Deciding how to leave a PEO can be challenging for small businesses. You have to think about when to notify your PEO provider, what information you need to disclose to your employees, and how to make the transition seamless. To pull it off, you need to consistently communicate with both your old and new provider to ensure nothing, like payroll or tax payments, slips through the cracks. You should also perform a thorough analysis of cost changes for both you and your employees—and be sure to notify them of changing health insurance premiums.
If you don’t want to go through the trouble of leaving your PEO to learn an entirely new system, consider using Rippling. It’s an HR software provider that has a PEO option that you can switch on and off with the click of a button. When your company starts growing and a PEO becomes less cost-efficient, you can opt to only keep the HR software and non-PEO services. And even better, if you realize you made a mistake or business needs change and you want a PEO again, you can switch it back on with ease. Sign up for a free demo today.
1. Define How HR and Payroll Needs Will Be Met
Before you start the process of leaving your PEO, it’s important to know where you are going. Will you be using another PEO service, transitioning to an HR or payroll provider, or taking over the process in-house? You should determine this early to ensure you won’t experience a gap in services. For instance, PEOs handle payroll; if you’re switching to a DIY payroll provider that doesn’t file taxes in your state, you’ll need to set up a process in-house to ensure you don’t miss any deadlines. Or, you can weigh your options and consider a full-service provider.
Also, consider how much HR expertise your company has access to under your PEO. If you find yourself calling for labor law guidance every other week, you’ll need to consider how you will work around that should you sign up with a provider that doesn’t have certified HR experts.
If you’re looking to transition to a different PEO, check out our top PEO picks.
2. Figure Out the Best Time to Make the Change
Typically, the best time to change providers that perform payroll services for you is at quarter-end. It helps you make a clean cut when it comes to taxes; if you switch providers at any other time during the year, you’ll need to ensure that none of your tax liabilities slip through the cracks. Make it a point to work with your PEO representative to send any related tax and payroll paperwork over to your new provider, and make sure that the new provider is clear on what it should do with them.
If you’re changing anytime during the year (for example at the end of a quarter), you’ll need to verify your year-to-date payroll numbers. Sometimes, new providers don’t transfer all of your prior period data over, and that can cause issues. Payroll records will be incorrect, including your year-end tax forms, if the software pulls the data from payroll entries. Most payroll and HR software companies will assist you in uploading the information before your first pay run is complete.
Regardless of when you choose to change HR payroll providers, give yourself enough lead time to perform all of the tasks on your to-do list.
3. Gather Stored Company and Employee Information
Be sure to collect copies of payroll documents that include information regarding your company’s (and employees’) taxes, deductions, PTO balances, benefits data, performance evaluations, termination records, and so on. Many PEOs will still allow you to access your data after you leave, but it can be challenging if you’re not able to freely log in and out of their software. You’ll have to call and make requests each time you need information, and there’s no guarantee that you will still be a priority once you’re no longer a client.
You should consider where you will store the information when you have it. Will you use your own network? Will you print them and save as paper files (which isn’t very efficient if you’re a growing company)? Or are you able to upload them to your new provider’s database?
If you’re looking for a full-service payroll provider to replace your PEO, check out our best payroll service recommendations.
4. Communicate Health Insurance Option Changes to Employees
One of the primary benefits of using a PEO is the competitive health insurance rates, and unless you’re leaving yours for a different PEO, your employees will likely experience a rise in coverage costs. It’s important that you obtain clear details on what those new options are and how much they will cost so that you can communicate to your employees as soon as possible. Dropping the ball in this area could lower morale and cause employee turnover if they are relying on the insurance.
If there’s going to be a significant increase in insurance rates (and it’s a big possibility), do your best to explore as many options as possible. Would it be more cost-effective for the employee if you credit their paychecks with a contribution so they can use it to purchase insurance on the Marketplace?
5. Request Updated Information on Each Employee’s FSA and HRA Accounts
Ask if the PEO will continue to process claims until the end of the FSA and HRA period or if you need to transition that responsibility to another administrator. It’s possible you will have to pay a fee for the PEO to maintain this service. Employees will also need to be made aware of their current balances and how much time they have remaining to spend it.
6. Check HR and Payroll Compliance Obligations
Because your PEO functioned as a co-employer, you will be transitioning to fully employ your workers on your own. And as a somewhat new employer, there are certain factors you’ll need to consider and prepare for:
- Ensure you have a federal and state tax ID number to file taxes under: PEOs file employer taxes under their own IDs, so this isn’t something you’ve had to be concerned with for a while, or even if you’ve been using a PEO since your business started. Check for both withholding and unemployment tax accounts.
- Time workers’ compensation so there’s no gap in coverage: Workers’ comp insurance is a requirement in all states, except Texas, so you’ll likely need to maintain it. Check that your new provider offers it, and be sure the start date is immediately after the end date your PEO communicates.
- Figure out COBRA obligations: Since the PEO’s relationship is being terminated, they will be responsible for sending COBRA notices to your employees; double-check that they do, however. You might also be charged a hefty fee if the PEO has to manage any COBRA accounts. And, if you don’t have a benefits plan in place by the time that goes into effect, you risk not being able to be reimbursed.
- Review any garnishment orders: If your PEO was managing any garnishments for you, you’ll need to assume responsibility for it. It’s best to be proactive and communicate the employer change to the applicable court that issued the order (contact information should be on the withholdings order) and set up a process to start withholding and sending funds as soon as the PEO stops.
7. Create New Employee Paperwork
If this is your first time fully employing workers, you’ll need to put together an onboarding packet, like a direct deposit form, Form W-4, Form I-9, employee handbook, leave policies, etc., so you’re prepared when it’s time to hire a new employee.
Be sure to take a close look at the policies your PEO required, and confirm that you want to maintain those once the relationship ends. You might need to create new documents with these policies in them if you’re unable to make a copy of the PEO’s documents. Also, be sure to communicate any changes to employees. It’s a good idea to have them sign an acknowledgment form.
Top Reasons Companies Leave a PEO
Companies leave PEOs for a few reasons. In most cases, it is a reaction to growth and a need for increased control—growth due to hiring or expanding locations and increased control due to the desire to utilize resources in-house or to control the company culture and benefits.
- Benefits choices: While PEOs can often help smaller companies obtain better benefit rates, as a company grows, it may earn competitive rates on its own from a broader choice of providers.
- Corporate culture and industry expertise: Companies striving to create a specific yet evolving corporate culture may find that they can control company culture better by utilizing an in-house team with industry experience.
- Misalignment or duplicate resources: Some companies find that their in-house teams and PEO resources are misaligned and not working well together, or they may be paying for duplicate resources. In some cases, it becomes a harmful “us and them” type situation.
- Fast growth: As companies grow and hire, they may find that their current PEO cannot provide services to the new locations. So, they may choose to move those services in-house rather than contracting with multiple PEOs. Or, the company is growing so big that using a PEO is more expensive than hiring an in-house HR team.
Before migrating away from your PEO service, you’ll need to consider all contingencies carefully, as well as the items we’ve listed below, to ensure a smooth transition. Also, assemble your team leaders to discuss how the changes may affect their processes and resource needs, and bring on additional resources such as HR and accounting team members if needed.
Consider the following:
- Costs: Before, during, and after the change
- Time: When to start the process, how long it will take, how long to implement and onboard the new PEO or HR team
- HR management: How will HR processes be managed during and after the change
- Business interruptions: How to keep processing running during the process
Tip: Before you make any plans, review your PEO contract. There may be penalties for exiting your contract early. Your contract may outline the contract termination requirements.
What to Consider After Leaving a PEO
After running the first round of payroll, work with team leaders and managers to determine the next steps. Discover roadblocks and problem areas to relieve. Hopefully, the change went well, but if not, now is the time to fix any issues.
Your situation will be unique, but it may help to consider the following actions:
- Schedule the HR team to follow up with the “new employees” to help them navigate the changes.
- Consider adding additional benefit choices.
- Create corporate culture-building materials and team-building activities.
- Build new performance plans.
- Share company information such as new organizational charts.
- Remove redundant resources if needed.
- Review technologies and consider new additions if helpful.
- Audit compliance, tax, and legal requirements to ensure compliance.
If you’re leaving your PEO because you’re dissatisfied with the service you received, check out our article on PEOs to learn exactly what value they should provide; you may find that you don’t have to abandon PEOs altogether, just the one you’re currently working with.
Leaving a PEO service is a positive step for many growing businesses looking to pull in costs and control their workforce. However, successful change depends on careful planning and management of a long list of details. With a good team and thoughtful planning, leaving your PEO can go smoothly.