Professional Employer Organizations (PEO) and Why You Should Leave Them

What is a Professional Service Organization (PEO)?

Sometimes companies have trouble meeting their human resources needs, especially while also trying to increase profits. To assist in this area, many companies hire professional employer organizations (PEOs). When hiring one of these organizations, the company and its employees become employees of the PEO, and the company delegates many of its HR responsibilities to the PEO. Though the company still officially hires its employees, the PEO handles payroll, benefits administration, workers’ compensation, medical insurance, and retirement accounts. Then, the company pays the PEO for its services (often a percentage of total salaries), along with an amount to cover the payroll for the employees.

PEO-provided Services

A typical PEO provides the following four main services to its clients:

• Human Resources Associate
  • PEO acts as an off-site HR department by offering consulting in sexual harassment, discrimination, Family Medical Leave Act (FMLA), and hiring and firing practices
  • Conducts background checks and pre-employment testing on potential employees
  • Recruits employees through advertising, resume screening and interviewing
  • Provides customizable employee handbooks and position descriptions
  • Conducts performance reviews
  • Provides employee training for new positions
• Employee Benefits Administration
  • PEO seeks out cost-effective benefits plans. By pooling all of its employees into one group (the vast array of companies hired by the PEO), the organization is able to spread their medical claims over a larger premium base. This equates to a lower annual rate increase, compared to smaller businesses.
  • PEOs typically offer the following benefit plans:
    • Health care
    • Dental
    • Vision
    • Long- and short-term disability
    • Life insurance
    • 401(k)
    • Section 125
    • COBRA compliance
• Payroll Administration
  • The PEO will take responsibility for the following:
    • Payroll
    • Employee taxes
    • Quarterly reports
    • Workers’ compensation insurance
    • Premium audits
    • Claims management
    • Benefits procurement
• Handling Risk Management
  • PEOs manage any workers’ compensation or unemployment claims that arise, typically at a lower claim cost

Advantages of Hiring a PEO

The following are the potential benefits of hiring a PEO:

• Employers do not need to spend time and resources on HR tasks.
• PEOs can provide consistent administration for larger companies, and often improved technology resources.
• When the PEO assumes its client’s payroll into its own accounts, it also assumes the liability for clients’ employees because it is technically now the legal employer.
• PEO assumes the liability of adhering to the legal tax and workplace standards.

Disadvantages of Hiring a PEO

The following are the potential cons of hiring a PEO:

• A company no longer has employees after hiring a PEO. The company essentially fires all its employees, who are then rehired by the PEO.
• By hiring a PEO, the company loses control and flexibility concerning compensation packages allotted to its employees. Though a company can decide how much to pay each of its employees, it has limited say on the benefits plans offered.
• Companies lose management control over their workers since they are officially employed by the PEO.
• As a company grows, the PEO may not be able to meet the needs of the business, including reporting and self-service capabilities.
• Difficult to itemize true cost of PEO because all insurance and benefits are bundled together.
• Employees may be confused by who truly is their employer; the PEO or the company that they report to each day. Employees may not know who to turn to when they have concerns regarding their compensation, benefits, etc.

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Why Companies Leave PEOs

Conceptually, PEOs are not designed to become a permanent part of a business. Your company’s HR and employee benefits strategies and processes will change as your business grows. This could diminish the advantages of a PEO partnership, so it may be time to exit. When it comes to HR and benefits administration, PEOs are basically a one-size-fits-all model, so a PEO may have difficulty handling your need for customized aspects in this area. Different industries have unique HR and benefits requirements, so a more tailored approach may be what you need.

Here are some signs that leaving your PEO may be the right move:

• Cost is too expensive – because companies using a PEO are charged per employee, the cost of hiring HR staff and/or adding new technology may be more effective than paying the administrative PEO fees, especially as your company grows larger
• A PEO’s services are not customized to the company’s needs, so oftentimes many of the PEO’s offerings go unutilized but the costs to the company are not reduced
• Your business has outgrown the PEO’s standard technology and support system
• You want to quickly change your benefit offerings to enhance your company culture; PEOs do not offer customized employee benefits programs, hindering a company’s recruiting efforts to hire workers looking for benefits packages that fit their needs
• Because a PEO becomes the employer, the company must abide by large-size rules and regulations, despite the actual size of the company. This can lead to more restrictive and costly measures that the company would not be subject to if they were not using a PEO
• PEOs do not offer a thorough, comprehensive leave of absence service, causing the company to either take on the administrative burden themselves or outsource it to another company at additional cost
• PEOs do not offer merger and acquisition assistance, so if the company grows and looks for that option, they will need to pay for additional support services

How to Leave a PEO

If you are with a PEO and the cons now outweigh the pros for your business, then it’s time to leave your PEO. There are many necessary changes to implement, but with careful planning and guidance, the transition away from a PEO can be smooth.

Considerations for Transitioning Away from a PEO

Before terminating your agreement with the PEO, check your contract regarding the following items:

• Termination requirements
• Important dates
• Penalties for terminating the contract
• Costs for leaving the PEO

Getting these in order first will help make the transition a lot easier.

Another consideration is how you’re going to fill your company’s needs that the PEO was meeting, specifically your HR management. Before leaving the PEO, make sure to have an in-house HR team that can take up the responsibilities, or look to outsource the HR functions through Administrative Services Outsourcing (ASO), using an organization that specializes in the HR services previously provided by the PEO.

You can also get assistance by investing in a payroll provider and/or human resource information system (HRIS) or human capital management (HCM) platform that will replace the infrastructure supported by the PEO. Most HRIS and HCM platforms provide access to many of the same services provided by the PEO, including recruiting, onboarding, and benefits management. They also automate many basic HR functions, alleviating the burden from your HR staff.

Timing and communication are also important considerations before leaving your PEO. It’s recommended to wait until January 1st to exit, as this will allow you to avoid employment tax liabilities for your company and employees. The exception to this would be if your PEO is a certified professional employer organization (CPEO) through the IRS. In this case, leaving at any point during the year will not cause the same tax liabilities.

Employees desire stability, so once you begin moving forward with the PEO exit process, be sure to clearly communicate the changes to your workforce in a timely manner. It’s reasonable that some employees will have questions about their payroll and benefits, so be sure that your managers can provide them with current information. You can also communicate the changes through company meetings and emails.

How GTM Can Help You Leave Your PEO

GTM has the resources, expertise, and knowledge to assist with unwinding out of a costly PEO, saving you money and increasing the quality of your human capital management system. We will create a timeline and checklist for a seamless transition from the PEO model to a service model.

Our secure, cloud-based payroll and HCM platform, isolved, provides all HR functions in one database. All employee data is accessible 24/7 from any device, with a single login. Enter new data or make changes once and it flows throughout the system, with multiple levels of access so the information gets to the right people every time. The system integrates your payroll with recruiting, onboarding, benefits enrollment, timekeeping, learning management, rewards and recognition, and all other HR capabilities.

Our experienced HR consultants can take over the PEO’s HR services such as talent acquisition, employee handbooks, compliance with state and federal labor laws, leave management, performance management, and more.

Through our extensive network of insurance partners, we can assist with finding you the right employee benefits provider for your company.

Ready to move away from your PEO? Request more information and a GTM representative will contact you to get started.