When your company partners with a professional employer organization (PEO), it can enjoy many benefits, such as payroll management, human resources support, and compliance assistance. However, there may come a time when your business outgrows the need for a PEO, or you want to manage these functions in-house.
Transitioning away from PEO services is a complex process, but with careful planning, it doesn’t have to be overwhelming.
Here’s what you need to know about planning for a seamless PEO transition, with a handy checklist and timeline to ensure a smooth exit strategy. We’ll also discuss how Mosey can assist with corporate compliance.
What Is a PEO and What Does It Do?
A professional employer organization is a company that partners with small to medium-sized businesses for human resource management.
A PEO can handle payroll, benefits, workers’ compensation, and some compliance with employment laws. When you work with a PEO, your business enters into a co-employment agreement, where the PEO takes on certain employer responsibilities for your workers.
Put simply, a PEO handles many of the HR tasks that you would otherwise manage yourself. This allows you to focus on running your business while the PEO takes care of tasks like hiring paperwork, administering benefits, and making sure you’re following state and federal employment laws.
Why Do Companies Transition Away From a PEO?
There are many reasons why a company might decide to stop using a PEO. Businesses may reach points in their growth and expansion where they need to make different decisions. At each step of that growth, it’s useful to evaluate your relationship with your current PEO.
Here are some reasons why you might exit:
Cost Savings
One of the main reasons companies decide to leave a PEO is to save money. While PEOs offer valuable services, they often charge a fee based on the number of employees or a percentage of your payroll. As your company grows, so does the cost.
By transitioning away from a PEO, you can reduce these fees and take control of HR and payroll functions without paying for the extra services that the PEO provides.
Greater Control Over HR Functions
Some companies prefer to have full control over their HR processes. When you work with a PEO, you are in a co-employment arrangement with a professional organization, which means the PEO shares responsibility for your employees. This can sometimes limit your ability to make quick decisions or implement changes in your HR policies.
By exiting a PEO, you can take full control of your company’s HR operations and customize them to suit your specific needs.
Increased Internal Business and HR Capabilities
As businesses grow, they often hire HR professionals to manage employee relations, payroll, benefits, and compliance. If your company has built a strong HR department, you may no longer need the support of a PEO. Instead, you can transition these functions in-house and rely on your internal team to handle HR tasks.
Technology and Software Advancements
Many businesses are turning to advanced HR software, such as Human Resources Information Systems (HRIS), that allows them to manage payroll, benefits, and compliance more easily in-house. With the rise of user-friendly HR technology, businesses can handle these tasks without needing a PEO, making it easier to leave these services.
Flexibility
When working with a PEO, you may feel limited by the service agreements and processes the PEO has in place. If your business needs more flexibility in managing HR or payroll, leaving the PEO and taking these functions in-house allows you to create systems that work best for your company’s needs.
Startups and smaller businesses may find that a PEO can successfully meet their needs for several years, but continued success may change the value of that relationship.
How To Plan Your PEO Exit Strategy
Exiting a PEO requires careful planning. Since the PEO handles essential business functions, it’s important to ensure everything is in place before transitioning. Here’s how to plan:
Review Your PEO Contract
Before you transition away, take a look at your contract. Some PEO contracts have termination clauses, notice periods, or penalties for early termination. Make sure you understand the terms of this contract, including when and how you can end the agreement.
Set a Transition Timeline
Create a timeline for your transition (more on that in a bit). It’s important to give yourself enough time for a smooth changeover, so plan your exit strategy over several months if needed. As you’ll see from our example timeline, you should include key dates for when you will take over specific HR and payroll tasks and when you will officially terminate your contract with the PEO.
Prepare Your HR, Payroll, and Employee Benefits Systems
One of the most important steps in transitioning off of a PEO is setting up your own HR and payroll systems. You’ll need to choose payroll software, establish employee benefits, and make sure you have systems in place to handle taxes, workers’ comp, and compliance.
If you don’t have an in-house HR team yet, you may also want to hire an HR consultant to help with this process.
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Communicate With Your Employees
Your employees may have questions or concerns about the transition, especially if they’re used to having their benefits or payroll managed by the PEO. It’s vital to communicate clearly with your team about changes, reassure them that their benefits and pay will be well-handled, and let them know who to contact if they have any issues.
Notify Your PEO
Once you’ve set up your internal systems and are ready to move forward, notify your PEO of your decision to end the relationship. Follow the terms of your contract regarding notice periods and ensure you communicate your exit strategy so the PEO can assist with the transition process.
Audit Your Records
Request all necessary records from your PEO before you end the relationship. That includes payroll data, employee benefits information, tax records, and any other documents related to employee management. Having these records on hand will ensure you can easily continue managing HR and payroll without missing important information.
You may also be required to keep copies of certain records by law. If your PEO was holding onto them for you, make sure they’re transferred back to your possession before you end your working relationship with the PEO.
Remember, although recurring costs may motivate you to end your relationship quickly, the costs of an improperly executed exit may be higher. Plan and move at a reasonable pace to ensure a seamless transition.
Your PEO Transition Checklist
With all that in mind, use the checklist below to assess your readiness at each stage of the process:
- Review Your PEO Contract: Understand the termination terms. Note any notice periods or penalties for early termination.
- Set a Transition Timeline: Plan a timeline for transitioning HR and payroll functions. Set key dates for taking over benefits administration, taxes, and compliance responsibilities (see the following section).
- Build Your Internal HR Team: Assess whether your current team can handle HR administrative tasks in-house. If necessary, hire HR professionals or consultants to help with the transition.
- Notify Your PEO: Provide formal notice of your intent to terminate the contract and work with the PEO to facilitate a smooth transition.
- Request Employee and Business Records: Gather all payroll data, employee benefits information, and tax records from the PEO. Make sure you have copies of any relevant contracts or documents.
- Prepare Your HR and Payroll Systems: Choose and set up payroll software. Establish employee benefits (health insurance, retirement plans, etc.). Ensure systems are in place to handle taxes, workers’ compensation, and compliance.
- Register for Payroll Tax Accounts: In each state where the PEO filed for you, you will need to register the business for its own payroll tax accounts (withholding tax, unemployment insurance, paid family and medical leave, workers’ compensation).
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- Communicate with Employees: Explain the transition process to your employees. Provide a point of contact for any questions or concerns. Ensure employees understand that their pay and benefits will remain secure. Update and distribute your employee handbook to align with the new policies and systems.
- Audit Compliance: Ensure you comply with state and federal labor laws, taxes, and workers’ comp requirements. Double-check that your new HR and payroll systems also meet legal compliance requirements.
- Test Your New Systems: Test your payroll and ensure that taxes are correctly calculated. Verify that employee benefits are set up properly and functioning smoothly.
- Monitor the Transition: Monitor the first few payrolls and HR processes to ensure their operation. Address any issues and communicate with employees as needed.
Once you’ve left your PEO, get into the habit of regularly reviewing your HR processes. You may have taken things for granted that you are now responsible for. A useful next step is to audit your HR and payroll processes thoroughly and regularly to ensure continued compliance. To put a finer point on the entire transition process, see the following timeline to gauge the timing for each step.
PEO Transition Timeline for Human Resources
A typical PEO transition takes about 2–4 months, depending on your company’s size and complexity. Here’s a simple timeline framework you can adapt to help your HR team stay on track:
Phase 1: Initial Planning (Weeks 1–2)
- Review your PEO contract for termination terms and required notice periods.
- Build or strengthen your internal HR team; identify any outside support needed.
- Outline your transition plan, including target dates for major milestones.
Phase 2: System Preparation & Notification (Weeks 3–4)
- Select and begin setting up your HRIS or payroll/benefits systems.
- Register for payroll tax accounts in all applicable states.
- Notify your PEO of your intent to exit and request all employee and business records.
Phase 3: Data Migration & Communication (Weeks 5–6)
- Securely transfer employee data, payroll, and benefits information from the PEO.
- Configure your HRIS and test payroll and benefits administration.
- Communicate the transition plan and timeline to employees; update handbooks and provide points of contact for questions.
Phase 4: Implementation & Compliance (Weeks 7–8)
- Run parallel payrolls or conduct test runs to ensure system accuracy.
- Enroll employees in new benefit plans and confirm coverage.
- Audit compliance with all tax, labor, and reporting requirements.
Phase 5: Go-Live & Monitoring (Weeks 9–12)
- Officially switch to your in-house HR and payroll systems.
- Closely monitor the first payroll cycles and HR processes for any issues.
- Continue supporting employees and address any concerns promptly.
- Regularly review and refine your HR operations post-transition.
Remember to mark key dates in your timeline. Also, as another best practice, try to time your transition for the end of a quarter or year to simplify payroll and benefits changes.
Plan a Smooth Transition With Mosey
Transitioning away from a PEO is a significant decision that requires careful planning.
By following this guide and using the checklist and timeline we’ve provided, you can ensure your transition is smooth and efficient. Whether seeking cost savings, more control over HR, or better flexibility, planning your PEO transition can help your business grow and succeed in the long run.
Mosey offers PEO transition assistance services for companies seeking to optimize their HR and compliance processes in-house. We’ll work closely with you to ensure a seamless transition from your PEO to your preferred HR management solution. Schedule a demo with Mosey today to learn how we can help your business grow, evolve, and thrive.
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