PEO Transition: How to Plan Your Exit Strategy

Managing HR, payroll, benefits plans, and compliance in-house can be overwhelming and impractical for many new businesses. Small and mid-sized companies often lack the dedicated HR teams needed to handle these tasks, leading many to outsource such responsibilities to professional employer organizations (PEOs). 

Yet, as companies grow and their HR needs become more complex, many find that PEOs no longer serve their needs, prompting them to build out their own HR teams and transition away from co-employment.

Whether you’ve already reached or are approaching this point, it’s crucial to understand your post-PEO options. While leaving a PEO behind can be challenging, bringing HR functions in-house can help your business gain greater control over HR policies, tailor initiatives to better suit your workforce, and reduce costs. In this article, we’ll share what a PEO is, how to determine when it’s time to move on, and what to expect during the transition.

{{rich-takeaway}}

What is a PEO and what does it do?

A PEO, or professional employer organization, is an outside firm that handles core HR responsibilities and administrative tasks on behalf of other businesses. This co-employment arrangement is often more cost effective and time efficient for startups and other small businesses than hiring and training an in-house HR team would be. 

Aside from handling core HR tasks, PEOs can negotiate and secure better insurance rates and healthcare coverage options than most small businesses could provide on their own. This allows PEO clients to deliver more comprehensive employee benefits packages to their employees for a fraction of the cost. 

What tasks do PEOs perform?

Common PEO services include:

• HR management
• Payroll administration
• Benefits administration
• Time and attendance tracking
• Compliance
• Workers’ compensation
• Training and development
• Unemployment insurance
• Risk management

Who uses PEOs?

Many small to mid-sized businesses lean on PEOs to enhance their HR capabilities and reduce costs. For example, a small 35-person company with a one-person HR team might need assistance processing payroll and administering employee benefits. By partnering with a PEO, a company can ensure accurate and timely payroll processing and offer more robust employee benefits. This partnership allows the business to focus on its core operations and growth without getting bogged down by administrative HR tasks.

When is it time to transition away from using a PEO?

Companies usually turn to PEOs early in their growth journey because they need comprehensive HR services but lack a dedicated HR team or have a people team that is too small to handle all HR functions effectively. However, as companies grow and their priorities evolve, there often comes a time when they prefer to bring these responsibilities in-house and invest in their own HR teams to align with their changing needs and strategic goals.

Here are some common reasons companies decide to leave their PEOs:

1. You have more complex HR needs. 

As your business grows, so does the complexity of your HR programs and policies. While Google Docs and ad-hoc processes may have cut it in the past, your business may reach a point where formalized tools and templates become essential for building more consistent people processes. 

At this stage, you might be better off adopting an HR technology solution, like a human resource information system (HRIS), that supports features like performance management, OKRs and goal-setting, ongoing recognition, and more in-depth people analytics. This can help you elevate your HR practices, create more consistency across your organization, become more strategic, and gain greater visibility into your people programs and employees.

2. You need more customizable employee benefits.

While PEOs can negotiate good insurance rates for your business, their health insurance options are often limited. This could hold you back should your company want to offer employees a wider selection of healthcare and benefits options. If your company is looking to build a more competitive benefits package, you may need to take benefits administration in-house to give you additional flexibility. 

3. You want to reduce costs.

While PEOs can be cost efficient for smaller organizations, things usually change when company headcount approaches 50 to 100 employees. Many PEOs use customers per employee per month (PEPM) pricing models, which can add up quickly as your staff grows. After doing the math, you might find there comes a point when it’s more cost effective for your business to hire or invest more in an internal HR team and supporting technology. 

4. You want to invest more in company culture.

While PEOs are great for young companies, they often don’t offer the flexibility and customization that fast-growing businesses crave. Employee handbooks, benefits, policies, and more are all shaped by the PEO, not the company, so they often fail to reflect a business’s unique culture and spirit.

By transitioning away from a PEO and taking ownership of your HR processes, your organization can create tailored policies and new benefits that align with your specific company values and goals. This can help you foster a stronger culture and build a workplace that puts your employees first. 

PEO Transition Checklist: How to Prepare

If your professional employer organization is no longer serving your business’s best interests, here’s a step-by-step guide you can follow to develop a successful PEO exit strategy and transition plan.

1. Review your PEO agreement terms.

First and foremost, read your business’s contract with your PEO. It will outline how to end your agreement, transition timelines, and any financial obligations, such as final payments or outstanding fees.

2. Determine the ROI of a PEO vs. another HR solution.

To determine the best next step for your business, compare the cost of your current PEO against the potential costs of building an in-house HR team or implementing an HRIS or payroll provider. Of course, you’ll need to include things like initial technology expenses, ongoing team salaries, and training requirements in your assessment. 

You’ll also want to weigh the potential benefits of bringing HR services in-house, including gaining greater control over your HR policies, the ability to build initiatives that align with your company’s culture and values, and improved scalability. By quantifying these factors, businesses can make an informed decision on whether switching to an HRIS, finding a payroll provider, or taking another route offers the best financial and operational returns.

3. Find a new HR partner.

To find the right partner for your business, identify your key needs. Do you need a payroll provider? Are you looking for help with your benefits program and performance management? Want assistance with employee development? Making a list of your must-have and nice-to-have features can help guide your search and ensure you find the best solutions for your business. 

You’ll also want to consider a vendor that can grow with your company. While you may not need certain features today, you might want to look out for helpful features you could add in the future as your workforce and HR needs grow, like ongoing recognition, compensation reviews, career growth tools, and more. Lattice makes it easy for businesses to add and remove product features as needed, making it simple to scale the tool alongside your business. 

4. Collect important employee and company data from your PEO.

Your PEO houses all your company’s vital documents, records, tax information, and more, so you want to triple-check that you have everything you need from them before you fully transition off their system. This will include: 

• Court orders, wage garnishments, and tax levies
• Tax filings, including W-2s, 1099s, and quarterly tax reports
• Employee tax withholding forms and I-9s
• Termination records
• Time off accruals and balances
• Leave history
• Consolidated Omnibus Budget Reconciliation Act (COBRA) participant information
• Affordable Care Act (ACA) reports
• Health savings account (HSA), flexible spending account (FSA), and health reimbursement arrangement (HRA) balances
• Past performance evaluations
• Employee compensation information
• Employee information (names, addresses, birth dates, social security numbers, etc.) 
• Workers' compensation, unemployment insurance, and Equal Employment Opportunity Commission (EEOC) records

5. Onboard your new HR partner.

Once you’ve selected your preferred HR vendor, it’s time to transfer your company information to their HRIS or payroll provider. To ensure a smooth transition, you’ll need to:

• Register for a new Federal Employer Identification Number (EIN) and state tax ID number.
• Perform a data migration by providing your new HR partner with all necessary business and employee data, including employee records, payroll data, benefits details, and compliance documents. Remember that any personally identifiable information (PII) or protected health information (PHI) must be transferred securely and confidentially. 
• Configure the vendor’s HRIS to match your business needs.
• Integrate the HRIS with any other systems in your HR technology stack.
• Define user roles and permissions.
• Run a parallel payroll cycle with your old PEO and new vendor for at least one pay cycle, so you can identify and resolve any discrepancies before fully transitioning to the new system.

As part of Lattice’s HRIS offering, customers have access to implementation experts to help configure and use the platform to best fit the business’s needs. We provide personalized training and support to coach your team throughout the transition process, helping you understand the new system and reach your people goals quickly and effectively.

Want to know more about the Lattice HRIS onboarding? Check out our Getting Started Guide for Admins or the Onboarding Checklist to learn all about setting up Lattice’s many different tools.

6. Ensure accuracy and compliance.

When leaving a PEO, you’ll often need to rehire employees. This step is crucial as it re-establishes your business as the sole employer of record. In the process, your business will need to collect essential information from employees to ensure compliance with employment laws and regulations, including:

• Form I-9: Verify each employee’s identity and authorization to work in the United States.
• Federal and tax withholding forms: Request employees fill out new W-4 forms and any state forms to ensure your business withholds the correct amount of taxes from each paycheck.
• Direct deposit information: Collect employee bank account and routing details to guarantee timely and accurate payments on payday.
• Employee handbook: Ensure all employees sign an acknowledgment form confirming they have received, read, and understand your new company handbook.
• Employee benefits: Conduct open enrollment, having employees choose from your new health insurance plans and any voluntary benefits, like retirement plans.
• Compliance training: Verify that employees participate in and complete required training programs, like sexual harassment training.

You’ll also want to establish a process to collect all of this information from new hires moving forward, so you can maintain accurate records, streamline onboarding, and ensure HR compliance.

7. Debut your new system to employees.

Lastly, share your new system with your employees, highlighting the reason for and benefits of the switch. While you can debut your new HR solution and highlight any company-wide process changes in a company all-hands meeting or email, be sure to provide asynchronous learning materials — like videos and written tutorials — so employees can learn at their own pace.

As with any new system, adoption takes time, so you should maintain ongoing communication with your employees and add new learning materials as your processes and tools evolve.

Check out Lattice’s Getting Started Guide for Employees and our Rollout Guide to help facilitate a smooth transition to Lattice’s HRIS.

Why would a company want to transition away from a PEO?

As discussed earlier, companies may choose to transition away from a PEO for several reasons, particularly to enhance their HR capabilities with more specialized and flexible solutions. While PEOs provide valuable core HR outsourcing services, they often lack key features growing businesses need — like employee recognition tools, compensation reviews, and performance reviews. 

The absence of performance review capabilities, in particular, can be a significant reason for businesses to seek alternative solutions. According to Lattice’s 2024 State of People Strategy Report, 38% of HR leaders consider performance management a top priority today. This statistic underscores the growing demand among businesses for high-quality tools that facilitate effective performance reviews, goal setting, and employee development — capabilities that are typically not fully met by PEOs. 

The report also found that the highest-performing teams were 2.6 times more likely than the lowest performers to have invested in performance management software. Goal-setting tools like Lattice OKRs & Goals can align teams around common objectives, cascade goals throughout an organization, track progress, and measure impact at every level, all areas where PEOs just can’t compete.

Partner with Lattice for your PEO transition.

Convinced you’ve outgrown your PEO? An HRIS might be right for you.

Lattice HRIS includes all the essential HR tools: employee record-keeping, payroll, onboarding, and advanced automation features. Plus, it works seamlessly with our entire product suite, providing performance, compensation, goal-setting, and analytics solutions to help your company streamline important HR functions. Using Lattice, your company can not only simplify its tech stack but also enhance its people strategy. 

Join the Lattice HRIS waitlist and be the first to hear how Lattice can help you gain a comprehensive understanding of your people and drive better business results.