Leaving a PEO, or professional employer organization, is difficult by design. PEO’s make money doing all the things you don’t want to do related to HR. A core feature of every PEO’s business model is interdependency of systems and stickiness of services. The point is to make switching costs extremely keen when a business starts contemplating leaving. PEO’s are infamously pricy and abscond with the main advantage of HR, better oversight over culture. PEO’s monetize economies of scale at the expense of customizing their services to your needs – in other words, if you’re not 1 of 300 clients to 1 HR advisor, the PEO isn’t making money on your business.
The advantages of working with a PEO, at least on the surface, are about the administration of employees. Being on a PEO is helpful during growth spurts—across state lines. It can also give employers access to a broader range of benefits.
Years ago, I worked for a multi-state organization that paid over $2000 per year per employee in administrative fees to a large PEO. Within a month of taking on the direction of a new business line, I realized that if I wanted to staff my department through the PEO, I’d never be profitable and I’d start looking like the enemy of the company’s profit goals very quickly. Not happening! I said to myself.
We were locked in to the PEO by a contract that would have taken 6 months to disentangle in addition to disruption to a labor force of about 100 employees. So, I (and a team of accountants and lawyers) created a new entity that operated along side the primary business and contracted a new payroll provider through which to administer HR to my division’s employees. It was one of the best decisions I have ever been involved in.
When should I start considering other options?
When should I consider leaving the PEO? There comes a time when a PEO will no longer meet the needs of your organization. You may get an uncomfortable pang in your chest after seeing an invoice for monthly payroll that has tacked on extra, inexplicable, exorbitant admin fees. You might even wonder if your employees are utilizing all of the amazing benefits the PEO touted as a value of their services. Your organization may have grown so rapidly that you have hired an internal HR person who is more than capable of running payroll and evaluating benefits packages. Many reasons for leaving can include a desire to customize employee benefits, cost, service, and complete control of employee culture, relationships, records, and technology.
When do I sever the relationship with my PEO? Most companies make payroll transitions at the end of quarters or years. It just makes sense for tax purposes. Securing the proper resources and knowledge to manage all the HR functions the PEO is managing is imperative for maintaining the flow of business.
How do I do this?
Be Prepared to Meet the Needs
Before you begin the process of leaving your PEO, it’s essential to know where you’re going. When you come off a PEO, you may be accustomed to payroll and tax support, even if minimal. Most payroll companies have a payroll specialist to client base ratio of around 1 payroll specialist to 300 clients. Better identify a company like Crescent where the ratio is 1 payroll specialist to 150 clients so you can reach your support specialist when you need them, every time.
Confirm Cost Benefits
Many businesses want a tailored approach from an in-house HR professional, that knows the nuances of their specific workforce, who can make decisions that benefit the business, not the PEO. Aligning concerns like culture, employer brand, employer value proposition and benefits, and employee satisfaction through a well-rounded strategy is the art of HR and it’s not feasible for an outside entity to do that without internal collaboration. A PEO cannot possibly deliver all things to all people, as they may claim to, from the outside looking in.
Timing and Taxes
Your 401K and your payroll taxes are primary considerations in the PEO-exit analysis. Be sure you have the right partners to shepherd you through the complex process of moving your 401K and other benefits to new brokers.
There are some tax consequences when you leave a PEO in the middle of the year. In the case of mid-year termination, the PEO will have to complete final taxes up to the termination date and provide W2 for that specific period. Your employees will be viewed as new hires when you take them back from the PEO.
Ensure that you have Federal and State Tax ID numbers as you will be responsible for W2s for the rest of the year. There are many outsourced companies out there who can help you register to do business wherever you operate. Your employee will account for two W2s from two employers. As a result, you will most likely overpay FUTA and SUTA, if you leave a PEO mid-year.
There are two times that are good exit points, at the company’s renewal, when benefits hit their open enrollment period and January 1st.
If you wait till January 1st, this strategic move will allow you to avoid “double taxation,” i.e., employment tax liabilities for your company as well as your employees. If your renewal does not fall on January 1st, then when it does is another good time to exit (change) providers. Changing health insurance mid-year, starts employees’ deductibles and coverage over again if it is through a PEO.
What are the primary switching costs?
The administrative burden of switching is the keenest of pains that accompany leaving a PEO. Benefits, retirement savings, and taxes can all be incredibly complex. Work with a payroll provider that can triangulate experts in each of these fields, who know your industry and can seamlessly transition you from the PEO’s labyrinth of services to more customized needs.
If you partner with a payroll company that regularly transitions businesses off of a PEO, they can help you avoid disruptions to your business that can result from rehiring employees.
What do you get for switching?
Freedom – freedom at last! From crippling administrative and hidden fees. Freedom to build your organization’s culture from the ground up, without confusing employees about who they work for. Visibility – a key need for successful leadership at any business is visibility. When your people go through a PEO for their HR support, you are missing a crucial data point in your day-to-day understanding of skills development, benefits utilization, and safety oversight.
When your company begins to grow, and the PEO is not bringing the value or service you need to take your business to the next level, consider talking to Crescent. Our tax team, our benefits team, and our wide network of partner-vendors across the spectrum of HR services are experts in disentangling businesses from PEOs.
PHILIP CARRILLO, MBA, SHRM-SCP
Leader, HR Advisory Services
Philip began his 12-year Human Resource career in HR Project Management and Recruiting in the legal tech sector, working for startups that were listed among Forbes Fastest Growing Companies. Philip has managed human capital operations in almost all 50 states and in parts of Europe. His experience ranges from compliance to leadership coaching. After achieving his MBA from Tulane University in 2019, Philip transitioned from in-house Director to consulting, where he focuses on helping leaders understand, document, and improve productivity and visibility through Performance Management, Mission Vision and Values integration, and Professional Development. Compliance remains a cornerstone of his strategic assistance to companies that want to scale carefully and smartly.
Philip believes that every employer can methodically create an attractive and inspiring Employer Brand and Human Capital strategy. “Every challenge can become the building block of a breakthrough opportunity through a dynamic HR strategy.”