enough, most owners start weaning themselves off of the built-in PEO services naturally. 

Perhaps you’ve hired a fantastic and experienced HR manager or invested in a payroll system that will alleviate mounds of stress. Now that you’re genuinely considering leaving the PEO, it’s time to pull the trigger on these functions by officially establishing them in-house. 

Are you itching to establish new services and feeling confident enough in your team to fulfill HR responsibilities? If so, be sure to review all the PEO-provided services to make sure you’ve covered your bases. No function should be left out in the cold and forgotten.

3. Upgrade Your Systems

When you’re ready to tackle in-house HR services, you’ll likely want a more upgraded software than a free accounting system for newbies. While ZipBooks and TurboCASH help startups or small businesses, they might not meet your needs at a higher level. 

Your newly hired HR manager might even have favorite software tools to recommend. Or, you might have chosen one while doing your research. Plus, you might need a new system altogether. For example, integrated human capital and performance management systems can impact scaling significantly, but PEOs rarely offer them. 

Consider these fundamental areas when you upgrade your systems:

• Employee health benefits
• Workers’ compensation insurance
• Unemployment insurance
• Payroll plans
• Retirement plans
• Taxes
• Employee handbook
• COBRA

We suggest that you make several dry runs or even overlap services with your PEO a handful of times to ensure you have your footing about you. Remember, system kinks and software bugs pop up all the time. Working these out before going live will save you a few headaches. 

4. Coordinate Timing 

It would be effortless to walk away from a PEO you’ve outgrown any time of the day, month, or year. But think twice before you gracefully part ways. Timing is paramount when it comes to leaving a PEO. 

Furthermore, it depends on whether you’re working with a PEO or an IRS-certified PEO (CPEO). Leaving a CPEO can be done throughout the year with very few ramifications. However, if you’re leaving a PEO, wait until January 1st to exit. This strategy will enable you to avoid employment tax liabilities for your company and its workforce. Sidestepping “double taxation” is a powerful motivator to wait.

5. Involve Your Company

Lastly, keep your employees informed about the switch away from your PEO to in-house services. After all, most services involve your staff anyhow. Consider employees participating in flexible spending accounts (FSAs). They need plenty of time to use their available funds. 

Plus, employees will likely want to know what insurance brokerage your company will be using and how the change will impact them. Transitioning from a PEO to an in-house system and insurance broker can take less than 60 days. The time seems to go quickly because of the necessary paperwork and data required. 

When leaving a PEO, a best practice is to involve your company, communicating effectively regarding what your team can expect. Ongoing communication is even better because there’s typically a learning curve with new systems. 

What’s the Next Step?

If you’re ready to move on from your current PEO, your next step should be finding an experienced broker. Getting the right employee health benefits requires knowing your current needs and having insight into your particular industry. 

Furthermore, review your insurance coverage to ensure your company’s protection. It can seem daunting to get all your ducks in a row — but you don’t have to undertake this entire process alone. For starters, here a checklist to help make leaving your PEO less of a hassle.