Unshackling Yourself From PEOs: How to Break Free and Maximize Your Flexibility

Is your company trapped in a dead-end relationship with your PEO?

By David Bradshaw, Chief Executive Officer
17th January, 2023
David is a highly experienced consultant specializing in business strategy, lean operations/automation, and human resources. He holds a Master's degree from the University of Cambridge, UK, and an MBA from Quantic School of Business and Technology.

Bundling your HR needs with a PEO can be an attractive option for companies looking for an efficient solution in the early days of becoming an employer - but is it a good fit for the long term?

PEOs provide employers with a low barrier to entry, and access to benefits that may otherwise be out of reach. But many companies find that their PEO relationship isn’t really working for them, or that PEOs in general are not a good long term fit. To make matters worse, the PEO relationship that was so effortless to enter into is a lot more difficult to leave. In this article, we explore why you might want to break up with your PEO, and how to successfully do so.

What is a Professional Employer Organization (PEO) and Why You Should Consider Leaving It?

A Professional Employer Organization (PEO) is a popular business model that specializes in providing HR-related services, such as payroll processing, benefits administration and insurance coverage to client companies. What differentiates a PEO from other outsourcing models is that the PEO company is actually a co-employer and has a significant amount of control over how the workforce is managed. For smaller companies looking to control their HR costs, hiring a PEO can be a great option. It eliminates the need for them to build out the necessary infrastructure and resources that are typically needed to manage human resource needs.

In this article, I explored some of the pros and cons of using a PEO. To summarize, the convenience of a PEO relationship comes with some major strings attached:

  • Reduced flexibility when it comes to policy and benefits choices
  • Poor employee experience
  • Infuriating customer service
  • High fees combined with lack of pricing transparency
  • Lengthy contractual tie-ins

Of course, not all PEOs are guilty of all of these, but in general SMEs are dissatisfied with their PEO, which is why so many companies consider switching.

What are the alternatives to using a PEO?

Over recent years, new product and service providers have emerged to cater for the needs of smaller organizations. There are now several viable alternatives to using a PEO that eliminate many of the drawbacks described above. For example, it is now possible for a solopreneur to get an affordable, professionally managed 401(k) plan for themselves. Rolling your own solution from these individual vendors can provide you with better pricing, more choice, and the ability to switch vendors for individual products and services without upsetting the whole apple cart.

This approach does come with an additional overhead of managing multiple vendors for your HR solution, but in practice this isn’t significantly different from having to work with the multiple departments at a PEO. You can even hire an organization to manage the portfolio for you very cost effectively (see our Fractional HR Service for an example).

4 Steps for Breaking Free from your PEO and Gaining More Control

1 Understand your contractual situation

The first step to take when considering leaving your PEO is to understand your contract with them. Under what circumstances can you terminate your contract? How much notice do you have to give? Is there a provision to terminate early, and if so what are the penalties?

2 Make a list of all of the products and services your PEO provides

It is important to understand the full range of services your PEO is currently providing to your organization, as it is easy to forget about certain products you need but don’t interact with frequently. For example, are they providing your Worker’s Comp insurance?

3 Review the list to make sure you are not missing something you want, and that you’re not receiving a product or service you don’t need

Once you understand what your organization is receiving from the PEO, now is the perfect opportunity to review this list to make sure that it still meets the needs of your business and its employees. For each product or service on the list, think about whether it makes sense for your business to have it. Conversely, think about which products or service you don’t currently receive from your PEO that you would like to consider adding.

Bear in mind that your benefits line-up can be a strong differentiator when it comes to hiring. This step is a great opportunity to think carefully about your offering to employees and adjust accordingly. One of the big benefits of unbundling from a PEO is that you have a whole new level of freedom to shop around and tailor your benefits package to work for you.

4 Define a project to search, select and implement new vendors for each product and service on the list

We’re big fans of PEO unbundling here at Northstar, but I’ll be the first to admit that this ‘step’ isn’t easy - in fact, it can be a significant undertaking for the uninitiated, littered with bear traps. We recommend that you get some professional help.

Our unbundling experts have excellent knowledge of the vendor marketplace, and know how to structure a project to manage all of the moving parts and navigate the risks.

Conclusion: Get the Right Support for Your Business When Leaving Your PEO

Breaking up is hard to do - and PEO relationships are no exception. However, that’s no reason to stay in a relationship that isn’t working for you, your business, or its employees. You can enjoy better service, more freedom of choice, and lower overall costs when you unbundle.

The key to success is to engage a partner who understands the complexity of the unbundling process, and will define and manage a project to ensure all of the necessary steps are followed and that nothing falls through the cracks.

Are you interested in finding out more? Book a discovery call with one of our HR experts today to find out how unbundling from your PEO could benefit your business.