Upcoming OneDigital Webinar

What AI Changes First: A People-First Playbook for Leading Your Organization Through AI Transformation

Join Mike Sullivan and Vinay Gidwaney on Wednesday, September 16 at 2:00 p.m. ET for a practical conversation on leading through AI transformation.

If you’re a business owner, you’re probably tired of hearing some version of the same question right now: “What is your AI strategy?”

It often feels like you only have two choices: rush to buy a tool and hope your team figures it out, or hold off until the dust settles and the technology feels less noisy.

Neither is a strategy.

The better question to ask is this: How will work get done in your business as people and AI begin working alongside one another?

That may sound like a small distinction, but it changes the entire conversation. AI is moving at lightning speed, but businesses are still trying to solve the same core human problems: helping employees do meaningful work, giving managers the information they need, serving customers well, and building an organization people actually want to be part of.

Technology should not distract leaders from those priorities. It should help them meet them. The question is not which app is newest or which vendor makes the biggest promise. The question is whether the technology helps your people solve problems, make better decisions, and spend more time on the work that matters most.

That is the key idea behind Workforce Intelligence, a people-first approach developed by OneDigital Co-founder and Chief Growth Officer Mike Sullivan and Chief Product Officer Vinay Gidwaney. 

In their new book, Workforce Intelligence: The People-First Playbook for Leading Your Company Through AI Transformation, they make the case that AI is not simply a technology issue. It is a workforce and leadership issue: how human talent and AI capability can work together to make the business stronger.

“We don’t see headcount when it comes to our people. We see faces.”

— Mike Sullivan, Co-founder and Chief Growth Officer, OneDigital

For small businesses, your advantage has never been having the biggest technology budget. It has been the judgment, relationships, adaptability, and local knowledge of your people. The right use of AI should strengthen those advantages, not erase them.

Stop Treating AI Like a Technology Purchase

Most AI conversations start in the wrong place: Which tool should we buy?

That is understandable. AI vendors are everywhere, each promising a faster, cheaper, more automated version of your business. But technology doesn’t create value on its own. The work itself does.

Before selecting a tool, leaders need to understand where time is being spent, which activities require real human judgment, and where repetitive work is getting in the way of stellar client service. That is a workforce conversation first and a technology decision second.

Consider a small professional-services firm. Your team may spend too much time summarizing meetings, searching for past client information, drafting standard communications, reconciling data, or chasing routine approvals. Those may be good places to explore AI assistance because the work is repeatable and time-consuming. They are absolutely not good reasons to remove the human being who understands the client, spots nuance, makes the final decision, and owns the relationship.

The goal is not to replace the person. The goal is to free up more of that person’s capacity for the work that creates real value.

Think of AI as a Coworker, Not a Shortcut

One of the most useful reframes from Mike and Vinay’s work is to think about AI as talent you are bringing into the organization.

That does not mean pretending a tool is a person. It means applying the same discipline you would use before adding anyone to the team. What job is this AI capability being asked to do? What information does it need? Who is accountable for its output? Where must a human review or make the final call?

This way of thinking produces sharper, smarter decisions.

AI can organize information, surface patterns, create first drafts, summarize a long document, and reduce routine administrative work. It should not be the final decision-maker on sensitive employee matters, client commitments, performance issues, discipline, compensation, or other choices that require context and accountability.

A simple rule of thumb: Automate repetition, not responsibility.

The Human Work Becomes More Important, Not Less

The anxiety around AI is completely understandable. Change brings uncertainty, particularly when the conversation is framed only around efficiency and cost reduction.

But the businesses that get this right won’t simply do the same work with fewer people. They will invest more intentionally in the work people do best: solving complicated problems, building trust, coaching others, making sound judgment calls, and creating better client experiences.

That makes leadership more important than ever. Employees need to understand why a new tool is being introduced, what will change, what won’t change, and how they will be supported. Managers need room to ask questions, develop their own fluency, and help their teams experiment without implying that the technology is there to make people obsolete.

This is the practical meaning of a people-first approach. It is not a slogan. It is an operating choice.

Four Questions to Ask to Get Started

You do not need a large innovation team or a company-wide transformation plan to start thinking more strategically about AI. You do need an intentional process.

Start with these four questions:

Starting small does not mean thinking small. A focused pilot gives you evidence, confidence, and employee feedback before you make bigger commitments.

Why HR Needs a Seat at the Table

AI adoption cannot sit solely with IT, operations, or finance. It changes jobs, expectations, skills, workflows, and trust. Those are undeniably people issues.

HR should be part of the conversation from the start. HR can help leaders think through training needs, job redesign, communication, policy, data privacy, and the employee experience of the change itself.

For many small businesses, though, internal HR capacity is already consumed by payroll, benefits administration, compliance tasks, employee questions, and day-to-day firefighting. When administrative work takes over, there is little time left for the strategic conversations that prepare a business for what is next.

That is one reason HR outsourcing can be more than an administrative convenience. When payroll, compliance, benefits, and HR administration are supported by the right team and systems, business leaders have more room to focus on strategic questions: How should roles evolve? What skills will our managers need? Where can technology help our people serve clients better?

The Opportunity Is to Build a Better Business

No one has every answer about where AI will take the workplace. But waiting for perfect clarity is not a plan either.

The businesses that will be best positioned are not necessarily the ones that move the fastest or buy the most technology. They will be the ones that learn how to combine capable people, smart processes, and useful technology in a way that improves both the employee experience and the client experience.

That is the real opportunity behind Workforce Intelligence. It is not about replacing the human side of business. It is about making it more valuable.

Join the Conversation

On Wednesday, September 16 at 2:00 pm ET, Mike Sullivan and Vinay Gidwaney will lead a OneDigital webinar, “What AI Changes First: A People-First Playbook for Leading Your Organization Through AI Transformation.” The session will explore how leaders can treat AI as talent rather than just technology, activate managers to lead change, build a blended workforce with clear ownership, and prioritize human amplification over simple cost reduction.

At Focus HR, now powered by OneDigital, we help growing businesses build the HR foundation for change, from practical people policies and compliance support to the systems and strategy that let leaders focus on the future of work.

Want to explore what a people-first approach to AI could look like in your business? Contact Focus HR to start the conversation.

Clint Parry, MBA, SHRM-SCP is a Senior Business Consultant at Focus HR, now powered by OneDigital. Based in Arizona, Clint works with growing companies to help them turn HR from an administrative burden into a strategic advantage.

The post Before You Write an AI Strategy, Ask This Question: How Will Work Get Done? appeared first on Focus HR Inc..

HR analyst Josh Bersin recently pointed to Lightcast job posting data showing HR-related postings growing at just 1.2% a year over the past two decades, but accelerating to 6% over the last 24 months, precisely the period when AI investment has been heaviest. 

And it’s not just job postings, it’s pay too. Bersin’s Lightcast data shows HR salaries up 82% over 20 years (3.1% a year, compounded) against 66% inflation (2.1% a year) over the same period, meaning HR pay has genuinely outpaced the cost of living, which isn’t true across most professions.

What’s driving that acceleration? Even as AI adoption speeds up, HR is splitting into two different professions, and which side of that split your business lands on will shape how well you manage people, cost and risk over the next few years.

The real split: administrative HR is shrinking, strategic HR isn’t

The numbers above are averages for the whole profession, and averages hide a lot of movement underneath. Wage growth is decelerating fast: Robert Half’s 2026 Salary Guide projects HR salary growth of just 1.6% for 2026, down sharply from 4.0% in 2024. And the part of HR most tied to hiring itself, talent acquisition, had a rough 2025: new BLS data analyzed by recruiting publication ERE shows the Human Resources Specialists category (the closest official proxy for TA roles) shrank by 0.5% in 2025, the first decline since BLS began tracking the category in 2012. HR job postings overall tell a similar story: SHRM found that as of December 2025, they sat at only 78% of their February 2020 level, even as HR headcount kept growing 16% over the same stretch, which points to employers promoting and retaining from within rather than hiring externally for the roles now under pressure.

A detailed labor-market analysis by AIHR explains why. Built with workforce data firm Revelio Labs across 54 HR roles and more than 162,000 active US job postings, it found a consistent pattern: broad, generalist, coordination-heavy roles are losing ground fast, while specialist, analytical and systems-focused roles sit in some of the tightest labor markets in HR.

On the losing side: demand for VP of HR roles fell 71% in six months, and there are now 757 candidates competing for every open VP of HR role. HR Administrator demand fell nearly 30% over the same period, and AIHR flags it as one of the roles most exposed to automation. HR Service Desk Agent demand fell 38%.

On the winning side: demand for Organizational Effectiveness Specialists grew 65%, Learning and Development specialists grew 43%, and the Total Rewards role family (compensation, benefits, payroll) grew 25%, with Payroll Administrator demand alone up 138%, likely reflecting rising pay-transparency and compliance pressure. Some of these specialist roles, such as HR Technologist, have as few as five candidates for every open role, an extraordinarily tight market by comparison.

The pattern holds even for senior titles. A big, broad job title such as VP of HR, HR Director or Senior HR Business Partner no longer guarantees security on its own. What predicts demand is whether the work is specialized, analytical or systems-based, versus the kind of generalist coordination work that AI tools and better HR software can now absorb.

Government projections point the same way for the years ahead. The US Bureau of Labor Statistics forecasts 6% employment growth for HR specialists through 2034, roughly double the 3% projected for all occupations combined. Over the same period, it projects the more administrative HR Assistant role (records, scheduling, day-to-day queries) to shrink by around 7% nationally, an outright decline inside an otherwise growing profession.

This lines up with what’s happening at the more junior end of HR too. SHRM research cited by recruitment analysts at GoodHiresOnly estimates that 85% of recruitment screening tasks and 90% of benefits administration tasks are expected to be automated between 2025 and 2027. That piece focuses mainly on the Indian HR market, but its underlying data reinforces the same split rather than contradicting it: the administrative layer of HR is being absorbed by AI at real scale, while judgment-heavy, relationship-heavy work such as conflict resolution, culture and organizational design isn’t going anywhere.

This isn’t unique to HR

The wider labor market follows suit. PwC’s 2026 Global AI Jobs Barometer, based on close to a billion job ads across six continents, found that jobs requiring specific AI skills grew 69%, almost eight times faster than the 9% growth in the overall jobs market, with a 62% average wage premium attached to those skills. Companies best able to use AI saw headcount grow 52%, against 36% at the least AI-exposed firms, and posted meaningfully higher wage growth too.

Inside HR specifically, adoption is already reshaping daily work. Recruiting data compiled by Pin shows AI adoption in HR functions reaching 43% in 2025, up from 26% the year before, though only 17% of organizations describe their AI implementation as “highly successful”, and two-thirds haven’t proactively trained staff to work alongside the tools they’ve rolled out. Separately, research summarized by Stealth Agents shows 60% of HR leaders used AI for strategic workforce planning in 2025, up from just 29% in 2023, cutting planning cycle times by close to half and helping teams fill critical roles 23% faster while cutting mis-hires by 18%.

The pattern across all of this data points the same way; AI isn’t erasing HR, it’s automating the transactional layer that was always more process than judgment, while, at the same time, raising the bar and the reward for the strategic layer HR was supposed to be doing all along.

What this means for your business

If you run a small or mid-sized business, this has a direct, practical implication.

The HR work paying off right now isn’t data entry, benefits administration, routine screening, or manually chasing compliance deadlines. It’s workforce planning, retention strategy, culture and the judgment calls AI genuinely can’t make.

The problem is that most small businesses can’t split HR into two functions. You likely have one person, or one small team, doing both the administrative load and the strategic work that actually moves the needle on retention and risk. When admin work fills the week, as it usually does, the strategic work is what gets squeezed out. That’s not a reflection on your team. It’s what happens when one role is asked to do two fundamentally different jobs.

This is the gap Focus HR, powered by OneDigital, exists to close, and it’s why we don’t just hand you software and step back. Our cloud-based HRIS platform automates the transactional side directly: multi-state payroll with automatic tax calculations, digital onboarding, a self-service benefits portal where employees manage their own plans and life events, built-in compliance training tracking, and dashboards that surface turnover and labor cost trends without anyone building a spreadsheet. That’s the layer the data above shows is genuinely being automated, so we help seamlessly integrate this automation into your business. 

The layer the data shows isn’t being automated, retention strategy, culture, workforce planning – the judgment calls a system can’t make – is exactly what gets squeezed out when your team is buried in admin. Our consultants take that administrative load off your plate and support you on the rest, which frees up your team’s time to focus on the work that actually moves the needle.

The data doesn’t point to less HR. It points to more focused HR. Businesses that make that shift deliberately, rather than waiting for AI to sort it out on its own, will be better placed over the next few years.

Want to see what your HR function could look like with the administrative work automated and the strategic work covered? Book a free consultation with Focus HR to talk through where your team’s time is going, and where it could go instead.

Clint Parry, MBA, SHRM-SCP is a Senior Business Consultant at Focus HR, now powered by OneDigital. Based in Arizona, Clint works with growing companies to help them turn HR from an administrative burden into a strategic advantage.

The post HR Jobs Are Booming Despite Rapid AI Adoption appeared first on Focus HR Inc..

That is not an argument for ignoring the world around you. It is a reminder to be deliberate about where you place your attention.

As you prepare for 2027, the question is not whether external conditions will affect your business. They will. The question is whether you will let them consume the time and energy your leadership team needs to make good decisions, serve customers, and build a stronger company.

Stephen Covey’s principle of proactivity offers a useful filter for the year ahead: focus your effort on the things you can do something about rather than becoming stuck in concerns you cannot change. For business owners, that principle becomes practical when you look closely at how your time is being spent.

You cannot control the economy. You can control what receives your best attention.

The January planning question that matters

As we plan for 2027, many leaders set revenue targets, hiring plans, and strategic goals. Those are important. But there is another question worth asking first:

What work is consuming your leadership capacity—and should it still be?

Think back over the past year. How often did a payroll question, benefits issue, policy gap, employee concern, compliance task, or urgent piece of paperwork derail the work your team had planned to do? None of those responsibilities is unimportant. The problem is not HR itself. The problem is allowing routine, specialist, or administrative HR work to crowd out the work only your leaders can do.

Your calendar tells the truth. If business owners and senior leaders are repeatedly pulled into administration, the business is paying for that work with its most limited resource: focused decision-making time.

A practical way to use Covey’s framework

Covey’s original model distinguishes between the Circle of Concern (the broad range of matters that affect us) and the Circle of Influence (the matters where our actions can make a difference). 

A useful practical refinement is to separate the innermost actions that you directly control from the broader outcomes you can influence.

This distinction matters because it changes the conversation about HR. You do not control every employment outcome. You cannot guarantee that a great employee will never leave or that every hire will work out. But you can influence those outcomes by setting clear expectations, equipping managers, improving the employee experience, and giving your people the support they need.

You also directly control whether repeatable administrative work remains a permanent drain on your leaders’ time.

Do what you do best—more consistently

“Do what you do best all the time” is a useful standard for annual planning, provided it is not taken to mean that leaders should disengage from people decisions. They should not.

Business owners and internal leaders should remain close to the work that defines the company: setting direction, creating a healthy culture, holding managers accountable, developing key people, making consequential employment decisions, and understanding what employees need to perform well.

Those responsibilities are strategic. They belong inside the business.

But many HR responsibilities are different. Payroll administration, benefits administration, policy maintenance, routine documentation, compliance tracking, and process design are essential work that often requires focused expertise and consistent execution. They do not always require the owner’s personal attention or a senior HR leader’s entire week.

The goal is not to “get rid of HR.” The goal is to give HR the right operating model, so it becomes an asset to the business rather than a source of constant interruption.

Turn HR support into a 2027 capacity decision

For many small and midsized businesses, outsourced HR is a practical way to protect the work that matters most.

For companies with fewer than 100 employees, an external HR partner can provide foundational HR capability without requiring the business to build every process and specialist function internally. That can mean clearer policies, more consistent administration, stronger documentation, and experienced guidance when issues arise.

For companies with more than 100 employees, the opportunity is often different. There may already be an internal HR team with valuable institutional knowledge and strategic responsibilities. In that case, external support can extend the team’s capacity—helping to keep routine administration, compliance work, and process execution from displacing retention efforts, recruiting, workforce planning, and manager development.

In both cases, the most productive question is not simply, “Should we outsource HR?” It is:

Which HR work should stay closest to our leaders, and which work would be better handled through dedicated systems, expertise, and support?

That question puts the decision squarely in your Circle of Control.

Begin the year with an HR capacity audit

Before Q1 gets busy, set aside time to review how HR work is currently handled. Identify where responsibilities are unclear, processes depend on one person, administrative tasks regularly interrupt leaders, or compliance work is handled reactively instead of systematically.

Then sort the work into three categories. 

• First, identify the people decisions and culture-building responsibilities that must remain with your leaders. 
• Second, identify the processes that should be standardized and managed more consistently. 
• Third, identify the administrative and specialist work where outside support would allow your team to focus on higher-value priorities.

This is not about chasing a generic savings percentage. It is about making an intentional decision about capacity, risk preparedness, and where your most capable people can have the greatest impact.

Make 2027 the year your time reflects your priorities

The economy will do what it does. The labor market will change. New employment challenges will emerge. Those realities belong in your Circle of Concern, and they deserve thoughtful preparation.

But your priorities, systems, standards, and use of leadership time belong much closer to home.

As you plan for the year ahead, do not allow routine HR administration to decide where your best hours go. Keep ownership of the people decisions that matter most. Build the support needed to execute the rest well. Then give your leaders more room to focus on the customers, talent, and strategy that will move the business forward.

Focus HR, powered by OneDigital, helps growing companies build an HR operating model that fits the way they work—whether that means foundational HR support or added capacity for an existing internal team. Prepare for 2027 with a conversation about where your people strategy needs more time, clarity, and support.

Clint Parry, MBA, SHRM-SCP is a Senior Business Consultant at Focus HR, now powered by OneDigital. Based in Arizona, Clint works with growing companies to help them turn HR from an administrative burden into a strategic advantage.

The post The One 2027 Goal Business Owners Actually Need: Getting Time Back appeared first on Focus HR Inc..

This guide compares both plans across the factors that matter most for small businesses — contribution limits, employer match requirements, administrative cost, setup complexity, and which type of business each suits best — using 2026 IRS figures.

SIMPLE IRA vs. 401(k): Quick Comparison Table

Here’s the at-a-glance view before we go deeper on each factor.

What Is a SIMPLE IRA?

SIMPLE stands for Savings Incentive Match Plan for Employees. It’s a retirement plan designed specifically for small businesses with 100 or fewer employees who earned at least $5,000 in the prior year.

The SIMPLE IRA’s defining characteristic is mandatory employer participation. You can’t set up a SIMPLE IRA and skip the employer contribution — the IRS requires you to either:

• Match employee contributions dollar-for-dollar up to 3% of compensation (you can reduce this to 1% in any two out of five years), or
• Make a 2% non-elective contribution for all eligible employees, whether they contribute or not

This mandatory match is both the plan’s strength (it guarantees employees benefit) and its limitation (it’s a cost you can’t waive in lean years without restrictions).

SIMPLE IRA 2025 Contribution Limits

• Employee contributions: Up to $16,500
• Catch-up contributions (age 50+): Additional $3,500 (total $20,000)
• Enhanced catch-up (ages 60–63): Additional $5,250 (total $21,750) — introduced under SECURE 2.0
• Employer match: Up to 3% of compensation (dollar-for-dollar on employee contributions)

Note: verify current limits at IRS.gov before your plan year begins, as limits adjust annually for inflation.

SIMPLE IRA Key Rules

Vesting is immediate. Every dollar — from both employee and employer — belongs to the employee from the moment it’s contributed. There’s no vesting cliff or schedule. This is excellent for recruiting but means departing employees take the full employer match with them.

Two-year rule. Funds withdrawn from a SIMPLE IRA within the first two years of the plan are subject to a 25% early withdrawal penalty (not the standard 10%). This is often missed by employees and can cause significant confusion and resentment if not clearly communicated during onboarding.

No loans. Unlike a 401(k), employees cannot borrow from a SIMPLE IRA. This is a meaningful limitation for employees who may view plan loans as a financial safety valve.

October 1 setup deadline. To establish a SIMPLE IRA for the current calendar year, you must set it up by October 1. If you miss that deadline, the earliest you can start is January 1 of the following year.

What Is a 401(k)?

A 401(k) is the most well-known employer-sponsored retirement plan and the gold standard for employee benefits packages. Unlike the SIMPLE IRA, it’s available to businesses of any size and offers significantly more flexibility in how it’s designed, administered, and funded.

The 401(k)’s flexibility is its primary advantage over the SIMPLE IRA — and its primary complication. You can design virtually any employer match formula, set vesting schedules, offer Roth contributions, allow plan loans, and choose from a wide investment menu. But all of that flexibility comes with administrative requirements that a SIMPLE IRA doesn’t have.

401(k) 2025 Contribution Limits

• Employee contributions: Up to $23,500
• Catch-up contributions (age 50+): Additional $7,500 (total $31,000)
• Enhanced catch-up (ages 60–63): Additional $11,250 (total $34,750) — introduced under SECURE 2.0
• Total contributions (employer + employee): Up to $70,000 or 100% of compensation, whichever is less

401(k) Key Rules

Employer match is optional. You choose whether to offer a match, how much it is, and what formula it follows. Common structures include 50% match on the first 6% of compensation, or dollar-for-dollar on the first 3%. You can also make profit-sharing contributions on top of any match.

Vesting schedules protect the employer. Unlike the SIMPLE IRA’s immediate vesting, a 401(k) can use cliff vesting (up to 3 years) or graded vesting (up to 6 years). This means employees who leave before they’re fully vested forfeit a portion or all of the employer contributions — a meaningful retention tool and cost protection for the business.

Annual IRS filing and non-discrimination testing. Most 401(k) plans must file IRS Form 5500 annually and pass non-discrimination tests (ADP/ACP tests) to ensure the plan doesn’t disproportionately benefit highly compensated employees. Safe harbor 401(k) plans are exempt from testing in exchange for specific mandatory employer contributions.

Plan loans are permitted. Employees can borrow from a 401(k) up to the lesser of $50,000 or 50% of their vested balance. This is a significant benefit that SIMPLE IRAs cannot offer.

SIMPLE IRA Matching Rules: The Detail That Matters Most

The SIMPLE IRA matching rules are the most misunderstood aspect of the plan — and the most important to understand before you set one up.

You have two options each year:

Option 1 — Dollar-for-dollar match up to 3% of compensation. You match every dollar the employee contributes, up to 3% of their annual compensation. If an employee earns $60,000 and contributes $1,800 (3%), you contribute $1,800. If they contribute only $600 (1%), you contribute $600. You only pay when they contribute.

Option 2 — 2% non-elective contribution. You contribute 2% of every eligible employee’s compensation regardless of whether they contribute anything. If an employee earns $60,000 and contributes nothing, you still contribute $1,200. This is more expensive if participation is low but simpler to administer.

Reducing the match to 1%. You can reduce the matching contribution to 1% of compensation in up to two out of every five years. This gives some flexibility in tight years, but you must notify employees within a specific window before the plan year begins — typically 60 days before the start of the year in which the reduction applies.

The mandatory nature of these contributions is why the SIMPLE IRA suits some businesses better than others. If cash flow is unpredictable or you want full control over whether and how much the employer contributes each year, a 401(k) with a discretionary match formula gives you that flexibility.

Which Plan Is Right for Your Business?

There’s no universal answer, but these guidelines cover most situations.

Choose a SIMPLE IRA if:

• You have fewer than 50 employees and want the lowest possible administrative burden
• You can commit to the mandatory employer match — and want to, because you see it as a genuine recruitment and retention tool
• You don’t have (or don’t want to spend) the budget for a TPA, annual Form 5500 filing, and plan testing
• Speed matters — you can set up a SIMPLE IRA quickly through most major financial institutions at no cost
• Higher employee contribution limits aren’t a priority for your workforce

Choose a 401(k) if:

• You want maximum flexibility over the employer match — whether to offer one, how much it is, and when it vests
• You or key employees want to contribute more than $16,500 annually (the SIMPLE IRA limit)
• You want to offer a Roth option or plan loans
• You plan to grow past 100 employees (SIMPLE IRAs have an eligibility ceiling)
• You want vesting schedules as a retention tool
• Your workforce skews older and the higher catch-up limits in a 401(k) are meaningful

Consider a Safe Harbor 401(k) as a middle ground

A safe harbor 401(k) is worth considering if you want 401(k) flexibility without the annual non-discrimination testing. In exchange for specific employer contribution formulas (either a 3% non-elective contribution or a matching formula), you’re exempt from ADP/ACP testing. It costs more than a SIMPLE IRA but less administrative headache than a standard 401(k) for many small businesses.

Can You Switch from a SIMPLE IRA to a 401(k)?

Yes, but there are rules. You can terminate a SIMPLE IRA plan and start a 401(k) within the same year — but only after at least January 1 of the year the 401(k) begins. The SIMPLE IRA must be terminated before the 401(k) becomes effective.

Employees who have held SIMPLE IRA funds for less than two years cannot roll those funds directly into a 401(k) — they must either wait out the two-year period or roll into a Traditional IRA first. This is one of the more complicated transition scenarios and worth discussing with your plan administrator or financial advisor before making the switch.

If you’re considering this transition, Focus HR’s retirement team can walk you through the sequencing and employee communication required to do it correctly.

What Does It Cost to Set Up Each Plan?

Cost is where the SIMPLE IRA wins clearly.

SIMPLE IRA setup cost: Most major financial institutions (Fidelity, Vanguard, Charles Schwab) offer SIMPLE IRA plans at no setup or annual maintenance cost. Your primary expenses are the mandatory employer contributions.

401(k) setup cost: A 401(k) requires a plan document, a plan administrator (or Third Party Administrator), and annual Form 5500 filing. Typical costs range from $500–$3,000 in setup fees and $1,000–$5,000+ annually in administration costs, depending on plan complexity and the number of employees. Some modern 401(k) providers (like Guideline or Human Interest) offer lower-cost structures specifically for small businesses, with all-in fees starting around $500/year for small plans.

The employer match cost is separate from administration in both plans. For a 25-person company with average compensation of $55,000, a 3% SIMPLE IRA match costs approximately $41,250 per year in employer contributions (assuming full participation) — identical to what a 3% 401(k) match would cost. The difference is purely in the administration overhead.

SECURE 2.0 Changes That Affect Both Plans

The SECURE 2.0 Act of 2022 introduced several changes relevant to small business retirement plans, some of which are now in effect for 2025 and 2026:

• Enhanced catch-up contributions for ages 60–63 — both SIMPLE IRAs and 401(k)s now offer higher catch-up limits for this age group, as noted in the contribution limits above
• Auto-enrolment for new 401(k) plans — 401(k) plans established after December 29, 2022 are generally required to include automatic enrolment (with an opt-out option) starting in 2025
• Small business startup tax credit increased — businesses with fewer than 50 employees can now claim a tax credit of up to 100% of plan startup costs (previously 50%), up to $5,000 per year for three years. This significantly reduces the cost disadvantage of setting up a 401(k)
• Employer match tax credit — businesses with fewer than 100 employees can also claim a tax credit for employer contributions made in the first five years of a new plan, up to $1,000 per employee

The startup cost tax credit is significant — a business setting up a 401(k) for the first time may recover most of the first three years of administration costs through tax credits, narrowing the cost gap with a SIMPLE IRA considerably.

Frequently Asked Questions

What is the difference between a SIMPLE IRA and a 401(k)?

The main differences are contribution limits, employer match flexibility, and administrative complexity. A SIMPLE IRA has lower employee contribution limits ($16,500 in 2025 vs. $23,500 for a 401(k)), requires a mandatory employer contribution, and has minimal administration — no annual IRS filing required. A 401(k) has higher limits, optional employer match, vesting schedule flexibility, and significantly more administrative requirements including annual Form 5500 filing and non-discrimination testing.

Can I have both a SIMPLE IRA and a 401(k)?

Generally no. The IRS prohibits maintaining a SIMPLE IRA and another qualified retirement plan (including a 401(k)) in the same year. You can transition from one to the other, but they cannot run simultaneously. The exception is if you acquire a business mid-year that already has a different plan in place — specific transition rules apply in that situation.

What is the SIMPLE IRA employer match requirement?

Employers must choose one of two contribution options each year: a dollar-for-dollar match on employee contributions up to 3% of compensation (reducible to 1% in up to two out of five years), or a flat 2% non-elective contribution for all eligible employees regardless of whether they contribute. The match is mandatory — you cannot operate a SIMPLE IRA without making one of these employer contributions.

What are the SIMPLE IRA contribution limits for 2025?

For 2025, employees can contribute up to $16,500 to a SIMPLE IRA. Employees aged 50 and over can contribute an additional $3,500 (total $20,000). Employees aged 60–63 can contribute an additional $5,250 (total $21,750) under the enhanced catch-up rules introduced by SECURE 2.0. These limits typically adjust annually — verify at IRS.gov before your plan year begins.

What happens to my SIMPLE IRA if my business grows past 100 employees?

If your business exceeds 100 employees, you enter a two-year grace period during which you can maintain the SIMPLE IRA. After that grace period, you must either transition to a different retirement plan (such as a 401(k)) or terminate the SIMPLE IRA. Planning this transition in advance is important to avoid disruption to employee retirement savings.

Is a SIMPLE IRA better than a 401(k) for a small business?

It depends on your priorities. If simplicity and low cost are the primary concern and you have fewer than 50 employees, a SIMPLE IRA is usually the right starting point. If you want maximum flexibility, higher contribution limits, or plan to grow significantly, a 401(k) — particularly a safe harbor 401(k) — is worth the additional cost. Many growing businesses start with a SIMPLE IRA and transition to a 401(k) when the business reaches a size where the additional benefits justify the administration cost.

How does Focus HR help with small business retirement plans?

Focus HR’s retirement and benefits team helps small businesses evaluate, set up, and administer retirement plans — from SIMPLE IRAs through full 401(k) programs. As part of our employee benefits services, we handle plan setup, employee communication, annual compliance, and fiduciary oversight. Book a free consultation with our small business HR consulting team to discuss what’s right for your business.

Setting up the right retirement plan is one of the highest-impact benefits decisions you can make for recruiting, retention, and your own financial future. Talk to the Focus HR retirement team about which plan fits your business, or explore our full employee benefits programs to see what else a benefits package can include.

The post SIMPLE IRA vs. 401(k): Which Retirement Plan Is Right for Your Small Business in 2026? appeared first on Focus HR Inc..

Arizona At-Will Employment: What It Does (and Doesn’t) Protect

Arizona is an at-will employment state. Under at-will, an employer can generally terminate an employee at any time, for any reason, or for no reason — and an employee can resign under the same terms.

But at-will is not a blanket shield. There are significant exceptions that expose employers to liability even when the termination itself was legitimate:

• Discrimination: Federal law (Title VII, ADA, ADEA, Title IX, GINA) and Arizona law prohibit terminating an employee based on a protected characteristic — race, colour, national origin, sex, religion, disability, age (40+), pregnancy, or genetic information
• Retaliation: Terminating an employee for filing a workers’ compensation claim, reporting a safety violation, filing an EEOC charge, or exercising another protected right is unlawful regardless of at-will status
• Implied contract: Employee handbooks, offer letters, or verbal assurances that suggest job security can create an implied contract that limits at-will termination rights
• Public policy exceptions: Arizona courts have recognised exceptions where terminating an employee violates a clear public policy — for example, firing someone for serving on jury duty or for refusing to commit an illegal act

Understanding where at-will ends and legal liability begins is the starting point for any termination decision. If the reason for termination is performance or conduct, documentation is your primary protection. If the reason is a business restructure or layoff, WARN Act considerations may apply (see below).

Before the Termination: The Documentation Checklist

The single most important thing you can do before terminating an employee is build a documented record. Courts and regulatory agencies routinely evaluate termination decisions against the paper trail — or the absence of one. “If it’s not documented, it didn’t happen” is the operating principle for any employment dispute.

Documentation that supports a defensible termination includes:

• Written performance reviews and ratings
• Written warnings (verbal warnings should be followed by a written summary)
• Emails, messages, or other communications documenting the issue
• Records of previous coaching conversations and corrective action plans
• Complaints from customers, colleagues, or managers (in writing where possible)
• Attendance records showing patterns of lateness or absenteeism
• Notes from one-on-one meetings where performance was discussed

Before proceeding with a termination, also confirm the following:

• The stated reason for termination is consistent with how similar situations have been handled with other employees (inconsistency is one of the most common bases for discrimination claims)
• The employee has not recently filed a workers’ compensation claim, made an EEOC complaint, or engaged in other protected activity that could create a retaliation claim
• The employee is not currently on an approved leave (FMLA, military leave, or a pregnancy-related accommodation under the PWFA — see below)
• Your employee handbook’s disciplinary procedures have been followed

If any of those flags exist, stop and consult with an HR professional or employment attorney before proceeding. Focus HR’s HR consulting team regularly assists Arizona employers with pre-termination reviews exactly for this reason.

The Pregnant Workers Fairness Act (PWFA): A Critical 2023 Update That Affects Terminations

If the employee you are considering terminating is pregnant, has recently given birth, or is dealing with a related medical condition, the Pregnant Workers Fairness Act (PWFA), which took effect June 27, 2023, requires employers to provide reasonable accommodations for pregnancy-related limitations — unless doing so would cause undue hardship.

Under the PWFA, covered employers (those with 15 or more employees) cannot:

• Require an employee to accept an accommodation they did not request or agree to
• Deny employment opportunities to a qualified employee based on the need for a reasonable accommodation
• Require an employee to take leave when another reasonable accommodation is available
• Retaliate against an employee for requesting or using a reasonable accommodation

Terminating an employee who has requested or is using a PWFA accommodation — without going through the proper interactive accommodation process first — is a serious legal exposure. The EEOC has been actively enforcing the PWFA since its effective date. If a pregnant employee’s performance has become an issue, the accommodation process must be documented and completed before any termination decision is made.

WARN Act: When You Must Give 60 Days Notice

If you are terminating a group of employees due to a plant closing or mass layoff (rather than individual performance or conduct), the Worker Adjustment and Retraining Notification (WARN) Act may require 60 calendar days advance written notice.

WARN applies to employers with 100 or more employees. Specifically:

• Plant closing: A covered plant closing occurs when the permanent or temporary closure of a single site of employment results in an employment loss for 50 or more employees during any 30-day period
• Mass layoff: A covered mass layoff occurs when 50–499 employees are affected during any 30-day period at a single site, if those employees represent at least 33% of the workforce at that location. If 500 or more workers are affected, the 33% threshold does not apply

Notice must be provided to the affected employees or their representatives, to the state’s dislocated worker unit, and to the chief elected official of the relevant local government.

There are limited exceptions to the 60-day requirement — including unforeseeable business circumstances and natural disasters — but these are narrowly interpreted. Failure to comply with WARN exposes employers to back pay and benefits liability for up to 60 days per affected employee, plus civil penalties.

Most small businesses with fewer than 100 employees are not covered by federal WARN. However, Arizona does not have a state-level WARN equivalent, so federal WARN is the operative standard for Arizona employers.

How to Conduct the Termination Meeting

The termination meeting itself should be brief, direct, and private. Here is the process to follow:

Before the meeting

• Have a witness present — a second manager or HR representative. Never conduct a termination one-on-one
• Prepare the termination letter in advance stating the effective date and reason
• Prepare the final paycheck (see Arizona requirements below)
• Plan for the return of company property — keys, badges, devices, access credentials
• Coordinate with IT to disable system access immediately after the meeting
• If the employee has a company vehicle, have a plan for its return

During the meeting

• Keep it short — the meeting should take 10–15 minutes, not an hour
• State clearly and early that the purpose of the meeting is to inform the employee that their employment is being terminated, effective [date]
• State the reason plainly and without ambiguity — do not soften or obscure the message
• Do not apologise repeatedly, argue, or enter a debate about whether the decision is fair
• Do not make promises about references, severance, or future employment in the moment
• Provide the termination letter and any separation paperwork
• Allow the employee to ask questions, answer briefly and factually

After the meeting

• Escort the employee from the building. This is not personal — it is standard practice that protects the business, other employees, and company data
• Immediately revoke all digital access — email, systems, cloud platforms, social media accounts
• Collect keys, access cards, and any company property
• Document that the meeting occurred and what was said

Arizona Final Paycheck Requirements

Arizona law on final pay timelines is more specific than many employers realise. Under ARS §23-353:

• Terminated employees must be paid all wages due within seven working days or the end of the next regular pay period, whichever is sooner
• Employees who resign must be paid no later than the regular payday for the pay period during which the termination occurred. If the employee requests it, wages must be paid by mail

The final paycheck must include all accrued, unused vacation pay if your company policy or employee handbook requires vacation to be paid out upon termination — Arizona does not mandate vacation payout by law, but if your handbook or policy promises it, it becomes a contractual obligation.

Violating Arizona’s final pay statute is a petty offence under ARS §23-353(D) and can trigger a wage claim with the Arizona Industrial Commission. Pay the final cheque on time, every time.

COBRA and Arizona Mini-COBRA: Health Insurance Continuation

Arizona’s health insurance continuation rules are broader than federal COBRA — and many Arizona employers are caught off guard by this.

Federal COBRA requires employers with 20 or more employees to offer terminated employees the right to continue group health coverage for up to 18 months at the employee’s expense (plus up to a 2% administrative fee).

Arizona Mini-COBRA, under ARS §20-2330, applies to all Arizona employers that offer group health benefits, regardless of size — including those with fewer than 20 employees who are exempt from federal COBRA. Key requirements:

• The employer must provide written notice to the terminated employee within 30 days of the qualifying event (termination). A notice mailed within 44 days of the qualifying event also satisfies this requirement
• The employee has 60 days from the date of notice to elect continuation coverage in writing, and must submit the first month’s premium within 45 days of electing coverage
• If the employer fails to provide timely notice, the employee has 120 days after the date of notice to elect coverage and pay the premium
• Continuation coverage under Arizona Mini-COBRA lasts up to 18 months
• The employer can charge the full cost of the premium plus an administrative fee of up to 5%

Failing to notify a terminated employee of their Mini-COBRA rights is a separate legal exposure from the termination itself. Build the Mini-COBRA notice into your standard termination packet.

Confidentiality and Data Security After Termination

One of the most overlooked post-termination risks is data security. The window between the termination meeting and the revocation of system access is when most confidential data is most vulnerable.

Immediately after the meeting, revoke or change:

• Email and cloud storage access (Google Workspace, Microsoft 365)
• CRM and client database access
• Payroll and HR system access
• Company social media account credentials
• VPN and remote access credentials
• Building and facility access (key cards, alarm codes)
• Any shared passwords the employee may have known

If the employee had access to trade secrets, client lists, or proprietary processes, consider whether a non-disclosure agreement or non-solicitation agreement is in place and enforceable. Arizona has adopted the Uniform Trade Secrets Act, which provides additional protection for trade secret misappropriation — but only if the information has been treated as confidential in practice, not just labelled as such.

The Impact on Remaining Employees

How a termination is handled sends a signal to everyone else in the business. Two common negative outcomes to be aware of:

Morale impact. If colleagues see a termination handled poorly — publicly, abruptly, or in a way that seems unfair — it creates anxiety among remaining staff about their own security. This can lead to voluntary departures you didn’t plan for.

Turnover cost. The cost of losing an employee and replacing them is routinely underestimated. Recruiting, interviewing, onboarding, and the productivity gap while a new hire ramps up can represent months of the departed employee’s salary. A thoughtful termination process — including addressing the team appropriately afterwards — reduces the downstream turnover risk.

When communicating a departure to the team, keep it brief: “We’re sharing that [name] is no longer with the company. We wish them well.” Do not share the reason for the termination with the broader team — this protects both you and the departed employee.

Frequently Asked Questions About Terminating Employees in Arizona

Can I fire someone in Arizona without a reason?

Generally yes — Arizona is an at-will state, which means employers can terminate employees for any reason or no reason, as long as the reason is not illegal (such as discrimination, retaliation, or violation of a public policy exception). However, at-will does not protect against wrongful termination claims, wage violations, or benefit continuation obligations, all of which apply regardless of the reason for termination.

How quickly do I have to pay a terminated employee in Arizona?

Under ARS §23-353, a terminated employee must receive their final wages within seven working days or by the end of the next regular pay period, whichever comes first. Failure to comply is a petty offence under Arizona law and can result in a wage claim.

Do I have to offer COBRA to a terminated employee if I’m a small business?

If you have fewer than 20 employees, federal COBRA does not apply to you — but Arizona’s Mini-COBRA law (ARS §20-2330) does. Arizona Mini-COBRA requires all employers that offer group health coverage to notify terminated employees of their right to continue that coverage, regardless of company size. You must provide this notice within 30 days of termination.

Can I terminate a pregnant employee in Arizona?

Terminating an employee because of pregnancy, childbirth, or a related medical condition is unlawful under the Pregnancy Discrimination Act, Title VII, and the Pregnant Workers Fairness Act (PWFA). If a pregnant employee’s performance is the genuine reason for termination, you must have documented performance concerns and must ensure the accommodation process under the PWFA has been completed before termination is considered. Consult an HR professional or employment attorney before proceeding.

What is the WARN Act and does it apply to my Arizona business?

The WARN Act requires employers with 100 or more employees to provide 60 days advance written notice before a plant closing or mass layoff (50 or more employees at a single site during a 30-day period). Most small businesses are not covered by WARN. Arizona does not have a state-level WARN equivalent, so federal WARN is the applicable standard for Arizona employers.

What should I say to the rest of the team after a termination?

Keep the communication brief and neutral: “[Name] is no longer with the company. We wish them well.” Do not share the reason for termination with other employees — this protects both the business and the departed employee’s privacy, and reduces the risk of defamation claims. Address any operational questions about who will cover the employee’s responsibilities separately.

How can Focus HR help with employee terminations?

As part of our HR outsourcing services, Focus HR assists Arizona employers with pre-termination documentation reviews, conducting and supporting termination meetings, preparing termination letters and separation paperwork, Mini-COBRA notice compliance, and post-termination follow-up. Book a free consultation with our small business HR consulting team to discuss how we can support your HR compliance.

The post How to Terminate Employees the Right Way: A 2026 Guide for Arizona Employers appeared first on Focus HR Inc..

Here’s what the Emod is, how it’s calculated, what a good score looks like, and — most importantly — how to bring it down.

What Is an Emod (Experience Modification Rating)?

The Emod is a multiplier applied to your workers’ compensation insurance premium, based on your actual claims history compared to the average claims history for businesses in your industry and state. It’s calculated annually by the NCCI (or a state rating bureau in states that don’t use NCCI) using your prior three years of payroll and loss data — typically excluding the most recent policy year.

An employer with an average claims history carries an Emod of 1.00 — the industry benchmark. Employers with better-than-average safety records see their Emod fall below 1.0. Employers with worse records see it rise above 1.0.

The Emod is not permanent. It’s recalculated each year as new claims data comes in and old data rolls off the three-year window. That means improving your safety record today starts moving your Emod in three years — but it also means a bad year follows you for three years, not one.

How the Emod Affects Your Workers’ Comp Premium

The Emod is applied as a direct multiplier to your manual premium (the base rate before any adjustments). Here’s a concrete example using a $10,000 annual workers’ comp premium:

For businesses with larger payrolls and higher manual premiums, the dollar impact scales accordingly. A roofing or construction company with a $100,000 annual manual premium and a 1.50 Emod is paying $50,000 more per year than an equivalent competitor with a 1.00 Emod. That’s a significant competitive disadvantage — and the Emod also affects your ability to win contract work (see below).

How Is an Emod Calculated?

The NCCI calculates your Emod by comparing your actual losses (claims) against the expected losses for a business of your size in your industry. The formula weights frequency of claims more heavily than severity — meaning multiple small claims hurt your Emod more than one large claim of equivalent dollar value.

Three inputs drive the calculation:

• Actual losses: The claims filed against your workers’ comp policy in the prior three policy years (excluding the current year)
• Expected losses: What the NCCI would expect a business of your payroll size and industry classification to pay in claims
• Primary vs. excess losses: Each claim is split into a “primary” portion (up to a threshold, typically around $17,500) and an “excess” portion above that threshold. Primary losses are weighted more heavily in the formula — which is why frequency matters more than severity

The result is a ratio. If your actual losses are lower than expected, your Emod falls below 1.0. If they’re higher, it rises above 1.0.

You can request your current Emod worksheet from your workers’ comp carrier or broker. The worksheet shows exactly which claims are being weighted and how. Reviewing it annually is worthwhile — errors in claim data do occur and can be corrected.

The Emod and Contract Work: A Hidden Business Risk

Workers’ compensation premium cost is the most obvious impact of a high Emod — but it’s not always the most damaging. In many industries, clients and general contractors use the Emod as a screening criterion when evaluating bids and subcontractors.

Common Emod thresholds in contract requirements:

• Many government contracts require an Emod of 1.00 or below
• Large construction general contractors often require subcontractors to carry an Emod of 0.95 or below
• Some energy, mining, and industrial clients set thresholds as low as 0.85

A business with a 1.25 Emod may be legally compliant and fully insured — but it won’t even make it to the bid evaluation stage for contracts with Emod requirements. Lowering the Emod is often as much a business development imperative as a cost control one.

What Is a Good Emod Score?

A score of 1.00 means you’re exactly average for your industry. Below 1.0 is better than average. Above 1.0 is worse.

For most industries, an Emod in the range of 0.80–0.95 is considered strong and represents genuine safety performance above the industry norm. An Emod below 0.75 is exceptional and usually reflects a sustained, systematic safety program rather than luck.

An Emod above 1.25 is a flag — both for insurers and for potential contract clients — that the business has a claims pattern that warrants attention.

Your “good” target Emod should also be set against what the contract clients in your market require. If you’re in construction and want to work with certain general contractors, the target may be 0.95 regardless of the industry average.

How to Lower Your Emod

Because the Emod is based on three years of claims data, improving it is a medium-term project, not a quick fix. The levers that move it are all on the prevention and claims management side:

Reduce claim frequency. The formula weights frequency more than severity. Preventing multiple small injuries does more for your Emod than preventing one large one. Focus safety programs on the most common claim types in your industry — slips, strains, and lacerations account for a large share of frequency-weighted claims in most sectors.

Return to work programs. Getting injured employees back to modified or light duty as quickly as medically possible reduces the indemnity (wage replacement) portion of a claim, which reduces the total claim cost that feeds into the Emod calculation. A well-run return-to-work program is one of the most direct Emod management tools available.

Dispute questionable claims. Not every claim filed is a legitimate claim. Working with your carrier to identify and contest fraudulent or exaggerated claims directly protects your loss history. Your workers’ comp broker or a PEO like Focus HR can assist with claims management and advocacy.

Audit your claims history for errors. Request your Emod worksheet annually and review it against your actual claim records. Errors in the data used to calculate the Emod do occur — a claim attributed to the wrong policy year, a closed claim that hasn’t been updated, or a misclassified injury type can all inflate your Emod. Errors can be corrected through the NCCI or your state rating bureau.

Implement a formal safety program. Documented safety training, regular workplace inspections, written safety policies, and incident investigation procedures all reduce claim frequency over time. They also demonstrate due diligence if a claim is ever disputed.

For more on how Focus HR manages workers’ compensation and Emod advocacy for small businesses, see our workers’ compensation services.

Emod and PEO Relationships

One often-overlooked benefit of working with a Professional Employer Organisation (PEO) like Focus HR is the impact on workers’ compensation. Under a PEO co-employment arrangement, your employees are covered under the PEO’s workers’ compensation policy rather than your own. This means:

• Your individual Emod may no longer be the direct driver of your premium — the PEO’s pooled rate applies instead
• Businesses with a high Emod often see their effective workers’ comp cost decrease under a PEO arrangement, because the PEO’s pooled rate reflects a much larger, more diversified risk base
• The PEO handles claims management, return-to-work coordination, and carrier relationships on your behalf

This is particularly valuable for businesses in high-risk industries (construction, manufacturing, healthcare) where an elevated Emod is compounding their premium costs. Book a free consultation to see how a PEO arrangement could affect your workers’ comp costs specifically.

Frequently Asked Questions About the Emod

What does Emod stand for?

Emod stands for Experience Modification Rating (sometimes written as Experience Modifier or EMR). It’s a number calculated annually by the National Council on Compensation Insurance (NCCI) — or a state rating bureau in non-NCCI states — that reflects a business’s workers’ compensation claims history relative to the average for its industry.

What is a good Emod score?

An Emod of 1.00 is the industry average. Below 1.0 is better than average and reduces your workers’ comp premium. An Emod in the range of 0.80–0.95 is considered strong. Above 1.25 is a flag for both insurers and contract clients. Many government and commercial contracts require an Emod of 1.00 or below to qualify for bid consideration.

How is the Emod calculated?

The NCCI calculates your Emod by comparing your actual workers’ compensation losses (claims) against the expected losses for a business of your payroll size and industry classification. The calculation uses three years of prior claims data, weights claim frequency more heavily than severity, and produces a multiplier applied to your manual premium. A ratio below 1.0 means your losses were better than expected; above 1.0 means worse.

How long does a workers’ comp claim affect my Emod?

Workers’ compensation claims affect your Emod for three policy years. The NCCI uses three years of loss data in the calculation, excluding the most recent completed policy year. A claim filed today will typically affect your Emod for three annual renewal cycles before rolling off the calculation window.

Can I lower my Emod quickly?

Not immediately — the Emod reflects three years of claims history, so improvement takes time to show up. The most effective levers are reducing claim frequency through safety programs, implementing a return-to-work program to minimise claim costs, auditing your Emod worksheet for data errors, and disputing questionable claims. Sustained improvement in claims performance typically moves the Emod meaningfully within two to three years.

Does working with a PEO affect my Emod?

Yes. Under a PEO co-employment arrangement, your employees are typically covered under the PEO’s workers’ compensation policy rather than your own individual policy. This means your individual Emod may no longer directly drive your premium — the PEO’s pooled rate applies instead. Businesses with elevated Emods often see their effective workers’ comp cost decrease under a PEO arrangement. Focus HR’s workers’ compensation team can provide a side-by-side cost comparison for your business.

Who calculates my Emod?

In most states, the NCCI (National Council on Compensation Insurance) calculates the Emod. A small number of states — including California, New York, New Jersey, Pennsylvania, Delaware, Indiana, Massachusetts, Michigan, Minnesota, North Carolina, and Wisconsin — use their own independent rating bureaus rather than NCCI. Your Emod worksheet is available from your workers’ comp carrier or broker each year.

Your Emod is one of the most controllable costs in your workers’ compensation program — but only if you’re actively managing it. Book a free consultation with Focus HR to review your current Emod, identify what’s driving it, and discuss whether a PEO arrangement could reduce your workers’ comp costs. You can also learn more about our workers’ compensation services and our broader HR outsourcing program for small businesses.

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The post What Is an Emod and Why Should You Care? appeared first on Focus HR Inc..

The challenge is that there is no single retention period for every employee document. Federal rules vary by record type. For example, the EEOC generally requires personnel and employment records to be retained for one year, while the Fair Labor Standards Act requires most payroll records to be retained for at least three years. Form I-9 records must generally be retained for the later of three years after the employee’s hire date or one year after employment ends.

Arizona employers have additional obligations. Arizona law requires employers to retain payroll records showing hours worked, wages paid and earned paid sick time for four years. Arizona also requires employers to use E-Verify and retain the verification record for the duration of employment or at least three years, whichever is longer.

A well-designed document retention program helps reduce legal risk, protect employee privacy and make HR administration more efficient.

Why document retention matters

Employee records contain highly sensitive information, including Social Security numbers, bank details, immigration documents, medical information, compensation data and performance records.

Keeping records too long increases privacy and cybersecurity risk. Destroying records too soon can make it difficult to respond to an audit, wage claim, discrimination charge or employee request.

A compliant retention program should help an employer:

• Meet federal and state recordkeeping obligations.
• Respond quickly to EEOC, DOL, USCIS or state agency inquiries.
• Demonstrate accurate payroll and timekeeping practices.
• Protect medical, financial and immigration information.
• Apply consistent retention and destruction rules.
• Prevent unauthorized access to confidential records.
• Preserve documents when litigation or an investigation is reasonably anticipated.

The most important principle is to create a retention schedule by record category, rather than treating every document in an employee’s file the same way.

Key federal retention periods

The following table provides a practical overview of common federal requirements. These are minimum periods for the records described; a longer period may apply under another law, contract, benefit plan, state requirement or legal hold.

These periods should not be treated as permission to destroy records automatically. A claim, investigation, subpoena, audit, lawsuit or anticipated legal dispute can require records to be preserved beyond the normal schedule.

Arizona-specific requirements

Four-year payroll and sick-time records

Arizona employers must retain payroll records showing:

• Hours worked for each day.
• Wages paid.
• Earned paid sick time paid to employees.

The retention period is four years. Arizona law also permits an employee or the employee’s designated representative to inspect and copy payroll records relating to that employee.

Failure to maintain these records can create a rebuttable presumption that the employer did not pay the required minimum wage or earned paid sick time. For this reason, Arizona employers should retain timekeeping, payroll and paid-time-off records in a format that can be searched and produced efficiently.

E-Verify records

Arizona law requires employers to verify the employment eligibility of employees through E-Verify after hiring. Employers must retain the verification record for the duration of employment or at least three years, whichever is longer.

This requirement should be managed alongside, but separately from, the federal Form I-9 process. Employers should avoid storing I-9 forms and E-Verify information in an unrestricted personnel folder.

USCIS allows I-9 forms to be stored on paper, electronically or in a combination of formats. Electronic systems must include controls that protect the integrity and accuracy of the forms, prevent unauthorized changes or deletion, maintain an audit trail and permit the employer to produce the forms for inspection. Employers must generally be able to present I-9 forms within three business days of an inspection request.

Arizona data security and breach response

Arizona’s data-breach law applies to businesses that own, maintain or license unencrypted and unredacted computerized personal information. If an investigation determines that a security breach occurred, the affected individuals generally must be notified within 45 days after that determination, subject to statutory exceptions and law-enforcement requirements.

This makes secure storage particularly important for employee records containing:

• Social Security numbers.
• Financial account information.
• Driver’s license or identity-document details.
• Health or medical information.
• Employment eligibility documents.

Arizona employers should maintain a written incident-response process, identify who is responsible for investigating a suspected breach and confirm that HR vendors have appropriate security controls.

How to organize employee records

A common mistake is to keep every employee document in one large personnel file. A better approach is to use separate, clearly labelled record groups.

1. General personnel file

This may include:

• Offer letters and employment agreements.
• Job descriptions.
• Policy acknowledgements.
• Performance evaluations.
• Promotion and compensation documentation.
• Training records.
• Disciplinary notices.
• Resignation and termination documents.

2. Payroll and timekeeping file

This should include:

• Time records.
• Pay rates.
• Payroll registers.
• Overtime calculations.
• PTO and sick-time records.
• Wage deductions.
• Payroll tax records.
• Bonus and commission calculations.

3. Confidential medical and leave file

Keep medical information separate from the ordinary personnel file. This may include:

• Accommodation requests.
• Medical certifications.
• FMLA documentation.
• Fitness-for-duty records.
• Workers’ compensation medical information.
• Medical restrictions.

Managers should receive only the information they need to administer work restrictions or accommodations—not the employee’s diagnosis or full medical documentation.

4. Form I-9 and E-Verify file

Store these records separately so they can be retrieved for an inspection without exposing unrelated employee information. This also limits access to sensitive identity and immigration documents.

5. Recruitment and background-check file

Keep applications, interview notes, reference checks, screening reports and candidate communications in a controlled recruitment repository. Access should be limited to employees involved in hiring or compliance activities.

6. Benefits file

Maintain benefit elections, plan notices, enrollment records and related communications in an appropriately restricted benefits system.

Secure storage for paper and electronic records

Paper records

Paper records should be stored in locked cabinets or a restricted-access records room. Employers should also:

• Use a sign-out process for files removed from storage.
• Prohibit unattended files on desks, printers or meeting-room tables.
• Store medical and I-9 records in separate locked locations.
• Restrict keys and access cards to authorized personnel.
• Maintain a backup or scanned copy where appropriate.
• Use a secure off-site storage provider when necessary.
• Shred documents using a cross-cut process when the retention period ends.

Electronic records

Electronic records should be managed through an HRIS software or document-management system with:

• Role-based access controls.
• Multi-factor authentication.
• Encryption in transit and at rest.
• Unique user accounts rather than shared passwords.
• Audit logs showing who viewed, changed or downloaded a record.
• Automated retention reminders.
• Secure backups and disaster-recovery procedures.
• Regular access reviews after promotions, transfers and terminations.
• Vendor contracts addressing confidentiality, security and data deletion.
• A documented process for correcting errors without deleting the original audit trail.

Sensitive information should not be stored casually in email inboxes, personal cloud drives, text messages or collaboration platforms. If an employee document must be sent electronically, use an approved secure system and confirm that the recipient is authorized to receive it.

Retention, legal holds and disposal

A retention schedule should identify:

• The record category.
• The retention period.
• The event that starts the retention clock.
• The system or location where the record is stored.
• The person responsible for the record.
• The approved destruction method.

The starting event is not always the same. For example, the retention period for a payroll record may begin with the relevant pay period, while an involuntary termination record may be retained from the termination date. An I-9 retention calculation uses both the hire date and the employment end date.

Before destroying records, HR should confirm that no legal hold applies. A hold should suspend routine destruction when the business receives or anticipates:

• An EEOC or DOL complaint.
• A wage or sick-time claim.
• A demand letter.
• A subpoena.
• A government audit.
• A workplace investigation.
• A workers’ compensation dispute.
• A lawsuit or threatened litigation.

Paper records should be cross-cut shredded or destroyed by a vetted records-management provider. Electronic records should be securely deleted in accordance with the system’s retention controls, including relevant copies where practical. Employers should maintain a destruction log showing the record category, date, method and approving person. Destruction records should never be used to conceal, alter or remove documents subject to a legal hold.

How Focus HR takes this off your plate

Building and maintaining a compliant retention program is a lot to manage on top of running a business—separate storage systems, different clocks for different record types, access controls, legal holds, secure disposal. Getting any one of these wrong carries real risk.

Focus HR handles this for its clients as part of its HR, payroll and benefits services, including:

• Setting up and maintaining a retention schedule across personnel, payroll, I-9, medical and leave records.
• Applying federal requirements under the EEOC, DOL, USCIS, IRS, FMLA and OSHA correctly by record type.
• Meeting Arizona-specific requirements for payroll, earned paid sick time and E-Verify records.
• Storing sensitive records—medical, I-9, financial—separately with appropriate access controls.
• Managing legal holds so records aren’t destroyed when a claim, audit or investigation is pending.
• Responding to employee or agency requests for payroll and personnel records.
• Securely and properly disposing of records once retention periods lapse.

Focus HR, powered by OneDigital, has helped more than 500 Arizona small businesses manage HR, payroll and benefits since 2003, with a local team based in Tucson.

Ready to strengthen your personnel-records process? Talk to Focus HR about handing off your retention program, or seek professional advice when a claim, audit or legal hold arises in the meantime.

This article provides general educational information and is not legal advice. Retention obligations can vary by industry, employer size, employee classification, government-contract status, benefit plan and the facts of a particular dispute. Arizona employers should consult qualified employment counsel before finalizing or changing a retention policy.

The post Personnel Document Retention Requirements in the USA: Federal and Arizona Rules appeared first on Focus HR Inc..

Between rising financial stress, growing employee expectations, SECURE 2.0 changes, and now the rollout of “Trump Accounts” under the One Big Beautiful Bill Act (OBBBA), many small business owners are asking the same thing:

“Is this something we actually need to care about?”

The answer is: probably yes — but cautiously.

Trump Accounts are being positioned as a new long-term savings vehicle for children, but they may also evolve into a new category of employee benefit. For employers, that creates both opportunity and risk. Like many new government-backed programs, there’s excitement around the concept, but also plenty of unanswered questions around compliance, administration, and practicality.

Here’s what small business employers should know before jumping in.

What Are Trump Accounts?

Trump Accounts are a new tax-advantaged savings account created under the One Big Beautiful Bill Act. They are designed for children under age 18 and aim to encourage long-term investing and wealth building from an early age.

Based on current guidance:

• Eligible children must have a Social Security number
• Annual contributions are currently capped at $5,000 per child
• Parents, grandparents, employers, and certain organizations may be able to contribute
• Contributions grow tax-deferred
• Employer contributions are proposed to be tax-free up to $2,500 per employee’s dependent, under new Treasury guidance.

The federal government is also expected to provide seed funding for some qualifying accounts.

At a high level, think of Trump Accounts as part retirement vehicle, part long-term savings strategy, and part financial wellness initiative.

Why Employers Should Pay Attention

At first glance, Trump Accounts sound more like a personal finance product than an HR strategy.

But that misses the bigger picture.

Employers are under growing pressure to help employees manage financial stress and improve long-term financial wellbeing — especially as healthcare costs, housing costs, childcare expenses, and retirement insecurity continue rising.

For many employees, traditional compensation alone no longer feels sufficient.

That’s why financial wellness benefits are becoming increasingly important in recruiting and retention strategies. Small businesses that cannot always compete with enterprise-level salaries are looking for more creative ways to support employees and differentiate themselves.

Trump Accounts may eventually become part of that conversation.

Especially for employers trying to position themselves as family-friendly, employee-focused workplaces.

What Employers May Be Able to Offer

One of the most interesting parts of the Trump Accounts framework is the possibility of employer contributions for employees’ children. Treasury’s August 2026 proposed rules confirm employers can contribute up to $2,500 annually tax-free, though the rule is not yet final.

That creates a few possible use cases:

• A family-friendly benefit for recruiting and retention.
• A financial wellness perk tied to long-term planning.
• A differentiator for employers that cannot compete on salary alone.

For employers comparing benefit options, this could eventually sit alongside other retirement and financial wellness tools, rather than replace them.

The Rules Are Still Evolving 

This is where employers need to slow down.

Trump Accounts are brand new, and many operational details are still unclear.

Questions remain around:

• Payroll integration (more below)
• Tax reporting obligations
• Administrative responsibilities
• Eligibility verification
• Documentation requirements
• Compliance oversight
• Employee communication
• Fiduciary exposure

Payroll and compliance experts are already warning employers not to move too aggressively until more guidance becomes available.

And honestly, this is where many small businesses get into trouble.

A benefit might sound great in theory… until it creates administrative complexity your internal team cannot realistically support.

Update: Treasury Releases Proposed Rules (August 2026)

On August 11, the Treasury Department and IRS released the first proposed regulations covering employer-sponsored Trump Account programs — answering some of the questions raised above, while confirming others are still unresolved.

Here’s what’s new:

• Two funding paths are now defined. Employers can contribute up to $2,500 per employee’s dependent, tax-free. Separately, employees can now defer their own pretax dollars via payroll into the account.
• A cafeteria plan structure applies. Contributions run through the same pretax mechanism many employers already use for health premiums and dependent care — familiar territory for most payroll systems.
• A safe harbor exists for the $1,000 federal match. Employers who simply match the federal pilot contribution (rather than running a broader program) can skip standard nondiscrimination testing, provided the match is offered equally to every employee with an eligible child.

But the administrative lift is real. Employers will need a written Section 128 plan document, and payroll providers will need to be able to route contributions to whichever trustee an employee’s account sits with — not just one default provider. FICA taxes still apply to these contributions, unlike most other pretax payroll deductions. Nondiscrimination testing questions also remain open, particularly around eligibility in workforces where few employees have qualifying children.

Our take: this is a step forward, not a finish line. The proposed rule is open for comment ahead of an October hearing, so further changes are likely. For most small businesses, the smartest move is still the one outlined above — ask whether employees genuinely want this before building the infrastructure to support it. If your workforce is hourly or lower-income, simply pointing employees toward the $1,000 federal seed money may deliver more value, faster, than setting up a full contribution program.

The Bigger Problem for Small Businesses

Trump Accounts are really part of a much larger trend:

HR and benefits administration are becoming dramatically more complex every year.

Small business owners are now expected to navigate:

• AI and workplace policy
• Pay transparency laws
• Leave law changes
• Rising healthcare costs
• Retirement plan changes
• Employee financial wellness
• Mental health expectations
• Payroll compliance
• Remote and hybrid work policies

And now potentially:
Trump Accounts.

For many businesses, the issue is no longer whether a benefit sounds valuable.

It’s whether the business has the systems, expertise, and HR infrastructure to implement it properly without creating more risk, confusion, or administrative burden.

How Small Businesses Should Approach Trump Accounts

For most employers, the smartest move right now isn’t rushing implementation — it’s strategic evaluation.

Before adding Trump Accounts to your benefits strategy, ask:

• Would employees genuinely value this?
• Does it fit our workforce demographics?
• Can our payroll and HR systems support it?
• Will it simplify our benefits strategy or add complexity?

Because in 2026, benefits are no longer just an HR checkbox. They directly impact recruitment, retention, employee trust, and business stability.

Looking Ahead

Trump Accounts may become a valuable option for some employers, particularly those focused on family-oriented financial wellness benefits. But for now, the smartest approach is to stay informed, monitor guidance, and avoid moving too quickly before the administrative and compliance details become clearer.

If your business is reviewing retirement plans, financial wellness initiatives, payroll systems, or overall HR strategy, now is the time to step back and evaluate whether your current approach is truly built for what employees — and regulations — now demand.

Book a free consultation > 

Clint Parry, MBA, SHRM-SCP is the Business Development Manager at Focus HR. Based in Arizona, Clint works with growing companies to help them turn HR from an administrative burden into a strategic advantage.

The post Trump Accounts Explained: What Small Business Employers Need to Know appeared first on Focus HR Inc..

Then diligence starts, and a buyer’s HR and employment attorney finds a cluster of issues that weren’t on the P&L at all.

Hidden HR liabilities don’t usually kill deals outright. Instead, they give buyers leverage: to renegotiate price, widen escrow holdbacks, add indemnification clauses, or slow the process down while issues get resolved. In our last post, we looked at key-person dependency — the risk that relationships and knowledge sit with too few people. This post is about the other side of the same coin: the hidden obligations attached to those people that sellers often don’t see coming.

Why “Clean Books” Aren’t Enough

The financial statements show revenue, costs, and profit. What they usually don’t show is weakness in your HR infrastructure. For instance:

• Whether your 1099 contractors should actually be W2 employees or some “salaried” employees are actually misclassified and owed years of unpaid overtime
• Whether health plan, 401(k), or COBRA administration has been handled in compliance with ERISA and IRS rules
• Whether personnel files, performance records, and disciplinary documentation exist to support past employment decisions
• Whether turnover is quietly high, signaling morale or management problems a buyer will inherit — we cover this in depth in the next post in this series

These aren’t exotic legal risks. According to Mayfaire Row’s analysis of acquisition survey data, HR and employment issues are routine findings in small business acquisitions — and they routinely affect deal terms.

Here are the five areas buyers look hardest at.

1. Worker Misclassification

This is consistently the highest-stakes HR finding in small business diligence.

Treating workers as independent contractors when they legally qualify as employees creates exposure across multiple fronts: back payroll taxes, interest and penalties, potential overtime under the Fair Labor Standards Act, and retroactive benefits obligations. Buyers treat that exposure as a contingent liability — meaning it gets priced into the deal, either through a price reduction, an indemnification clause, or money held in escrow until the risk period passes.

Littler Mendelson’s 2023 acquisition survey found worker misclassification in 34% of small business acquisition targets — roughly one in three deals. For businesses in industries that lean heavily on contractors (marketing, delivery, cleaning services, trades), the rate is higher still.

The fix: audit every 1099 relationship before you go to market. The IRS and DOL each apply their own tests to determine whether a worker is genuinely independent. If there’s any doubt, get an employment attorney’s opinion before a buyer’s attorney forms their own.

2. Unfunded PTO Liability

Accrued but unpaid paid time off is earned compensation. In most states, it’s a balance sheet liability — money owed to employees if they leave. The problem is that most small businesses don’t track it with the same discipline they track accounts receivable, and it rarely appears clearly on the balance sheet.

To illustrate the scale: a 20-person company where employees average 10 days of accrued PTO at $30 an hour is carrying roughly $48,000 in unfunded leave liability. For professional services businesses with salaried staff and generous PTO policies, the number grows quickly. If it shows up in diligence unannounced, it affects the working capital calculation and can become a negotiating point. If it was earned, it’s often owed. Get a current PTO accrual schedule reconciled against payroll records before you’re in front of a buyer.

3. Missing or Weak Employment Agreements

This section covers two related issues that often show up together in diligence: weak employment agreements and gaps in personnel documentation. Both create uncertainty for a buyer — and uncertainty in diligence becomes leverage.

Employment agreements

Many small businesses run for years without formal written employment agreements for key staff — and it works fine, until a sale. At that point, a buyer needs to know what happens to your people after close. Without written agreements, there’s limited contractual protection around notice periods, confidentiality, and non-solicitation. There’s nothing in writing to prevent a key employee from leaving the week after close, taking client relationships or institutional knowledge with them. Well-drafted agreements covering non-solicitation (typically 12–24 months), confidentiality, and clear compensation terms give a buyer something to stand on.

Personnel files and HR documentation

This is actually the more common issue in small business diligence. Buyers will ask to see personnel files during due diligence — and in many small businesses, those files are incomplete, inconsistent, or effectively nonexistent. What they’re looking for includes: offer letters and compensation records for each employee, signed acknowledgment of key policies (handbook, code of conduct), performance review history, disciplinary documentation, and records of any workplace incidents or complaints.

Missing or thin personnel files create two problems. First, they make it hard for a buyer to verify what they’re taking on. Second, if there’s ever a dispute with an employee post-sale — a wrongful termination claim, a harassment allegation — sparse records leave the business with no paper trail to defend itself.

Before you go to market: audit your personnel files for completeness. Every current employee should have a file that tells a clear, consistent story from hire to present.

4. Payroll and Wage Compliance

Payroll errors and wage and hour compliance gaps are another common diligence finding. This includes misclassified salary vs. hourly status, unpaid overtime, incorrect overtime calculation methods, and gaps in record-keeping.

Buyers and their employment attorneys will review payroll records looking for patterns that suggest systemic compliance issues rather than one-off errors. A pattern of the same type of error — applied across multiple employees over multiple years — can become the basis for a price adjustment or an indemnity, because it implies an ongoing liability rather than an isolated mistake.

Clean, consistent payroll records that match your employment classifications and your state’s wage and hour rules are worth reviewing well before you go to market.

5. Benefits and COBRA Obligations

Employee benefits create obligations that follow the business — and compliance gaps here are more common than most small business owners expect.

Before closing, buyers will typically review the current health insurance plan (contribution rates, upcoming renewal dates, and whether the plan has been administered correctly), COBRA administration processes for departing employees, and retirement plan status.

On the retirement plan side, 401(k) plans carry specific ERISA compliance obligations that are easy to let slip in a small business: timely deposit of employee deferrals, accurate plan document maintenance, required annual testing (ADP/ACP tests for non-discrimination), and filing of Form 5500. If any of these have been missed or administered inconsistently, a buyer’s ERISA review will find it — and the correction process can be time-consuming and costly if it hasn’t been done before diligence.

The practical fix: if you have a 401(k) or other retirement plan, have a benefits advisor or ERISA attorney review plan compliance before you go to market. The correction programs available proactively (through the IRS’s EPCRS program, for example) are significantly less painful than having the issue surface as a buyer’s negotiating point. And make sure COBRA notices and administration are documented and current — this is a routine compliance gap that’s straightforward to fix but shows up reliably in diligence.

What These Gaps Have in Common

None of these issues are impossible to fix. What makes them problems is when they’re found. Discovered by a buyer’s attorney during diligence, they become leverage. Identified and resolved by the seller before going to market, they’re just operational cleanup.

The difference between the two outcomes is usually 12–18 months of lead time.

What to Do Before You Go to Market

• Audit every contractor relationship against IRS and DOL classification tests.
• Reconcile PTO accruals for every employee and reflect them accurately in your financials.
• Review employment agreements for key staff — have an employment attorney assess enforceability and draft replacements where needed.
• Audit your personnel files — every employee should have a complete file from hire to present, including offer letter, policy acknowledgments, performance history, and any disciplinary documentation.
• Check payroll for systematic errors in classification, overtime calculation, and record-keeping.
• Review 401(k)/ERISA compliance — confirm timely deferrals, annual testing, Form 5500 filings, and plan document currency. Have COBRA administration documented and current.
• Document your HR policies — buyers want to see that practices are consistent and written down, not managed by memory.

If you want to know where your business stands before a buyer starts asking, book a Focus HR exit-readiness review. It’s the same work — done on your timeline instead of theirs.

Clint Parry, MBA, SHRM-SCP is a Senior Business Consultant at Focus HR, now powered by OneDigital. Based in Arizona, Clint works with growing companies to help them turn HR from an administrative burden into a strategic advantage.

The post The HR Gaps That Create Hidden Liabilities When Selling appeared first on Focus HR Inc..

Then a key employee finds out and quietly starts taking calls.

It happens more often than sellers expect. And the timing is always bad — right when the deal is most fragile.  A team member leaving during due diligence can stall or sink a deal. One leaving in the first year after close can quietly unravel the value the buyer paid for — and come back to you through earn-out adjustments or indemnity claims.

The good news: this is one of the more solvable problems in exit planning. It just needs to start earlier than most owners think.

Turnover Before the Sale: The Signal Buyers Are Already Reading

Before we get to retention strategy, there’s something more immediate worth addressing: what your current turnover rate is saying to a buyer right now.

High turnover isn’t just an operating cost — it’s a red flag. Buyers read it as a signal that there may be morale problems, management issues, or a culture that depends heavily on the owner’s presence to hold together. Any of those things creates a question mark over whether the business will keep performing after you leave.

If your business has seen above-average turnover in the past two or three years, a buyer’s due diligence will find it. Exit interviews (if you have them), payroll records, and a simple headcount comparison across periods tell the story pretty clearly. In many M&A contexts, acquired firms lose around 40% of managers in the first two years — three times the normal rate — so any pattern of high turnover before sale raises red flags about what might happen after.

This doesn’t mean a business with any turnover is unsellable. It means unexplained turnover is a liability. If you’ve had people leave, be ready to explain why — and if the honest answer is “because the culture hasn’t been great” or “because we’ve been understaffed and people burned out,” that’s worth addressing now rather than having it surface in a buyer conversation.

A few things worth doing before you go to market:

• Pull your headcount by year for the past three years and understand the story.
• If turnover has been high, identify the real reasons
• Fix what’s fixable. A business that made genuine improvements to how it treats people is a better story than one where the problem is still quietly ongoing.

A buyer isn’t expecting perfection. They’re expecting honesty and evidence that you understand the business you’re selling them.

Why Retention Strategy Starts Before a Buyer Appears

There’s a common pattern in small business sales: the owner waits until late in the process to loop in key staff, assuming they can manage the conversation when the time comes. Often, the key employee finds out another way first — through a rumor, a behavioral shift, an offhand comment — and starts quietly weighing their options before anyone has spoken to them directly.

By the time the retention conversation happens, you’re already behind.

For buyers, a stable team is part of what they’re buying. Losing key people in due diligence or in the first year can erode the value they paid for and trigger earn-out or indemnity risk.

Research from Towers Watson across 180 companies found that nearly three-quarters (72%) of companies that successfully retained staff through a sale process had identified who they wanted to keep and started retention efforts during due diligence or negotiations — not after close. Among less successful companies, 58% didn’t start until the deal was already done.

The other finding worth sitting with: 92% of successful companies used financial retention incentives, but 74% also used personal outreach from leaders and managers — three times the rate of less successful ones. Money gets attention. A direct conversation from someone the employee trusts is what actually keeps them.

Who Actually Needs a Retention Agreement

Not everyone. The list should be short and deliberate.

Think about it from the buyer’s perspective: whose departure would change what they’re actually buying? That might be a long-tenured operations manager who knows how everything runs. A salesperson who owns the relationship with your top three clients. A technician whose knowledge isn’t written down anywhere.

It’s rarely the whole team. But it’s also rarely as obvious as “the management team” — sometimes the most critical person in a small business is someone without a senior title who just knows everything.

Identify those people specifically. Then think about what it would take to keep them through the transition.

What Retention Agreements Look Like in Practice

There’s no one-size approach, but BizBuySell’s seller guidance outlines the structures that work most often for small businesses:

Stay bonuses are the most common — a payment (or series of payments) tied to staying through close and for a defined period afterward, often 12 months. Splitting the payment between the closing date and the end of the retention window gives the employee a reason to stay engaged, not just to show up.

Phantom equity arrangements give a key employee a small percentage of the sale proceeds at close — say, 0.5–1% of the transaction value. It gives them a genuine stake in the deal succeeding, not just surviving it. For a key employee who’s contributed significantly to the business’s value, it’s also a way to recognize that fairly.

On amounts: WTW’s 2024 M&A Retention Survey found median retention payments typically run 75–100% of base salary for the most senior roles, around 50% for other senior staff, and 30% for other salaried employees. For a small business, these are starting-point benchmarks — the right number depends on how hard the person is to replace and how much of the deal value depends on them staying.

The Conversation Most Owners Dread Having

There’s no way around it: at some point you have to tell your key people you’re selling.

Most owners put this off as long as possible. The fear is understandable — you don’t want to trigger a wave of anxiety, you don’t want word getting out before you’re ready, and you’re not sure how people will react. But Morgan & Westfield’s guidance on employee communication during a sale makes a useful point: the most common reason key employees leave isn’t that they’re unhappy with the new owner. It’s the uncertainty that built up while they were kept in the dark.

Employees who find out through the grapevine have weeks or months to sit with their worst-case scenarios before anyone speaks to them directly. By the time you have the conversation, they’ve already half-decided.

The conversation doesn’t need to be exhaustive — it needs to answer four things:

• What’s happening
• Why
• What it means for them specifically
• What happens next

You don’t have to have every answer. But you do have to show up and have it directly, one-on-one, with the people who matter most to the business.

The Link to Your Broader Exit Readiness

This post sits alongside two others in this series worth reading together. Key-Person Risk: The Quiet Deal Killer covers what happens when too much of the business depends on too few people — which shapes who’s on your retention list. The HR Gaps That Create Hidden Liabilities covers the contractual side: non-solicitation clauses, employment agreements, and what happens when those aren’t in place before a sale.

Retention planning connects both. You need to know who’s critical. You need the agreements to protect the business if they leave anyway. And you need the conversation to give them a reason to stay.

If you’re thinking about selling in the next one to three years and want to think through where your retention risks actually sit, book a consultation with the Focus HR team. It’s easier to solve before a buyer starts asking questions. 

Clint Parry, MBA, SHRM-SCP is a Senior Business Consultant at Focus HR, now powered by OneDigital. Based in Arizona, Clint works with growing companies to help them turn HR from an administrative burden into a strategic advantage.

The post Retention Before Sale: How to Keep Critical Staff Through Due Diligence and Transition appeared first on Focus HR Inc..