When you should bite the bullet and build your own damn HR department

Because startups are vying for the same talent as major players in the industry, fledgling companies must offer a rich employee benefits package with the perks that can woo A-listers from other jobs. That’s why many startups contract with professional employer organizations (PEOs) (think JustWorks or TriNet) to handle their employee benefits and back-office services.

With a PEO, startups are able to look more like an attractive Fortune 500 company from an employee benefits and compensation perspective. PEOs can offer a shot at better, more cost-effective and competitive health and welfare plans by underwriting smaller groups at rates lower than they would normally qualify for.

As a general rule, a company that expands to more than 100 full-time equivalent employees should begin to consider moving away from a PEO arrangement.

They also handle human resources functions like benefits administration, payroll, taxes, unemployment, workers’ compensation, disability and, in some cases, hiring and firing procedures that no one who starts a world-changing app really wants to deal with. Because the PEO handles most behind-the-scenes functions, everyone else can focus on their core goal — growing the business. Using a PEO can be the perfect solution for a fast-growing tech company in its early days.

PEOs provide a co-employment relationship that redefines roles: The startup is the worksite employer while the PEO is the legal employer.

But, at some point, the startup will very likely outgrow this co-employment relationship.

Picture this scenario:

• After just 18 months, a tech startup using a PEO employs over 100 people, and they’re adding more every week. They hope to reach 200 people by year’s end. Their new CFO reviews the PEO’s administrative costs and wonders what the firm is getting for their money. Aside from benefits, payroll and workers’ comp, they’re not using many of the services the PEO offers, like training, background checks and reimbursement. Recruitment is done in-house, too. The payroll system is just OK — it’s overpriced and doesn’t offer any real bells and whistles. The PEO charges upward of $100,000 in administrative fees.

As a general rule, a company that expands to more than 100 full-time equivalent employees should begin to consider moving away from a PEO arrangement because there can be significant savings in the open employee-benefits market. Ditto for workers’ compensation. A recent client in Brooklyn that went from 20-120 employees in under two years saved 29 percent, which equated to $386,000 annually.

Tech firms can have a better chance of getting lower rates on health plans because of their favorable demographic (young and healthy with few medical claims) and they’ll have more plan options than the fixed choices offered by the PEO. They may also have a shot at lower rates for workers’ comp and other liability insurance, but more than anything, leaving a PEO allows them the flexibility to build a truly customized benefits package, with worksite products, wellness programs and the potential to self-insure.

Because a PEO controls and manages so many critical business elements like health insurance, compliance, payroll, retirement funds and COBRA, the idea of leaving might seem daunting. Breaking away requires a complete exit strategy to mitigate these issues and disruptions.

With the right model — and right execution — the growing pains from leaving a PEO aren’t so painful, and will help carry you to the next level one step closer to that big IPO.