Borderless Impact (Webinar Replay) -

Hiring a Professional employer organization? A PEO Cost Analysis

Hiring a Professional Employer Organisation? A PEO Cost Analysis

The benefits that a good PEO can provide organisations are clear. However, the issue of the costs of hiring a PEO frequently raises concerns for some organisations.  

So, how does a PEO price its services? 

Several factors impact PEO cost. However, a straightforward answer is that a PEO prices its services according to:  

  • The value a PEO delivers to your company 
  • The volume of HR risks the PEO assumes on your behalf under the agreement 

If you’re seriously considering working with a PEO and you’re concerned about how the price of the service will impact your bottom line, it is best to approach the conversation from the following standpoint: 

  • What does it already cost you to handle the services that the PEO will be taking over? 
  • What kind of HR-related support do you urgently need for your company? 
  • How important is it that you get this support? 
  • What will you be willing to pay for this support? 

We’ll discuss the following items first to facilitate your understanding of how a PEO prices its services. 

What’s Your Current Employer Overhead? 

It’s common knowledge that being an employer attracts a lot of HR-related costs that go beyond the monetary compensation you offer to your employees. Some of the costs include: 

  • Workmen compensation insurance coverage 
  • Statutory insurance and paid leave coverage  
  • Employee benefits 
  • Retirement benefits contribution 
  • Both tangible and intangible administrative costs 
  • Tangible costs associated with payroll administration 
  • Intangible costs associated with administering payroll (e.g., time and effort) 

It is estimated that an employer’s overhead (asides from compensation) on average costs between 1.25% and 1.4% of an employee’s salary. This is a significant part of an employer’s budget by every standard. 

Considering that PEOs help organisations consolidate these employee-related costs, it is wise to evaluate your current employer overhead when deciding whether to engage a PEO. 

What Is the Worth of a PEO Service to Your Company? 

Carefully consider that a PEO will partner with your business as a co-employer and provide your company with comprehensive HR solutions to help you succeed as an employer. The support that a PEO brings your company will afford you: 

  • Much needed administrative relief 
  • An opportunity to reduce the weight of liabilities and risk management  
  • Specialised HR support 
  • A streamlined technology platform 

In addition to these, considering that the PEO will become a co-employer of your employees, your employees will enjoy access to PEO-sponsored benefit plans. 

A reputable PEO will: 

  • Provide your company with flexible end-to-end solutions 
  • Offer your staff desirable employee benefits, e.g., health and welfare, retirement, et cetera. 
  • Take the burden off you by providing administrative services that fit your budget and are well worth the cost. 

However, it is crucial to note that PEOs price their services differently. PEO cost is usually calculated in tandem with the quality of HR support the PEO will be delivering to your company and the type of technology they’ll be bringing on board. This is why it is vital to be very clear about what qualities you want in a PEO. 

To grasp the total value of a PEO, you’d need to: 

  1. Assess the services provided by the PEO
  2. Decide how the services will be provided. 
    • Will it be person-to-person through an account executive 
    • Or will it be an on-demand, online software solution 
    • Will it be through a team of experienced HR professionals in various HR specialities 
    • Or a combination of the above 
  3. Evaluate the level of HR specialisation that the PEO will be offering you and how much you plan to rely on their services. 
  4. Ascertain the features and capabilities of the software that the PEO will be providing you in addition to the services they’ll be rendering. 

When considering PEO cost, think value, don’t think numbers alone

When deliberating whether to invest in a PEO, the big question to ask and answer is: How valuable is your time?  

Time and expertise are the key values that a PEO brings to your business. So, if you have all the time in the world to spend on distracting HR-related administrative burdens, by all means, skip the services of a PEO.

But, on the other hand, as a business owner or leader in today’s fiercely competitive business terrain, time is of the essence. Then the services of a PEO are what you need to gain an advantage. 

The Cost Breakdown of a PEO

Now that we’ve established the true value that a PEO can bring to your business, it’s time to assess how PEOs charge for their services.  

While some PEOs will provide you with an itemised invoice for their services, others will prefer to charge a single and comprehensive service charge made up of various costs, such as administrative fees and direct costs. 

What are the direct costs that PEOs take on your behalf? 

Direct PEO costs are those fees you are obliged to bear as an employer. They include charges for: 

  • Payroll taxes 
  • Workmen compensation insurance 
  • Employee benefits 
  • Group life insurance 
  • Pension  

What are the administrative fees that PEOs charge? 

This cost varies among PEOs. It is the fee that covers the PEO’s HR services. They typically include: 

  • Fees for payroll administration 
  • Workers’ compensation administration and safety 
  • Fees for benefits administration 
  • Fees for HR compliance 
  • Fees for HR technology 
  • Fees for HR services 

How PEO administrative fees are calculated

Organisations use two common models to calculate the administrative PEO Costs. They are: 

  1. Percentage-based – The PEO calculates their administrative costs as a percentage of your staff’s payroll(gross). 
  2. Flat charge – The PEO’s administrative fees are calculated as a fixed cost per employee. 

In deciding which model works for you, consider the structure of your organisation and how you plan to grow in the future.

If you plan on hiring a significant number of low-wage employees in the future, the percentage-based administrative fee may be preferable for your business.

However, you should know that you will be required to pay more to the PEO just for increasing your employees’ pay, not because the PEO is providing any extra value or a higher quality of service. This is often a significant drawback for most companies. 

Conversely, if bonuses, commissions and pay increases are a part of your compensation strategy, a flat fee per employee will give you greater flexibility as you adjust or grow your payroll without having to incur additional PEO Costs.

In this case, when a PEO’s administrative fees are calculated as a fixed cost per employee, the PEO and its client company share in the increased liability when new employees are hired. 

In Conclusion

Partnering with a PEO will require you to trust them. Not only with your payroll but also with other employer responsibilities, e.g., employee benefits. 

Ultimately, if you don’t trust the model they used to bill you, there might always be avoidable friction in the relationship. 

Considering that the PEO cost will drastically vary from one organisation to organisation, it’s important to ask the PEOs you’re considering to be transparent with you about their fees, including how they calculate administrative fees. 

If you choose to partner with Workforce Africa, we’ll provide you with the tools and support you may need to make the best decision for your business.