If your company isn't partnered with a best-in-class PEO, your HR costs may be higher than they should be. Administrative fees are part of working with a PEO, but you shouldn't be expected to pay for services you do not want or will not use.
Unfortunately, some PEOs do just that. They combine the overall cost of doing business and charge a % of the total for their administrative fees which leaves business owners with a lump sum and the uncertainty of what they are being charged for because of the lack of transparency.
The average PEO provides a positive return on investment, even if they are overcharging you. Still, your return on investment could be even higher when your PEO’s charges only include the services your company needs.
All PEO companies have minimum services that they require for their client companies. Each PEO varies, but common standard service requirements often include payroll and workers’ compensation insurance.
All PEOs charge a monthly admin fee for their services. Depending on the PEO, you might be charged one of two ways: per employee per month (PEPM) or percentage of payroll (POP). PEPM is a flat monthly fee charged for each employee you have. POP administration fees are based on payroll and bundled with your state taxes, federal taxes, and workers' compensation insurance.
Some PEOs set their admin fee based on the assumption that you will take advantage of every service they offer. This is known as charging client companies on a "fee-inclusive" basis. It's similar to taking a vacation at an all-inclusive resort. You pay for everything the resort has to offer, but you might not partake in all the activities or use all the amenities.
Fee-inclusive arrangements with a PEO are typically not beneficial for businesses, especially those with an existing in-house human resources team. Each business is different in terms of size and needs, and many do not need all the extra services a PEO provides. PEOs that offer extensive human resources support typically take care of the majority of HR administrative tasks. Examples of additional tasks beyond standard services include:
Fee-inclusive arrangements lack transparency. Not only are you likely getting overcharged, but the PEO typically does not break down your total fee and let you know what all you are paying for.
Small businesses that are growing fast especially benefit from using a PEO. Yet, no one wants to pay for things they do not need. Best-in-class PEOs understand this. They are flexible and strive to configure the "right-fit services" for their clients.
Fee-inclusive PEO arrangements might seem like they should be a better deal. After all, when you order a la carte at a restaurant you typically pay more than if you order the entire meal. The difference in this example is that you typically do not throw half of your meal away at a restaurant, but you can easily be paying a fee and not use 50 percent of the services offered.
Ultimately, customizing PEO services to the client company lowers fees and offers better value for your company because you only pay for the services you use. Additionally, PEOs who offer customized services for their clients create transparency so a company knows exactly how much they are paying and what their investment includes.
If you think your PEO fees are too high, they might be. It's important to check your contract and find out how your PEO is charging you. You want to ensure you aren't being charged on a fee-inclusive basis and paying for services you simply cannot or do not use.
If a PEO is not flexible enough to customize their offerings for you, then they won't be able to provide the unique service that your unique company needs. Not only do different businesses have different needs when they work with a PEO, but those needs change with time. Working with a best-in-class PEO not only provides the flexibility you currently need, but also the flexibility you need in the future if you grow your company.
But how do you know whether you are dealing with a best-in-class PEO or a sub-par one?
Download our “Grade Your PEO Scorecard” and learn within minutes whether you are with the right PEO or whether you should look for a higher-quality one.
Wendy Katz is the Chief Financial Officer at Questco Companies. Wendy is aiding our clients’ drive for profitability and compliance by providing pragmatic insights and sound financial solutions to constantly evolving HR challenges.