Exiting a Professional Employer Organization (PEO) is a significant decision, and it requires careful planning to ensure compliance, continuity, and cost-effectiveness. Let’s look at some factors employers should review when considering a transition away from a PEO.
The PEO Contract
Before making the move, thoroughly review your PEO agreement. Pay close attention to:
Termination Clause: Understand the notice period required to exit the contract and any associated penalties or fees. Many PEOs require 30–90 days’ notice.
Timing: Some contracts stipulate that termination must occur at specific times, such as at year-end, to simplify payroll and benefits transitions.
Data Ownership: Clarify what employee data, payroll records, and HR documentation the PEO will provide upon termination.
Your new service provider should be able to help you review the terms and help you navigate the best scenario for a smooth transition.
Payroll & Benefits Continuity
Leaving a PEO shouldn’t disrupt your employee experience, especially for vital pieces like payroll, tax, and benefits.
Timeline: A payroll service provider will help you plan an appropriate schedule for importing wage and employee data, rolling out benefits, and communication/training for employees on the updated platform.
Benefits Coverage: Your employees' benefits are likely tied to the PEO’s group plans. Leaving the PEO may mean losing access to those plans. Be prepared to:
* Shop for new group benefits.
* Enroll employees in new plans without gaps in coverage.
* Communicate any changes in cost or coverage to employees clearly.
If you don’t have a preferred benefits broker, your payroll service provider can refer you to someone they know and trust to help you find the right plans for your employees. These partners can work as a team to make switching to the new plans seamless. Make sure you check for technology integration capabilities before choosing your partners.
Regulatory Compliance and Legal Obligations
PEOs often take on a co-employment model, sharing responsibility for compliance with labor laws and regulations. After leaving a PEO, the full burden of compliance will fall on your business.
HR Compliance: Ensure you have a robust HR team or an experienced advisor who understands state and federal labor laws, such as wage and hour laws, leave policies, and anti-discrimination laws.
Tax Responsibilities: A PEO acts as the employer of record. You’ll need to take that back when you leave. Make sure you have an Employer Identification Number (EIN) and are clear on how you and your service providers will manage tax withholdings, filings, and remittances.
Workers’ Compensation: If your PEO provided workers' compensation coverage, you'll need to secure a new policy and ensure compliance with state requirements. Ask your payroll service provider for a referral to partners you can choose for your coverage.
Prepare Your HR Infrastructure
Leaving a PEO means taking ownership of all HR functions.
HR Software: Invest in an HR technology solution to handle payroll, benefits, time tracking, and employee records. Ideally, you can find one platform that brings all of the pieces you’ll need together.
Policies and Procedures: Develop or update employee handbooks, workplace policies, and job descriptions.
HR Staff: If you don’t already have an internal HR team, designate or hire for the HR responsibilities, and consider adding fractional HR support.
Communicate with Employees
Your employees will likely have questions and concerns about the transition. Proactive communication is key to maintaining trust and morale.
Explain the Decision: Share why the company is leaving the PEO and how it aligns with business goals.
Discuss Changes: Clearly outline any changes to payroll, benefits, or policies.
Provide Support: Offer resources, such as FAQs or dedicated points of contact, to address employee concerns during the transition.
Prepare Your Budget
Leaving a PEO can involve upfront costs, including termination fees, new software or service subscriptions, and potential increases in benefits premiums. Creating a detailed budget for the transition will help you stay on track.
Make sure the service providers you choose offer transparent pricing.
Partner with Experts for a Seamless Transition
Consider working with experts to ease the process. Find a main point of contact and ensure that all your partners can work together so that you’re not piecing things together and complicating the process.
An HR Consultant, a Payroll Provider, and a Benefits Broker are the three main players you’ll want on your team. Meeting with the team together and keeping communication open will simplify the experience.
Leaving a PEO is a strategic move that can give your business greater control and flexibility. However, it requires careful planning and execution to minimize disruptions and ensure compliance. Take the time to assess your company’s readiness, and don’t hesitate to seek professional guidance. A successful transition away from a PEO can position your business for long-term growth and operational success.
Interested in talking through the possibilities?
Reach out to our Coastal Payroll consultants.
