May 30, 2023Compliance

Terminating your PEO: 10 steps for a successful transition

A Professional Employer Organization (PEO) is a third-party organization that provides administrative and human resources services to businesses. Terminating a PEO can be complicated and should not be taken lightly. It’s important to understand the process for ending your contract in order to avoid any complications or expensive fees.

How do you transition from a PEO?

PEOs are designed to provide services to businesses and organizations on a long-term basis. This can make it difficult to terminate a contract as the business is often deeply involved in processes such as payroll, recruitment, tax filing, employee benefits administration, and more. That means that the termination process can be complex and include several steps, depending on the type of contract you have with your PEO. Additionally, some PEOs may require long-term contracts that are difficult to break without paying hefty penalties or fees.

Take the time to evaluate how the termination of a PEO relationship affects your business operations and adjust accordingly. Following the 10 steps outlined below can help ensure the transition is successful and minimize disruption to employees. Having an effective transition plan in place simplifies the process and reduces the likelihood of any issues or delays. By taking a proactive approach, you can effectively manage the termination of a PEO relationship and keep your business operations running smoothly.

1. Review the contract and termination provisions

Before initiating the termination process, it’s essential to thoroughly review the PEO contract and understand the termination provisions. The contract will typically outline the notice period, termination fees, and any specific requirements for termination. Determine if the contract includes provisions for the PEO to provide assistance during the transition period. This could involve cooperation in transferring employee records, data, or other relevant information.

Clear guidelines on the PEO’s obligations and responsibilities during the transition can help ensure a smooth handover. By familiarizing yourself with these terms, you can plan accordingly and ensure compliance with the contractual obligations.

2. Notify the PEO of termination

In your research, determine the required notice period for terminating the contract. This provision specifies how much advance notice must be given before ending the agreement. Once you have determined to terminate the PEO relationship, promptly notify the PEO in writing. Adhere to the notice period specified in the contract and provide all necessary information, including the desired termination date. Open lines of communication will help facilitate a smoother transition and ensure a mutual understanding between both parties.

3. Assess employee benefit transition

One critical aspect of terminating a PEO is transitioning employee benefits. Evaluate the current benefits offered through the PEO and determine how these will be managed post-termination.

Research and identify suitable benefit providers that align with your company’s needs and budget. This may involve engaging insurance brokers, consulting with benefits experts, and obtaining competitive quotes from different providers. Consider factors such as plan options, network coverage, provider accessibility, customer service, and cost. Ensure a seamless transition of coverage for employees to minimize any gaps or disruptions in benefits. Coordinate with the new benefit providers and set effective timelines for the transfer of coverage. Plan for an open enrollment period to allow employees to select their new benefit options. Consider any waiting periods or pre-existing condition limitations that may apply with the new plans.

Communicate the changes effectively, providing clear information about the transition, timeline, new plan offerings, and any changes in coverage or costs. Offer support and resources to help employees understand the transition and make informed decisions.

4. Create a new state unemployment insurance account

When terminating a PEO, insurance policies tied to the PEO arrangement will also come to an end. Assess the existing policies, including workers’ compensation, general liability, and healthcare coverage, to ensure there is no gap in coverage during the transition.

State Employment Insurance, also known as Unemployment Insurance (UI), is a critical insurance program that provides temporary financial assistance to eligible employees who have lost their jobs. When transitioning away from a PEO, companies need to understand the implications for UI coverage. Companies terminating their PEO relationship will typically need to establish their own UI account with the state workforce agency. This involves contacting the appropriate state agency to initiate the process and following their guidelines and requirements. If the company had been under the PEO’s UI account, they may need to request a transfer of their UI experience rating or account history to their new UI account. This helps ensure that the company’s UI tax rate is based on its own employment history rather than starting from scratch.

Companies are responsible for paying UI taxes based on their employees’ wages. Understand the UI tax rate, payment schedule, and reporting requirements specific to your state. Stay compliant with these obligations to avoid penalties or disruptions in UI coverage for employees.

5. Ensure workers’ compensation coverage

When leaving a PEO (Professional Employer Organization), companies need to carefully consider workers’ compensation insurance. Compliance with state-specific regulations is crucial, as workers’ compensation requirements can vary by state. Companies should familiarize themselves with the rules governing insurance carriers, reporting obligations, classification codes, and premium calculations in the relevant states of operation.

As companies transition away from a PEO, they may need to obtain their own workers’ compensation policy. Consulting insurance brokers or carriers can help identify suitable coverage options based on factors like coverage limits, premium rates, carrier reputation, and claims handling processes. It’s also essential to understand the process for managing workers’ compensation claims and reporting incidents. Establishing internal procedures for prompt reporting and documentation of workplace injuries or illnesses, as well as compliance with reporting requirements to insurance carriers and state agencies, is crucial.

In addition, transferring the Experience Modification Rate (EMR) from the PEO’s policy to the new policy should be explored to ensure that the company’s premiums reflect its own claims history. Compliance with regulations, timely premium payments, accurate reporting, and maintaining proper records are essential to fulfill workers’ compensation insurance obligations. Seeking guidance from insurance professionals, brokers, or legal experts who specialize in workers’ compensation can provide valuable insights into state-specific regulations, policy options, and risk management strategies to facilitate a successful transition.

6. Get coverage for Employment Practices Insurance (EPLI) if needed

When terminating their relationship with a PEO, companies should consider Employment Practices Liability Insurance (EPLI) and its implications. Firstly, evaluate the extent of EPLI coverage provided by the PEO, considering policy limits and coverage terms. Determine if additional coverage is needed to meet the company’s specific needs. Research and secure a comprehensive EPLI policy, taking into account coverage limits, premium costs, and carrier reputation. Understand retroactive coverage for prior incidents and the availability of tail coverage to protect against future claims.

Secondly, ensure compliance with notice requirements when terminating the PEO relationship to maintain continuity of coverage. Establish internal procedures for claims management and reporting, designating responsible individuals within the company. Seek guidance from insurance professionals or legal experts specializing in EPLI to understand policy terms, potential coverage gaps, and risk management strategies. By addressing these considerations, companies can effectively manage EPLI concerns during the transition away from a PEO and protect themselves against employment-related claims.

7. Establish new payroll and/or HR systems

As the PEO relationship concludes, you will need to establish new payroll and HR systems to manage employee information, payroll processing, and compliance. Research and select a suitable payroll provider or invest in HR automation software that meets your specific requirements. This step is crucial to ensure a smooth payroll transition and maintain accurate record-keeping.

During the evaluation phase, ask potential vendors about their knowledge in serving customers transferring away from a PEO. Find out if they offer assistance with the transition, such as importing historical payroll and tax data. Ensure that the vendor’s solution is easy to use, and consider factors such as integration capabilities and customer service. Verify that the provider meets local, state, and federal compliance requirements.

Once you have selected a new payroll and HR provider, put together an implementation plan. This should include tasks such as setting up accounts, configuring the system, training employees, and testing the system before going live. Begin as early as possible to ensure a successful transition.

8. Transfer employee data

In the evaluation of your contract, examine the provisions related to intellectual property rights and data ownership. Understand who owns the data and systems developed or used during the course of the PEO relationship. Ensure that any necessary data transfer or ownership rights are clearly defined to safeguard the company’s interests.

To maintain HR records and comply with legal obligations, transfer employee data from the PEO’s systems to your newly established payroll and HR systems. Ensure the accuracy and confidentiality of sensitive employee information during the transfer process. This may include personal details, compensation data, performance reviews, and benefits enrollment.

9. Handle compliance management

One significant change after terminating a PEO is taking sole responsibility for compliance with employment regulations. Develop a comprehensive compliance management plan to ensure adherence to federal, state, and local employment laws. Establish protocols for record-keeping, reporting, and staying up to date with changing regulations.

When a company terminates a PEO relationship, it may attract attention from the IRS, as it is transitioning its tax reporting responsibilities. The IRS might scrutinize the company’s tax records to ensure that all tax liabilities have been properly accounted for and that there are no discrepancies or irregularities in the reporting. Consider consulting with legal experts or HR professionals to ensure a smooth transition and ongoing compliance.

10. Prepare for employer tax changes

Terminating a PEO relationship may reset employer taxes and reporting obligations. For example, when a company enters into a PEO relationship, the PEO typically obtains its own EIN to handle payroll tax filings and reporting on behalf of the client company. However, when the company terminates the PEO relationship, it may be required to change its EIN back to its original EIN or obtain a new one. This change in EIN can trigger a “re-start” for tax purposes, as it can create confusion with the Internal Revenue Service (IRS) regarding the continuity of the company’s tax reporting history.

Consult with an accountant or tax advisor to understand the impact of the termination on payroll taxes, unemployment insurance, and other employer-related taxes. Stay informed about tax filing deadlines, new reporting requirements, and any necessary registrations to avoid penalties or noncompliance.

A note on the post-termination period

Once the PEO relationship has ended, monitor the post-termination period to ensure a smooth transition and address any remaining contractual obligations. Reconcile invoices, collect final payments, and handle any other outstanding matters with the PEO to resolve all issues before closing out the contract. As the employer, you are responsible for all employee-related matters, so make sure any HR policies, processes, and procedures are updated accordingly.

By familiarizing yourself with the process of terminating a PEO, you can ensure an efficient and compliant transition. Manage communication and assess employee benefits to guarantee a smooth experience for employees as well. Establish new payroll and HR systems, transfer employee data accurately, manage compliance effectively, and prepare for employer tax changes to complete the termination successfully.

Looking for a payroll platform to help you transition away from PEO? Let’s talk about Everee.