Outsourcing human resources (HR) to professional employer organizations (PEOs) can give startups and small businesses a competitive edge. Yet, not every partnership is successful. Having a PEO transition checklist is essential when the benefits of leaving a PEO outweigh the cons.
Since PEO services integrate deeply with your HR processes, switching to a new PEO provider or alternative solution impacts payroll, benefits, and more. This guide explores why companies leave PEOs, what to do before exiting, and the steps to switch PEOs.
Leaving a PEO: top questions answered
PEO providers maintain your company’s employment data, sponsor health insurance, and run payroll. While many small businesses stay with one vendor for years, others transition to a new PEO or exit the model for an alternative outsourcing service.
Commonly asked questions about the PEO transition process include:
- Why do companies leave PEOs? Businesses cancel PEO contracts because they outgrow the services, want more flexibility or control, are dissatisfied with the delivery or quality, or don’t achieve cost benefits.
- How do you transition out of a PEO? Develop a PEO transition checklist to coordinate the transfer of HR data and management to internal staff or alternative providers.
- What are the tax implications of leaving a PEO? When you quit a PEO, your company becomes responsible for employment taxes, including state unemployment insurance (SUI).
- What should I consider when leaving a PEO? Before terminating a PEO contract, review cancellation fees, benefit enrollment dates, and tax deadlines to ensure a seamless PEO transition.
[Read more: PEO vs. HRO: Comparing SMB Solutions]
What is the difference between a certified PEO (CPEO) and a PEO?
Although the IRS certification is the main difference between CPEOs and PEOs, this status could affect the PEO transition process. A certified PEO (CPEO) is an IRS-certified organization recognized through publication on a CPEO public listing.
The voluntary IRS program confirms that professional employer organizations meet financial reporting, bonding, background, tax compliance, experience, and location requirements. CPEOs must post bonds and verify information annually to maintain their status.
While non-certified PEOs must meet industry standards and state and federal regulations, they don’t undergo IRS certification. When switching PEOs or transitioning off one, the IRS certification verifies that the CPEO meets stringent financial stability requirements and adheres to employment tax obligations.
Why do companies exit or switch PEO providers?
As startups and small businesses grow, their goals change, and new issues arise. A new PEO could deliver better services and support. Conversely, a business quitting the PEO model might choose an administrative services organization (ASO), employer of record (EOR) service, or HR outsourcing (HRO) company.
Motivations for choosing a new PEO
A PEO should reduce employee turnover and increase profitability. When a routine review of your PEO relationship reveals shortcomings or requests for improvements go nowhere, your company isn’t getting the value it deserves.
Here are signs it’s time to switch PEOs:
- It’s difficult to reach your contact person, or the specialists are unfamiliar with your industry or specific challenges.
- The technology platform, usually a human resources information system (HRIS), feels outdated or lacks necessary add-on modules.
- Problems with essential services, like PEO payroll processing or benefits administration, are unresolved.
- The insurance carriers or plans haven’t met your coverage or cost standards, and a new PEO offers better options.
- You don’t feel the PEO can support your company’s expansion across state or international borders.
[Read more: 6 Things to Consider Before Taking Your Business Global]
Reasons for exiting the PEO outsourcing model
Experts estimate that companies generally stick with a PEO for over five years. During this time, small business owners leverage the co-employment model to grow their companies. However, as workforce and payroll totals increase, leaders want to strengthen their company culture and internal workflows.
For larger businesses, the benefits of leaving a PEO include:
- Flexible employee benefits: Standard PEO benefits are better than open-market versions but less customizable. Leaving a PEO lets you tailor coverage to your workforce.
- Specialized support for targeted goals: PEOs provide broad offerings but fewer in-depth services. Alternatives can solve specific challenges with dedicated advisors and software.
- Control over costs: The PEO fee structure means your costs increase as your workforce grows. Eventually, replacing the PEO with an in-house solution is more cost-efficient.
- Ability to scale HR processes: A PEO is invaluable when you don’t have an HR team. With an internal HR department, a PEO could be redundant.
How long does it take to exit a PEO?
Transitioning off of a PEO takes about four to six months. If you switch to a new PEO, this time frame could be at the lower end, whereas it’s at the upper limit if you exit the PEO model. The best time to leave a PEO is at the end of the year.
Consider these factors when planning your PEO transition:
- Tax implications: Leaving a PEO mid-year impacts SUI and FICA (Federal Insurance Contributions Act) taxes. If you quit the PEO model, you must acquire a new employer identification number (EIN).
- Impacts on flexible spending accounts (FSAs): Employees need time to use FSA funds. Mid-year exits could increase expenses for workers who reached out-of-pocket or deductible maximums.
- Retirement plan considerations of leaving a PEO: If your business participates in your current provider’s multiple employer plan, you must designate a new one. It takes about 60 days, including a 30-day blackout term.
When a routine review of your PEO relationship reveals shortcomings or requests for improvements go nowhere, your company isn’t getting the value it deserves.
What to do before leaving your PEO?
A PEO integrates deeply with daily HR processes and data. To ensure data and service continuity, develop a straightforward leaving a PEO checklist. It helps your team understand costs and workflows while preparing for the PEO transition.
Review your PEO contract termination provisions
Read your agreement to understand the PEO contract termination process. It outlines the provider’s responsibilities and your company’s obligations, including when to notify them and where to send the PEO termination letter. The cancellation clause also discloses early termination or transition fees.
[Read more: 5 Things You Need to Know About Choosing a PEO]
Decide if you will switch PEOs or handle HR internally
Understanding your next step after leaving a PEO is vital to a successful conversion without service gaps. Bring together stakeholders, executives, and department managers, including HR and finance, to discuss operations.
Determine if your business will:
- Transition to a new PEO.
- Use an HR outsourcing service.
- Only outsource payroll.
- Move all HR processes in-house.
Create an internal PEO exit checklist
Keep teams focused by developing an exit plan or leaving a PEO checklist with key dates and task assignments. Use a project management tool to communicate, document actions, and discuss concerns. This approach generates insights about lessons learned and best practices to improve future outsourcing goals.
Add the following details to your leaving a PEO checklist:
- Identify HR, employee, operational, and finance challenges.
- Assess current costs, the PEO transition budget, and forecast expenses.
- Review COBRA (Consolidated Omnibus Budget Reconciliation Act) conditions and fees.
- Research new PEO or HR outsourcing solutions.
- Compare current staffing and resources to future needs.
- Discuss how proposed changes impact existing workflows.
- Complete a data audit to identify inconsistencies or gaps.
How to switch PEOs in 7 steps
A well-structured PEO transition checklist ensures uninterrupted HR services and benefits. Although leaving a PEO comes with challenges, your replacement plays a pivotal role by coordinating the migration, onboarding your team, and communicating effectively.
Choose a new PEO provider
With research from your leaving a PEO checklist, you should have a shortlist of companies that address your needs. Ideally, your team has read case studies, met with sales representatives, and received price quotes.
After completing the selection process, request a contract and ask for specifics about the new provider’s support during the changeover. Signing the co-employment agreement is the last step. The switch begins with the new PEO providing system access so you can set up accounts.
[Read more: Choosing a PEO: A Guide to Finding a Suitable Co-Employer]
Establish a PEO transition checklist
With your internal leaving a PEO checklist complete, it’s time to coordinate with your new PEO on a transition strategy. It defines key milestones and assigns responsibilities.
Consider adding the following actions to your PEO transition checklist:
- Define the criteria for assessing the conversion process. Metrics may include payroll accuracy, smooth system integration, and employee satisfaction.
- Review your data security protocols for physical and digital information. Consider access levels, file-sharing methods, and third-party software usage.
- Devise a contingency plan to handle disruption. Have a backup method to process payroll and manage data transfer issues or other errors.
Send a PEO termination letter
Businesses must send a formal cancellation notice within the required time frame when terminating a PEO contract. Your new provider may help draft a letter to meet legal and contractual requirements.
The PEO termination letter should include the effective termination date and proof that it’s within the required notice period. Request the provider to send a final account statement and documentation, cooperate during the changeover, and confirm receipt of the notice and final date.
Prepare to leave your PEO
As part of your PEO transition checklist, finish the data audit by requesting a comprehensive employee report from your old PEO to verify changes. Then, obtain a detailed payroll statement showing pay stubs, deductions, and tax withholdings.
Cross-reference data from your former PEO system and internal records to confirm accuracy. Next, verify that your new PEO will inventory existing benefits, evaluate the status of pending claims, and manage them during the switchover.
Complete the PEO transition
During the PEO transition, your new provider handles most of the process while your team communicates and alleviates employee concerns. The former PEO completes the final benefits and payroll adjustments while assisting with the data transfer.
This stage includes these steps:
- Setup systems: The new PEO configures software, coordinates with the former vendor to migrate data, and tests the system.
- Establish payroll: While the former PEO conducts final payroll runs, the new provider sets up the system and resolves issues.
- Benefits enrollment: The new PEO communicates changes, answers employee questions, and enrolls them in new benefit programs.
[Read more: Best Health & Wellness Perks to Boost Employee Morale]
Follow up after finishing the PEO transition
After leaving your PEO, evaluate the process and effectiveness of your PEO transition checklist. Consider soliciting employee feedback through surveys or interviews. Feedback should assess your company’s approach, communication efforts, and the new provider’s benefits, payroll system, and HR support.
Analyze your success metrics to determine if leaving the PEO and transferring to a new service went smoothly. Review the new PEO payroll processing error rates, verify systems are functioning as expected, and complete a cost comparison.
Develop action plans to address employee concerns or areas for improvement. Set timelines and assign follow-up tasks to ensure accountability. Also, consider scheduling regular meetings with your new PEO provider and establishing key performance metrics for monitoring services.
Finalize the PEO exit plan
As a final step, formally end your previous PEO relationship. Go through your leaving a PEO checklist and review the contract to confirm your organization met cancellation terms, timelines, and financial obligations. Next, meet with your former vendor to assess the exit process or concerns.
Send a PEO termination letter verifying the end date, addressing financial settlements or outstanding matters, and requesting written acknowledgment. After receiving the response, confirm that an authorized representative signed it and that the relationship is officially terminated. Acknowledge receipt of the PEO letter and thank your former provider.
Lastly, file records related to the PEO contract termination process and update internal systems. Notify your HR and finance leaders that your PEO transition is complete.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
