PEOs and The Admin Fee
The administration fee -- the amount that a Professional Employer Organization charges you to manage your services -- is, in the end, what will determine whether your company is getting its money’s worth.
What’s in the Admin Fee, Anyway?
In short, the administration fee covers the basic services that a PEO provides, which includes payroll processing, benefits administration, hiring/firing, handling unemployment claims… all those reasons you started working with a PEO. The exact services you receive will depend on which PEO you work with and what they offer, but each one will have an admin fee that covers the core services. When considering a PEO, come right out and ask them to detail what is and isn’t covered in the admin fee.
Flat Fee, or Percentage of Payroll?
There are two basic admin fee pricing models for working with a PEO: a flat fee per employee (monthly or annually) or a percentage of gross payroll. Which is better?
The answer depends on your particular business model, but generally you’ll be better off with a flat fee per employee. If you’re a small-medium business looking to grow and make more money for yourself and for your employees, an administration fee that’s a percentage of payroll may actually penalize that growth by charging you more over time for the same services. If your gross payroll is $300,000 this year and grows to $400,000 the next while maintaining the same staff, a 3% admin fee jumps from $9k to $12k for exactly the same services. PEOs, who derive most of their profit from the admin fee, love this.
Companies that are looking to add lower-paid positions as they grow may benefit from a percentage of payroll arrangement because a flat fee per employee may be high relative to their low earnings. As always, you’ve got to crunch some simple numbers to figure out what’s best, but most of the time a per-employee fee is most sensible.
Use Admin Fee Questions to Help Select a PEO
There’s no perfect answer that describes every single PEO’s admin fee -- and getting clarification on what the admin fee entails is an excellent opportunity to help you figure out which PEO you want to work with. The PEO should be able to do the following:
- Detail clearly which services are part of the admin fee and which are not;
- Provide projected costs and outline future services;
- Answer any questions you have about services and add-ons.
And that last part might be the most useful. When you ask a PEO questions about their admin fee, you’ll get a sense of how clear and capable they are. Do they explain things in a way you understand? Do they provide the right amount of support for you? You’ll be asking tons of questions throughout your relationship with a PEO, so treating an explanation of all that goes into admin fees as an audition of sorts will pay off later on. If you’re not satisfied with how they explain the admin fee, you’re unlikely to be satisfied with their service.
The admin fee is the foundation of your transaction with a PEO, and finding the right balance of quality and value is critical to selecting which of the hundreds of PEO options is the best fit for your business.