Understanding PEO Pricing Models (and Why it's a Good Investment for You)

PRemployer on November 20, 2023

Understanding pricing models for PEOs

Collaborating with a professional employer organization (PEO) has many benefits, including significant HR cost savings. However, some organizations mistakenly believe that the price they pay for such services could be hard to handle.

PEOs are often highly beneficial partnerships for businesses, where the cost of working with them is lower than the amount they save businesses. Their expertise ensures tasks are done correctly and efficiently with less burden on your internal team.

Let's take a closer look at the way PEO pricing models work.

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Understanding PEO Pricing Models

While each PEO chooses its approach to pricing, most reliable professional employer organizations use one of the two pricing models:

  • A flat fee per employee
  • Percentage of total payroll

However, businesses may incur additional costs during the setup process, which can include onboarding employees, setting up withholdings for payroll and benefits, and using software. Meanwhile, additional services such as background checks, drug testing, and training programs are charged separately.

Every company is unique, and PEO costs will fluctuate depending on your specific needs and business requirements.

Flat-Fee Per Employee

Flat-fee charges can be per head or a flat amount and are used primarily for small businesses with a lot of part-time of season employees. The average charge per-head per-year is $1,613, according to the October 2023 PEO survey. However, the actual amount you pay monthly depends on the number of employees in your organization, where the price is higher for companies with fewer than 20 employees and lower for companies above that amount.

This pricing model can help maintain pricing consistency for businesses managing many variabilities, giving your business assurance of what your monthly budget will look like.

Percentage of Total Payroll

The percentage of payroll pricing model involves defining a flat percentage of your payroll. The average is between 2% and 12% of the wages. The exact rate depends on many factors, including the total number of employees.  

This pricing model can benefit companies with seasonal and part-time workers. However, it could be an issue during the months when the payroll is higher than usual due to bonuses. You can always discuss such situations with the PEO in advance to avoid extra fees.

What Benefits PEOs Offer

The benefits that PEOs can provide your company differ from organization to organization. Usually, they include:

More than 50% of small businesses report that arranging healthcare is their biggest challenge. PEOs solve this problem by providing access to higher-quality benefits for your employees. They pool all their clients' employees together to purchase plans many companies don't qualify for due to their size.

The critical benefit PEOs provide are increased efficiency, which also decreases the internal headaches in managing these tasks internally. PEOs are able to achieve level of management efficiency that’s significantly lower than the rate that businesses can manage internally, and they can do it with less liability held by the business. They are also seasoned HR professionals who keep up-to-date with changing laws, can guide companies developing HR teams, and offer counsel in keeping teams happy for better retention.

Tasks PEOs Manage

Besides providing excellent insurance plans to your employees, PEOs manage these plans, handle negotiations with insurance companies, and deal with annual planning and budgeting. Their expertise enables PEOs to administer benefits efficiently, lowering costs by saving your internal team the time they'd spend doing so themselves.

PEOs also offer their clients training platforms, consult them on HR management, and help with employee recruitment and onboarding. This organization can take over a significant percentage of your HR tasks, leaving your team more time to build a healthy workplace environment and make effective HR decisions.

How PEOs Create Cost-Effectiveness

According to the National Association of Professional Employer Organizations (NAPEO), working with a PEO can have an average of 27.2% ROI. The average annual cost savings per employee include 37% for benefits and 4% for workers' comp.

PEOs achieve this impressive ROI by using economies of scale. To take full advantage of this option, a company and a PEO enter a contractual relationship called co-employment. Through this agreement, the PEO and the company share certain HR responsibilities. Co-employment allows businesses to mitigate some costs and liabilities and gives them more opportunities to focus on revenue-generating activities.  

Through the agreement, the PEO becomes an employer of record for your employees. That allows the organization to handle payroll, benefits packages, and other tasks that involve leveraging sensitive data. However, all actions of the PEO are still under complete control of the business owner, who makes all the HR decisions.

Outsource Your Services with a Single Entity

Businesses that are overwhelmed with time-consuming HR tasks often try to outsource them to different companies, such as payroll processors, HR consultants, and others. That leads to higher costs and takes extra time to implement them.

Working with a full-service PEO allows you to outsource all your services to one entity. You can partner with an organization that handles administrative HR needs, provides additional on-demand services, and keeps you up-to-date with changing regulations and technology.

By partnering with a PEO and outsourcing benefits, payroll, recruitment, and other tasks, you can save significant time and money while improving employee retention.  

Allowing a PEO to Work for You

PEOs offer convenient pricing models, which take into consideration various factors that are unique to your business. A reliable PEO can adjust its pricing model to fit your business needs and make the collaboration more effective.

PRemployer offers a wide range of PEO services aimed at helping your business succeed. We work hard to help you achieve your HR goals while saving time and money.

Reach out to discuss the possibility of a fruitful collaboration today.  

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