HR and payroll separation is the visible workstream.

Why HR and payroll are the visible workstream.

No other separation workstream touches every employee. IT separations are felt by those involved in cutover. Finance separations are felt by the controller team. HR and payroll are felt by everyone who collects a paycheck, files a leave request, or asks about benefits. The visibility means a single missed run becomes a leadership credibility issue, not a technical issue.

The implication is risk profile, not timeline. HR and payroll separation can be completed in 6 to 10 months, which is shorter than IT and finance. The shorter timeline is offset by the lower tolerance for error. A finance close can run two days late and the audit committee tolerates it. A payroll run that misses by even a day creates a different category of problem.

The HR separation plan has to anticipate the visibility. Employee communications, manager training, escalation paths for individual cases, all of these matter more in HR than in any other workstream. The Newco HR director should be in place by day 30 because the team has to know who is accountable when an issue surfaces.

Sellers know HR and payroll are politically sensitive. The TSA pricing reflects that. HR services are often priced higher per unit than the underlying processing cost would suggest, because the seller knows the buyer cannot afford to push too hard on the line item. The right answer is to plan the exit aggressively and renegotiate price after signing if the exit slips.

The HRIS decision sets the timeline.

The Newco HRIS decision is made in the first 30 days post-close. Most carve-outs land on one of three options. Adopt a clone of the seller's HRIS, which is fastest but carries forward seller specific configuration. Stand up a new tenant of the same vendor, which preserves the operating model but requires a fresh implementation. Move to a different vendor, which is the longest path and rarely makes sense in the TSA window unless the seller's HRIS is being sunsetted anyway.

A clone of the seller's HRIS can stand up in 90 days. A fresh tenant typically takes 120 to 180 days. A new vendor implementation runs 9 to 18 months and usually exceeds the TSA window. The vendor decision drives every downstream date including the first independent payroll run.

Data migration is the silent work. Every employee record, every dependent, every benefit election, every accrued leave balance, every prior compensation event. Most sellers maintain reasonable employee master data. Most do not maintain clean historical compensation, prior bonus, or equity records. The buyer has to scope the historical depth needed and budget the data work accordingly.

Integration footprint matters as much as the core HRIS. Time and attendance, performance management, learning management, expense reporting, applicant tracking. Each integrates with the HRIS. Each has to be either migrated or replaced. A Newco that wants a clean HRIS landscape rebuilds the entire stack. A Newco that wants to land Day One on time keeps the seller's stack and replaces components over the following year.

The first independent payroll is the test.

The first independent payroll run is the single most watched event in the separation. Every employee sees the result. Tax withholding has to be right. Garnishments have to be honoured. Direct deposit has to land in the right account. PTO accruals have to roll forward correctly. Year to date totals have to reconcile against the seller's records.

Parallel payroll is the right risk mitigation. Run the same period on both seller and Newco systems for three consecutive cycles, reconcile to the cent, then cut over. Parallel payroll is expensive because the seller continues to charge under the TSA and the Newco is paying the new provider. The cost is acceptable. The alternative is taking the risk of a real cutover without rehearsal.

Tax reporting boundaries deserve special attention. Year to date wages and tax withholding cross the seller and the Newco when the cutover happens mid year. The buyer's payroll provider has to either receive the year to date balances or treat the cutover as a tax restart. Both approaches work. The reconciliation work, however, is non trivial. Plan for an extra two weeks at year end to handle the W-2 or P60 implications.

The escalation path for individual payroll cases has to exist before cutover. Every Newco employee should have a clear contact for a missing direct deposit or a missing reimbursement. Without a documented escalation path, the operating partner's office becomes the de facto escalation point on day one, which is not a sustainable place to land.

Benefits administration and the broker handover.

Benefits administration is rarely simple in a carve-out. The seller's plans cannot follow the Newco automatically. New medical plans, new dental, new vision, new 401(k), new disability, new life insurance. Each requires a broker, a carrier, an enrolment process, and a payroll integration. The work runs in parallel with payroll separation but on a different timeline.

The broker is the first hire. A benefits broker for the Newco needs to be in place within 60 days of close. The broker drives carrier selection, plan design, enrolment material, and the open enrolment window. Without a broker, the buyer is running benefits selection in parallel with everything else, which is not feasible.

The 401(k) transition deserves dedicated attention. Employee balances must transfer to the Newco plan or roll over to an IRA. Loan balances must be honoured under the new plan or accelerated. Match contributions have to continue without gap. The lead time on a new 401(k) plan is 90 to 120 days with a reasonable provider. The buyer should start this work in the pre-signing window if possible.

Communication to employees is constant. A monthly benefits update from close through year end is the right cadence. Employees need to know when their plans change, what changes, and how to enrol. Silence creates fear. Clear, dated, specific communication preserves trust. Sequenced milestone setting is covered in TSA exit milestones, explained.

Cost ranges and the stranded cost trap.

HR and payroll TSA fees typically range from $25K to $120K per month for a mid-market carve-out. The variance is driven by employee count, geographic footprint, and the depth of benefits administration the seller is providing. A 300 employee single country carve-out at the low end. A 3,000 employee multi country carve-out with international payroll at the high end. The reference ranges by workstream are in TSA exit cost benchmarks.

Per employee per month metrics are useful here. A typical range for the full HR and payroll bundle is $40 to $120 per employee per month. The seller's quote should reconcile to a per employee per month figure that holds up when compared with what a market provider would charge. Above $150 per employee per month is usually a place to push back.

The stranded cost trap is real in HR. The seller may continue to charge for HR shared service support after the Newco has stood up its own HR team. Employee data may still flow back to the seller for compliance reasons even after operational responsibility transfers. Identifying and turning off these residual services is a discrete piece of work in the last 60 days of the TSA. Without it, the buyer pays for an HR organisation it no longer uses.

The Newco standup cost for HR is usually $30K to $100K per month at steady state for a mid-market carve-out, on top of TSA fees during transition. New HRIS subscription, new broker fees, new payroll provider fees, new background check and screening contracts. Building the standup budget in parallel with the TSA exit budget is what produces a clean financial picture.

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