Why More Businesses Are Moving from PEOs to Fractional HR

February 19, 2025 | Denise Gelfand. President PostPEO

Denise Gelfand, the President of PostPEO, shares her latest article on the choice between fractional HR or a PEO.

Fractional HR has many benefits including Greater Control Over HR Functions, Custom-Tailored HR Support, Custom-Tailored HR Support, Flexibility to Scale HR Support, Compliance & Risk Management Without Co-Employment with a PEO, and a Strategic Partner, Not Just an HR Administrator.

At JorgensenHR, our leading HR solution is BestPartner, offering top-notch fractional HR services.

Introduction

Businesses looking to streamline HR functions often consider two main options: a Professional Employer Organization (PEO) or a Fractional HR Consultant. While PEOs provide bundled HR services under a co-employment model, they can come with significant costs, control limitations, and rigid structures. In contrast, a fractional HR consultant offers flexibility, tailored support, and strategic HR expertise without the constraints of co-employment.

As more businesses seek cost transparency and greater autonomy over HR, many are transitioning away from PEOs. However, navigating this transition requires careful planning.  A PEO exit consultant can be a crucial resource in ensuring a smooth, compliant, and cost-effective exit.

This article explores the advantages of a fractional HR consultant over a PEO and how a PEO exit consultant helps facilitate the transition.

1. Greater Control Over HR Functions

Challenges with a PEO:

A PEO’s co-employment model means they technically become the employer of record for tax and compliance purposes. This can create challenges in key HR areas:

• Hiring & Firing Decisions – Many PEOs have strict policies around terminations, requiring employers to follow their guidelines rather than making decisions based on internal business needs.
• Employee Policies – PEOs often implement standard employee handbooks and policies that may not reflect your company’s culture or specific industry requirements.
• Customization Limits – Since the PEO is responsible for compliance, they often have set HR rules and processes that may not align with how you want to manage employees.

How a Fractional HR Consultant Solves This:

✅ Works directly for your business providing expert HR guidance without taking control away from the business.
✅ Creates customized policies and procedures tailored to company culture and industry requirements.
✅ Enables direct control over hiring, firing, and compliance decisions without external approval.

How a PEO Exit Consultant Helps:

• Assesses existing PEO agreements to identify contractual obligations that could impact HR control.
• Guides businesses in reinstating employer-of-record responsibilities, ensuring compliance post-PEO.
• Develops a transition plan to rebuild HR infrastructure tailored to company needs.

2. Custom-Tailored HR Support

Challenges with a PEO:

PEOs one-size-fits-all HR solutions may not align with company goals. Their focus is on core administrative functions rather than tailoring solutions to fit your company’s unique culture.  If your business wants to:

• Develop a leadership training program,
• Build a high-performance work culture, or
• Create a custom compensation and incentive strategy, a PEO may not provide this level of personalization.

How a Fractional HR Consultant Solves This:

✅ Takes the time to understand your company’s values, goals, and workforce challenges helping to build a strong HR foundation.
✅ Creates custom handbooks, policies, and HR frameworks designed specifically for your business.
✅ Provides industry-specific compliance and risk strategies instead of generic HR templates.
✅ Offers personalized leadership coaching for managers and executives.
✅ Designs tailored initiatives that align with your business’s mission.

How a PEO Exit Consultant Helps:

• Identifies HR functions that need to be built or replaced post-PEO.
• Recommends and integrates a fractional HR consultant to fill gaps left by the PEO exit.
• Ensures compliance continuity, preventing disruptions in HR operations.

3. Cost-Effectiveness & Transparency

Challenges with a PEO:

• PEOs typically charge 2-12% of payroll or flat per-employee fees ranging between $1500-$2500 annually, which increase as payroll and employee headcount grows.
• Bundled services make it hard to see exactly what you’re paying for and can lead to hidden costs for unused services.

How a Fractional HR Consultant Solves This:

✅ Offers transparent, flexible pricing (hourly, project-based, or retainer).

✅ No hidden fees.

✅ Businesses only pay for HR services they actually need.

✅ Allows for cost-efficient scaling without the commitment of a PEO contract.

How a PEO Exit Consultant Helps:

• Conducts a cost analysis of PEO fees vs. in-house HR alternatives.
• Helps businesses secure cost-effective payroll, benefits, and compliance vendors.
• Ensures a seamless financial transition, avoiding penalties or unexpected costs.

4. Flexibility to Scale HR Support

Challenges with a PEO:

• Locked-in contracts make it difficult to adjust services or costs as business needs change.
• Businesses may be forced to pay for services they no longer need. .

How a Fractional HR Consultant Solves This:

✅ Provides on-demand HR support without long-term commitments.
✅ Allows businesses to scale HR services up or down as needed.
✅ Integrates with in-house HR teams, instead of replacing them.

How a PEO Exit Consultant Helps:

• Creates a phased transition plan, ensuring HR continuity post-PEO.
• Helps businesses determine the right HR structure for long-term flexibility.
• Connects businesses with HR technology solutions to support scalable operations.

5. Compliance & Risk Management Without Co-Employment

Challenges with a PEO:

• The PEO assumes limited compliance responsibility as the employer of record, but businesses must follow their risk-management policies, restricting an employer’s autonomy in HR decisions.
• The PEO may prioritize protecting itself over your business.

How a Fractional HR Consultant Solves This:

✅ Provides custom compliance training and legal guidance tailored to the business.
✅ Ensures companies stay compliant without giving up control over HR policies.
✅ Proactively monitors industry-specific regulations rather than relying on broad PEO policies.

 

How a PEO Exit Consultant Helps:

• Ensures proper legal compliance when transitioning employer-of-record responsibilities.
• Helps businesses avoid compliance pitfalls that arise post-PEO.
• Works with legal and HR teams to restructure policies and procedures for in-house compliance.

6. A Strategic Partner, Not Just an HR Administrator

Challenges with a PEO:

• PEOs focus on transactional HR administration (payroll, benefits, compliance)
• They don’t provide strategic HR leadership that helps businesses develop talent, build culture, and improve retention.

How a Fractional HR Consultant Solves This:

✅ Provides strategic workforce planning for business growth.
✅ Helps improve employee retention and engagement through customized initiatives.
✅ Offers executive coaching and leadership development to build strong internal teams.

How a PEO Exit Consultant Helps:

• Identifies HR gaps post-PEO and connects businesses with strategic HR experts.
• Assists in building a long-term HR strategy tailored to the company’s vision.
• Works with leadership teams to ensure a seamless transition to an in-house HR model.

Final Thoughts: Choosing the Right HR Solution

While a PEO can be a good option for companies looking for a fully outsourced HR solution, it often comes with higher costs, less flexibility, and a loss of control over critical HR functions.

A fractional HR consultant provides a tailored, strategic, and cost-effective alternative, allowing businesses to get the HR expertise they need without unnecessary overhead.

For companies that value flexibility, autonomy, cost transparency, and customized HR solutions, partnering with a fractional HR consultant is often the smarter choice.  This approach allows businesses to get the HR expertise they need without unnecessary overhead or the constraints of a PEO contract.

For businesses looking to exit a PEO and transition to an alternative HR solution, a PEO exit consultant ensures a smooth, cost-effective, and compliant transition. PostPEO guides companies through the exit process, restructuring HR functions, and optimizing operations to help businesses regain control over their workforce management while maintaining compliance and efficiency.