Things to Consider when Moving from a PEO

September 13, 2017 Zuman

2015, the average number of worksite employees per client was 22.5. 1 This varied by PEO size: the largest PEOs reported an average of 25.3 worksite employees per client, while the smallest firms reported 12.7.

For many small businesses, a professional employer organization (PEO) can be a tremendous asset. With not many people on staff and a thin budget, outsourcing human resources can be a smart strategy. But as a company grows larger, its payroll and benefits needs become more complex, and it’s vital to have in-house expertise. At that point, a PEO may no longer be the best fit.

Moving away from a PEO is not like ripping a bandage off. It can’t be done in one smooth motion. As a company grows, it takes a strategy and time to transfer all of the tasks PEOs do to an internal HR department.

When making the transition, HR executives and members of the finance department should take several factors into account so that the business can continue to operate smoothly during the change, and after the PEO service has been terminated.

1. Review what the PEO does for the company

Examine everything your PEO does for you. Many people assume a PEO is just a payroll and benefits service, but as Business News Daily explained, there is a lot more than paying your employees and getting you a deal on benefits. A PEO handles planning insurance, benefits and retirement packages for workers, as well as HR management. Understanding how to transition all of the PEO responsibilities to an internal team will be a major undertaking for HR employees.

It’s critical to monitor compliance with employment laws, create workplace policies, and comply with all the rules involved with reporting federal and state taxes.

Along with HR needs, a PEO also offers big business resources, including legal advice. When lawyers are needed for terminations or there is an issue with constantly changing workplace laws and regulations, the organization can be called upon.

Because the duties PEOs cover can be complex, it is important to have a strong understanding of their ins and outs before deciding to move on without them.

2. Determine if costs will change

In 2015, the average size of a PEO client company was 22.5 people, the National Association of Professional Employer Organizations reported. Yet by partnering with a PEO, those small businesses were often entitled to better health care coverage and other perks they normally would not have earned if they had negotiated those plans on their own. PEOs can negotiate better deals for rates because they qualify for pricing benefits given to large businesses.

Once a company is large enough that it no longer needs a PEO, the business’s finance department should communicate with insurance and 401(k) providers to determine if rates will change.

Don’t neglect to factor in the money saved by not paying the PEO. The average business will pay a PEO $900 to $1,500 per employee per year.

3. Handling new HR needs

As a business continues to grow, the needs of its HR department will expand. More employees means more time required for recruiting, interviewing and training, as well as handling the payroll and benefits for the workers.

PEOs are useful for smaller companies, because there is not as much to oversee. As the staffing and logistical duties shift to the business itself, the HR department should adopt its own practices. What the PEO did for vacation time, sick days and payroll may have worked when the company had 25 workers. But when there are 100 people in an office, strategies should change. A new HR department should reflect on what the PEO did that was effective and what wasn’t, and then develop a unique plan of its own.

4. Expecting the unexpected

Moving on from a PEO is a major step for a business. The transition will not only mean more administrative tasks for employees, but also more control for the company. Top decision-makers will have more influence on how employees are hired and trained, what office life is like and where the company’s finances are dispensed.

That greater responsibility means all of the mundane tasks the PEO previously handled are now dealt with internally. By accepting all this work, an HR department should be prepared for the obstacles and challenges that may come its way.

About the Author


Zuman is the premium solution for HR, payroll, benefits administration delivering superior control, lower risk, and enhanced employee engagement for growing companies.

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