Cost is one of the most important considerations when looking at a potential PEO (Professional Employer Organization) partner. For most companies considering PEOs, HR needs have become either costly or excessively complex, or the organization wants the risk-management benefits of having a professional handle HR. This means that the PEO has to make a case that the benefits it provides will justify the cost, and that working with them will ultimately save your organization more money than you spend.
So how much should you expect to pay, and how do you calculate your savings? We’ll look at both questions in detail.
The Two Pricing Models for PEOs
Most PEOs will price their services using one of two models:
- A percentage of payroll. Percentages can vary depending on the size of your organization and the type of workers you employ. Generally, expect anywhere from 2% to 12% of payroll, with many organizations hovering near the middle of that range.
- A flat fee per employee per month. This is preferred by many organizations because it does not tie PEO cost to employee compensation, allowing for greater flexibility as you grow. Again, the price will vary substantially depending on your organization, with about $40/month (per employee) on the low end ad $160/month on the high end.
Each of these models has its own advantages. A percentage is easy to calculate and grows fluidly with your organization. Flat fees do offer the flexibility mentioned above, but may not make sense if you expect to add large numbers of lower-earning employees; in that case a percentage will save you more.
To get the best deal, you should consider both your current organization structure and the way you would expect to grow.
What makes a PEO more expensive for some organizations?
As you can see, that’s a wide swing in how much a PEO will cost. Most of the difference comes down to:
- The size of your organization. As with many professional services, rates are lower for large organizations than they are for smaller ones, because the PEO’s fixed costs are spread over a higher number of workers. However, many PEOs will have packages designed for small businesses to make their prices affordable—and small businesses are likely to realize much larger insurance savings by working with a PEO.
- Salaried vs. wage workers. Employees who receive an hourly wage generally carry a higher price from a PEO than those who are salaried. This is largely because of the higher expected turnover with wage workers and the higher rate of disputes, unemployment claims and more.
- Administering benefits is a large part of the PEO’s cost, and is reflected in their pricing—ifbenefits are involved. If many or all of your workers do not receive benefits, the price will be lower. This offset the higher PEO cost of wage workers for many organizations.
How much money will the PEO save me?
There are several factors that determine your ROI when working with a PEO. They include the three main advantages or savings a PEO provides:
- The real savings on HR costs. You need to consider the cost reduction in benefits administration, health insurance costs, and uninsurance costs, not just the wage savings on HR staff.
- Risk/liability. For many companies, the greatest benefit a PEO offers is risk management. This can be hard to quantify, but if you have a target for reduction in workers compensation costs, payroll errors, unemployment claims or other risks, that dramatically improves the math of hiring a PEO.
- Fringe services that you’ll use. Some PEOs, like NetPEO, offer additional services such as recruiting, onboarding, job training, employee performance improvement, and even safety training. If you are getting these services—and if they will bring real value to your company—factor them into your decision. However, not every service delivers equal value. For example, if you have few safety issues and aren’t in a high-risk industry like construction, then safety training may not matter to you.
Service is also a consideration. At NetPEO, we not only work to save you money—we also deliver immediate access to live customer support and strategic help for any issue you face. Let us give you a free consultation on your PEO needs. Fill out the form to your right or contact us and get your free consultation today.
