When Should a Startup Transition from a PEO to In-House HR?

Deciding whether a startup should leave a Professional Employer Organization (PEO) and move to in-house human resources (HR) is a complex question without a clear, one-size-fits-all answer. This decision involves numerous factors, from cost savings and workforce composition to growth plans and regulatory concerns. In this article, we explore the key considerations and the importance of making an informed decision.

Cost Savings and HR Expertise

Mid-sized employers generally benefit from having in-house HR professionals. Bringing some HR functions in-house can lead to significant cost savings. For instance, reducing the need for outsourcing some HR responsibilities can lower expenses and potentially improve value for money. However, there are still some HR functions that can be outsourced long-term for savings, such as recruitment, training, or strategic planning, especially if the organization lacks in-house expertise in these areas.

Workforce Composition

The nature of your workforce is a critical factor in deciding whether to use a PEO or move to in-house HR. Organizations with large contingent or contract workforces might find value in retaining a PEO as part of their HR solution. Furthermore, if your company is expanding globally and plans to maintain local entities, international PEOs play a crucial role in the employment process. The PEO can provide localized expertise and support, making the transition smoother and more cost-effective.

Regulatory and Legal Considerations

Each state and industry has unique regulations and requirements for employers, which can impact the decision to move to in-house HR. For example, in some states, a company is considered a large employer at 50 employees, while in others, it's at 100 employees. This can affect the number of employees per HR professional ratio that's optimal for your organization. Industry-specific needs and company goals also play a significant role in determining the best approach.

Financial and Operational Impact

The financial impact of moving from a PEO to in-house HR cannot be overstated. The average salary for an HR professional before benefits ranges from $40,000 to $94,000, with a median of $57,000 according to PayScale. Additionally, groups with a PEO often have a rich benefit offering that includes contributions towards medical, dental, vision, life, and retirement benefits. Don't forget to factor in payroll taxes and other administrative costs when making your decision.

Strategic and Personalized Considerations

Each organization is unique, and the decision to move from a PEO to in-house HR should be made carefully, considering the best interests of both the company and its employees. It's important to assess your current HR strategy against your current and future business goals. A phased approach might be necessary, as the transition from a PEO to in-house HR does not happen overnight. Companies with over 100 employees have successfully transitioned, while others have chosen to enter into PEO relationships for the first time to better support their growth.

In conclusion, while there is no clear numerical answer to when a startup should transition from a PEO to in-house HR, conducting a thorough assessment of your unique situation is essential. Consider all the factors involved, and make a decision that aligns with your company's strategic goals and workforce needs.