4 Considerations When Leaving a PEO

July 20, 2016 Zuman

PEOs - or Professional Employer Organizations - are often the best solution for all things HR-related (payroll, benefits, etc.) at small businesses with fewer than 25 employees. But as companies grow, they often need more flexible HR tools. PEOs can be effective, but many companies quickly grow to the point that they simply need more options. However, leaving a PEO can be complicated.

Even with the July 2016 implementation of the Small Business Efficiency Act (SBEA) - which removed a sizable hurdle - shifting away from a PEO still takes a lot of careful consideration and thorough analysis of your organization's infrastructure.

Here are a few helpful considerations to make leaving your PEO that won't affect the flow of business:

Weigh cost vs. benefits

Several studies have found that PEOs can be useful, though usually for companies with 25 or fewer employees. Beyond that point, the costs far exceed the inherent benefits. While cost vs. benefits is important to consider when departing a PEO, it's not always easy to measure the benefits of an individual PEO. It's important to look at the most essential components of a given billing statement, like administrative fees, taxes, workers comps and retirement. You also need to uncovered hidden costs, which are often taxes on existing fees. Finally, make sure you know what's covered in each column. Administrative costs, for instance, will almost always feature fees like COBRA or flexible spending.

Proper timing is essential

When leaving a PEO, companies who rush can expect a series of consequences that can impact a huge portion of their standard operations. Moving away from PEOs isn't just complicated, but it's also a delicate process where timing is of the utmost importance. Perhaps the biggest element to consider is the effect on taxes. If you shift too late in the year, this will cause issues with employees' tax forms, especially as it relates to Social Security wage requirements or Federal Unemployment Tax Act and State Unemployment Insurance limitations. It's always better to make a switch before the mid-year point to avoid needless headaches. If you do make a change at that year's halfway point, that will require duplicate tax payments to be processed, usually from any savings available.

Do your due diligence

For many companies, the move away from a PEO is meant to afford them more control in the everyday functions of HR. However, there is no denying that there can be a noticeable period of adjustment between systems, and this can impact overall efficiency. That's why it's a good idea to run parallel payrolls to check for overall accuracy. Running a new payroll, say with a Payroll Service Provider (PSP) against the PEO gives you a definite set of data and figures to work with. From there, you can reconcile the two sets of numbers, find any discrepancies and work out strategies to avoid errors in the future. With this approach, you can be more certain that there won't be quite as noticeable of a post-shift learning curve.

Consider your new system

Even if you conduct enough pre-shift research, and the timing is nearly perfect, there is one more major consideration that can effect the smoothness of your transition: technology. When leaving a PEO, it's almost always a good idea to replace the old technology to ensure proper compatibility and functionality. A "technology-only" approach is a truly effective option, as it can compile the processes necessary for managing benefits, payroll and the workforce. The technology itself must always be scalable, as this sense of growth is vital to maintaining pace with ever-changing landscape. When considering technology, data accuracy and configuration are two hugely important components of any new system.


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