If you’re considering entering into an agreement with a professional employer organization (PEO), chances are you have questions about how PEO pricing works.
As a solution that helps you consolidate your employer overhead, minimize your risks and manage your workforce more efficiently, PEOs price their services according to:
- The value they will deliver to your company
- The amount of HR-related risk the PEO is assuming under their agreement
When you inquire about how the PEO prices its services, it’s wise to approach your conversations with the following information in mind:
- How much does it already cost you to handle the services the PEO is offering to take on?
- What kind of help do you value most?
- What are you willing to pay for that support?
To help you understand how PEO pricing works, let’s discuss these items first.
What is your employer overhead?
Being an employer comes with many HR-related costs beyond the cash compensation you pay to your employees, such as:
- Payroll taxes (FICA, FUTA, Social Security, Medicare)
- Worker’s compensation insurance coverage
- Statutory insurance and paid leave programs (e.g., state-mandated disability, family medical leave)
- Employee benefits
- Employment practices liability insurance (EPLI)
- Administrative costs (both tangible and intangible)
- Tangible costs could be those associated with payroll administration
- Intangible costs might include the time and effort that comes with administering payroll
Employer overhead (in excess of compensation) typically costs between 1.25% and 1.4% of an employees’ salary, according to the U.S. Small Business Administration. It’s a substantial part of your budget and also a top contributor to the time, effort and sanity you expend running your organization.
Since PEOs help companies consolidate these employer-related costs, your current employer overhead is an important factor to consider.
What are a PEO’s services worth to your organization?
A PEO will work alongside your business as a co-employer and provide a full-service HR solution that helps you manage being an employer, giving you:
- Administrative relief
- Reduced liabilities and risk management
- HR support
- A streamlined technology platform
Additionally, since the PEO will become a co-employer of your employees, your employees will generally have access to PEO-sponsored benefit plans.
The best PEO for you will:
- Give you an end-to-end solution with flexibility
- Provide desirable employee benefits (health and welfare, retirement, etc)
- Support you with administrative services that:
- Fit your budget
- Are well worth the cost
Every PEO company prices their services differently, and you’ll find vast differences in the level of HR support and type of technology each PEO will offer. That’s why it’s important to know exactly what qualities you’re looking for in a PEO.
To assess the value of a PEO, you should:
- Evaluate the services provided by the PEO.
- Determine how the services will be provided.
- Person-to-person through an account executive
- As an on-demand, online software solution
- Through a team of experienced HR professionals in various HR specialties
- Or in some combination of the above
- Review the PEO’s HR talent and consider how much you plan to rely on their HR-related services.
- Evaluate the capabilities of the software that would be available to you and your employees to accompany those services.
When you begin asking about PEO pricing, don’t let the numbers alone dominate your thinking.
Not only do you have to make sure that a PEO’s costs make business sense to you, but you must also be happy with the value you’re getting for the price you would pay.
A large part of the value of a PEO is that the PEO will take on many time-consuming and distracting administrative burdens that will allow you to focus on running your core business, which often translates into a more profitable business.
PEO cost and pricing breakdown
Now that you have a framework for assessing the value of a PEO, we can look at how PEOs charge for their services. Some PEOs will give you an itemized invoice for their services, and others may charge a single, comprehensive service fee made up of various costs, such as direct costs and administrative fees.
Direct costs
Direct costs will be somewhat uniform from one PEO to the next and can be compared to your current direct costs as an employer. These costs may include charges for:
- Payroll taxes (FICA, Social Security, Medicare)
- Workers’ compensation insurance
- Employee benefits
- Employment practices liability insurance (EPLI)
Administrative fees
Another type of cost PEOs may charge is an administrative fee, which typically covers the PEO’s HR, compliance and administrative services. These costs are where you’ll see most variation among PEOs, and may include charges for:
- Payroll administration
- Workers’ compensation administration and safety
- Benefits administration
- HR compliance
- HR technology
- HR services
Calculation models for PEO administrative fees
There are two common models PEOs use to calculate the administrative fees discussed above:
- Percentage-based – the PEO’s administrative fees are calculated as a percentage of your employees’ gross payroll
- Flat charge – the PEO’s administrative fees are calculated as a fixed cost per employee
The current structure of your organization and the way you plan to grow in the future will determine which model is a better fit for you. It’s wise to conduct a break-even analysis to understand at what point a percentage-based fee is more expensive than a flat charge.
If you have or will hire lots of low-wage employees in the future, the percentage-based administrative fee may be preferable. (Again, this is dependent upon the results of your break-even analysis.) However, you will pay more to the PEO just for increasing your employees’ pay, not because the PEO is providing you added value or a higher level of service. For some companies, that can be a significant drawback.
If commissions, bonuses and pay increases are a part of your compensation strategy, a flat fee per employee gives you more flexibility as you adjust or grow your payroll without incurring additional fees from your PEO. When a PEO’s administrative fees are calculated as a fixed cost per employee, the PEO and client company share in the increased liability when new employees are hired.
It’s all about trust
When you enter a relationship with a PEO, you will be trusting them with payroll as well as other employer responsibilities, such as employee benefits.
At the end of the day, you’ve also got to be able to trust the system they use to bill you for their services.
Since this can vary so dramatically from one PEO to another, ask the PEOs you’re considering to be transparent with you about their fees, including how they calculate administrative fees.
Look for a PEO that gives you the tools and information you need to make the best decision for your business.
For more insight into building a relationship with the best PEO for your organization, download our free guide: HR outsourcing: a step-by-step guide to professional employer organizations (PEOs).