August 15, 2023 | By Questco Companies
Navigating PEO pricing models can feel like a Herculean task. With myriad components such as administrative fees, HR costs, and payroll costs, it's no wonder that understanding the intricacies of PEO costs is often seen as a complex endeavor.
Yet, the importance of this understanding cannot be overstated.
In a surprising twist, a study by the National Association of Professional Employer Organizations (NAPEO) found that the average return on investment (ROI) for businesses partnering with PEOs is an impressive 27.2%.
However, the positive ROI will only appear if you partner with a PEO that uses fair pricing models.
But which PEO pricing model is best for your company?
Below, we’ll break down the elements that constitute PEO fees, from bundled quotes to unbundled quotes, and everything in between. Then, we’ll delve into the factors that influence PEO pricing, the components of pricing, and the various calculation models for PEO administrative fees.
Two primary models dominate the industry: bundled quotes and unbundled quotes.
In a bundled quote model, PEOs charge a single percentage amount for every payroll. This model is akin to purchasing a package deal, where all services are included for a set price. It's simple but may not always be the most cost-effective option.
The bundled quote includes all direct costs, such as payroll taxes, workers’ compensation insurance, employee benefits, and administrative fees for services like payroll administration, HR compliance, and benefits administration.
Unbundled quotes break down the pricing into major categories. These typically include statutory costs, workers’ compensation insurance, state unemployment taxes (SUTA) cutoffs, and administrative fees. This model offers a more granular view of where your money is going, providing a detailed breakdown of each service and its associated cost.
While the unbundled model may seem more complex, unbundled pricing offers improved transparency. Employers can see what they're paying for, which can benefit budgeting and cost management. However, it's important to remember that the total cost may still vary depending on the specific services your organization needs.
In both models, the PEO fees are influenced by various factors, including the value delivered to the company, the amount of HR-related risk the PEO is assuming, the current employer overhead, and the services a PEO offers to the organization.
When it comes to PEO pricing, the two major components are direct costs and administrative fees.
Direct costs are those that are directly associated with employing staff. These include payroll taxes, workers’ compensation insurance, and employee benefits. These unavoidable costs are part of the package when partnering with a PEO.
Payroll taxes, for instance, are a significant part of the direct costs. These are taxes that employers are legally required to withhold from employees' wages, including federal income tax, Social Security, and Medicare.
Workers’ compensation insurance is another crucial component. This insurance provides wage replacement and medical benefits to employees injured while performing their duties. The cost of workers comp insurance can vary depending on the work's nature and the associated risk.
Employee benefits, such as health insurance, retirement plans, and paid time off, are also part of the direct costs. These benefits are essential for attracting and retaining top talent and are often required by law.
Administrative fees cover the cost of the services provided by the PEO. These include payroll administration, workers’ compensation and safety administration, benefits administration, HR compliance, HR technology, and HR services.
Payroll administration, for instance, involves managing all aspects of paying employees, including calculating pay, withholding taxes, and ensuring that employees are paid on time.
Workers’ compensation administration and safety involve managing workers' compensation claims, ensuring workplace safety, and complying with OSHA regulations.
Benefits administration includes managing employee benefits, such as health insurance and retirement plans, while HR compliance ensures that the company follows all relevant labor laws and regulations.
HR technology refers to the software and systems used to manage HR tasks, while HR services can include a wide range of functions, from recruiting and hiring to training and development.
With the definition of administrative fees in mind, the question becomes: how are these fees calculated?
Administrative fees can be calculated in two primary ways: percentage-based charges or flat charges.
In the percentage-based model, the administrative fees are calculated as a proportion of an employee's gross payroll. This approach is akin to a sliding scale, where the prices fluctuate in tandem with the payroll. If an employee's wages increase, so too does costs.
Conversely, if the payroll decreases, the fee follows suit. This model provides flexibility and scales with the company's growth or contraction. Percentage-based models are sometimes referred to as “percentage of payroll” (POP).
The flat-charge model operates differently. Here, the administrative fees are calculated as a fixed cost per employee, irrespective of their wages. This model offers predictability, as the fee remains constant regardless of changes in an employee's salary. It's a straightforward approach that allows for easy budgeting and financial planning. Flat-charge models are also called “per employee per month” (PEPM).
Both models have their merits and can be suitable depending on a business's specific needs and circumstances.
The percentage-based model might appeal more to businesses with variable payrolls, while the flat charge model could better fit those seeking stability in their expenses.
Start by assessing the value a PEO brings to your company. This isn't just about the bottom line. It's about the PEO's comprehensive offerings, from payroll administration and HR compliance to safety training and talent acquisition assistance.
Consider the time and resources saved, the increased efficiency, and the peace of mind from knowing your HR tasks are handled by experts.
Next, conduct a break-even analysis. This involves comparing the costs of partnering with a PEO against the current employer overhead.
Remember, PEO costs aren't just about the administrative fees. They also include direct costs such as workers' compensation insurance, and employee benefits. By comparing these costs, you can understand the financial implications of partnering with a PEO.
Finally, consider the level of trust and transparency with the PEO. A PEO's billing structure should be clear and straightforward.
A reputable PEO should be able to break down your total fee and let you know exactly what you're paying for. This level of transparency is crucial for building a strong and beneficial partnership.
However, beware of "fee-inclusive" billing, which can lead to overpaying for unused services.
Fee-inclusive billing is a pricing model where a PEO charges a single fee for all its services, regardless of whether they are all utilized by the client.
While this model might seem convenient, it can lead to several issues. The first problem is the potential for overpayment. With fee-inclusive billing, you might find yourself paying for PEO services your business doesn't need or use.
This lack of service customization can lead to inflated PEO fees.
The second problem is the lack of transparency. When a PEO bundles all its services into one fee, it can be challenging to understand what exactly you're paying for. This can make it difficult to assess the value you're getting from the PEO, and whether the cost aligns with the services you're actually using.
The solution lies in finding a PEO that offers both flexibility and transparency. Such a PEO will tailor its services to your specific needs, ensuring you only pay for what you use. In addition, they will provide clear billing that lets you know exactly what your investment covers.
As mentioned earlier, the average ROI from partnering with a PEO is 27.2%.
This is where a best-in-class PEO comes into play. These organizations understand the unique needs of each business and offer customized services that align with those needs.
This approach ensures that employers get the most value from their investment and eliminates the risk of overpaying for unused services.
A best-in-class PEO is flexible, adapting its offerings to your company's evolving needs. This flexibility is crucial, especially for growing businesses whose HR requirements can change rapidly. By tailoring their services, these PEOs ensure that employers only pay for what they use, leading to significant cost savings.
Transparency in the pricing model is another hallmark of a best-in-class PEO. These organizations break down their fees, allowing employers to see exactly what they're paying for. This level of transparency eliminates any uncertainty around billing and helps build trust between the PEO and the client company.
In essence, a best-in-class PEO is a partner that understands your business's unique needs and offers services that provide the best value. By choosing such a PEO, employers can ensure they're getting the most out of their investment while avoiding unnecessary costs.