While most PEO relationships are successful long-term, sometimes circumstances change or partnerships don’t work out. Knowing when to leave a PEO and how to execute a clean transition protects your business and employees.
When to Consider Leaving Your PEO
Service Issues:
- Consistently unresponsive account manager
- Frequent payroll errors
- Benefits enrollment problems
- Poor employee support
- Unfulfilled promises or commitments
Cost Increases:
- Rates increasing 15-20%+ annually without justification
- Better pricing available from competitors
- Hidden fees appearing unexpectedly
- Feeling overcharged for services received
Business Changes:
- Company grew beyond PEO’s capabilities
- Company shrank and no longer needs full PEO services
- Expanded to states PEO doesn’t serve well
- Changed industries and need specialized expertise
Strategic Reasons:
- Building internal HR department
- Acquired by company with different HR arrangements
- Merging with another company with different setup
- Investor or board directive to change
Compliance Problems:
- PEO made compliance errors affecting your business
- Inadequate guidance on regulatory issues
- Failed to stay current with employment law changes
- Tax filing mistakes
Review Your Contract First
Before making any decisions, understand:
Contract term: Most PEO contracts are annual with auto-renewal
Notice requirements: Typically 30-90 days before contract end
Early termination provisions: Some contracts include penalties for leaving early
Auto-renewal clauses: Many contracts renew automatically unless you provide notice within a specific window
Exit fees: Some PEOs charge termination fees
Data access: Understand what records you can take and in what format
Missing your notice deadline can lock you in for another year.
Types of PEO Exits
1. Transition to New PEO
Pros:
- Continuous coverage and support
- No gap in benefits or workers’ comp
- Similar operations and processes
- Relatively straightforward
Cons:
- Two implementations (exit + new setup)
- Potential for friction between PEOs
- Coordination complexity
Timeline: 6-8 weeks (overlap implementations by 2-3 weeks)
2. Return to Self-Management
Pros:
- Complete control
- No ongoing PEO fees
- Customization freedom
Cons:
- Need to establish all systems independently
- Benefits costs likely increase
- Workers’ comp shopping required
- Significant administrative burden returns
- Compliance risk increases
Timeline: 8-12 weeks (need time to establish all systems)
3. Switch to ASO or Unbundled Services
Pros:
- More control than PEO
- Potentially lower costs
- Flexibility in service selection
Cons:
- More complexity than staying with PEO
- May not save as much money as expected
- Still requires vendor management
Timeline: 6-10 weeks
The Exit Process: Step by Step
8-12 Weeks Before Target Exit:
Review contract and plan strategy:
- Verify notice requirements
- Calculate any exit fees
- Determine target exit date
- Decide on replacement arrangement
Begin shopping alternatives:
- If moving to new PEO, start evaluation
- If self-managing, identify needed vendors (payroll, benefits broker, workers’ comp)
- If going ASO, research options
6-8 Weeks Before Target Exit:
Secure replacement services:
- Sign with new PEO or vendors
- Ensure effective dates align properly
- Verify no coverage gaps (especially benefits and workers’ comp)
Document everything:
- Request all employee files and records
- Download payroll history and reports
- Save benefits enrollment documentation
- Collect workers’ comp information
- Export all data from PEO systems
4-6 Weeks Before Target Exit:
Provide formal notice to current PEO:
- Submit written termination notice per contract
- Specify final date
- Request final account reconciliation
- Confirm data export procedures
Begin implementation with new provider:
- Start setup with new PEO or vendors
- Provide employee information
- Select benefits options
- Configure payroll systems
Communicate with employees:
- Explain what’s changing and why
- Clarify timeline
- Address benefits continuation
- Answer questions and concerns
2-4 Weeks Before Target Exit:
Coordinate transition details:
- Confirm final payroll date with old PEO
- Verify first payroll date with new provider
- Ensure benefits effective dates align (no gaps)
- Coordinate workers’ comp transition
- Plan for final payments and reconciliations
Finalize new setup:
- Complete implementation with new provider
- Test systems thoroughly
- Conduct employee enrollment (if changing PEOs)
- Verify everything ready for go-live
Final Week:
Complete transition:
- Run final payroll with old PEO
- Start with new provider
- Verify benefits coverage continues
- Monitor closely for any issues
- Provide extra employee support
Post-Transition (First 30 Days):
Monitor and verify:
- Ensure benefits coverage active
- Verify payroll accuracy
- Confirm workers’ comp in place
- Address any employee concerns
- Resolve transition issues promptly
Critical: Avoid Coverage Gaps
Benefits Coverage:
- HUGE RISK: Gap in health insurance coverage
- Benefits effective dates must align precisely
- Consider overlapping coverage briefly if dates don’t align perfectly
- Verify COBRA eligibility if gap occurs
Workers’ Compensation:
- LEGAL REQUIREMENT: Must maintain continuous coverage
- Old policy covers through final date
- New policy effective immediately after
- Even one day without coverage is illegal in most states
Payroll and Tax Compliance:
- Final payroll must process correctly
- All taxes filed and paid by old PEO
- New provider must be registered and ready
- No gap in payroll tax compliance
Common Exit Challenges
Hostile PEO: Some PEOs become difficult once notified you’re leaving:
- Slow to provide data
- Unhelpful with transition
- Attempt to delay or complicate exit
- Hold records hostage
Protection: Understand your contract rights. If PEO is being unreasonable, consult an attorney.
Data Access: Ensure you get:
- Complete employee files
- Full payroll history
- Benefits enrollment records
- Workers’ comp claims history
- All tax documentation
Request data early and in usable formats (Excel, CSV, PDF).
Employee Confusion: Transitions confuse employees about:
- Where paychecks come from
- Benefits coverage status
- Who to contact with questions
- Changes in processes
Solution: Over-communicate. Provide clear written guidance about what’s changing, when, and who to contact.
Timing Challenges: Aligning final payroll, benefits dates, and new provider start can be tricky:
- Different PEO pay schedules
- Benefits effective dates (typically month beginning)
- Workers’ comp policy periods
- Contract termination dates
Solution: Plan early, build in buffer time, and over-communicate with both providers.
Financial Considerations
Final Reconciliation:
- Ensure all payroll taxes paid
- Verify benefits premiums current
- Settle workers’ comp adjustments
- Receive any deposits or prepayments back
- Pay any final invoices
Overlap Costs: May need to pay both providers briefly during transition if dates don’t align perfectly. Budget for this.
Implementation Costs: New PEO may charge setup fees. New vendors will have their own costs.
Hidden Exit Fees: Some contracts include:
- Early termination penalties
- Data export fees
- Final administrative charges
- Pro-rated annual fees
Understand all costs before initiating exit.
Communication Script for Employees
“We’re making a positive change to improve our HR and benefits management. Here’s what you need to know:
What’s changing: We’re transitioning from [current PEO] to [new PEO / self-management].
When: Effective [date], your paychecks will come from [new source].
Your benefits: Your health insurance and other benefits will continue without interruption. [If changing plans:] You’ll have an opportunity to enroll in new, improved benefits options.
What you need to do: [Specify: attend enrollment meeting, complete forms, set up new portal access, etc.]
Who to contact: For questions during the transition, contact [person]. After [date], contact [new resource].
Why we’re doing this: [Briefly explain: better service, improved benefits, cost savings, company growth, etc.]
Your job and compensation are completely unaffected. This is purely an administrative change that will improve how we handle HR functions.“
When NOT to Leave
Don’t leave your PEO solely because:
- One frustrating incident occurred
- You had a disagreement about a single issue
- A competitor offered slightly lower pricing
- You heard complaints from other companies
- Change sounds appealing
First try:
- Escalating concerns to PEO leadership
- Requesting different account manager
- Negotiating pricing adjustments
- Discussing your concerns directly
Leaving a PEO is disruptive. Exhaust alternatives first unless problems are severe or persistent.
Alternative to Full Exit: Renegotiation
Sometimes you don’t need to leave—you need to renegotiate:
Approach your PEO about:
- Reducing rates
- Improving service commitments
- Changing account managers
- Adding/removing services
- Adjusting contract terms
Leverage:
- Competitive proposals from other PEOs
- Length of relationship
- Company growth
- Threat of leaving
Many PEOs will make concessions to retain good clients.
The Bottom Line
Exiting a PEO requires careful planning, attention to detail, and clear communication. Most exits occur smoothly when properly managed, but rushing or poor planning creates unnecessary problems.
Before leaving, ensure you understand your contract, have secured replacement services, planned for seamless transitions, and communicated clearly with employees.
Need to exit your current PEO or explore alternatives? Contact PEO Consulting Partners for expert guidance. We manage PEO transitions professionally, ensuring smooth exits with no coverage gaps or compliance issues—at no cost to you.