This question is asked numerous times, and it’s not easy to answer because there are a lot of factors that go into what your administration fee should be. For those of you new to PEO or unfamiliar, the administration fee is what you pay the PEO for their services. To fully understand what you should pay in administration fees, you must first understand how a PEO makes money.
PEOs are for profit organizations, therefore they exist to make a profit. Some of the larger ones are even publicly traded so there is no doubt they must make money or become extinct. PEOs make money by providing payroll, employee benefits, workers’ compensation insurance and HR compliance to small-medium businesses.
When PEOs first launch their costs are very high, he HRMS systems that process payroll, manage employee benefits, and store all of your employee’s data are expensive. The employee benefits plans have few employees on them and are not priced as well as they would be with a larger amount of employees. There is a great deal of risks involved in owning a PEO, so legal fees, accounting and the like expense mounts quickly.
As PEOs grow and acquire clients their costs are reduced as with any business. Some PEOs charge a percentage of payroll (POP), others charge a fixed per employee per month fee. Ones that charge a percentage of payroll greatly benefit because as their client’s payroll increases so does their administrative fees. Often PEOs that charge this way disguise the administration fee in with Workers’ Compensation costs and Taxes, showing it as a percentage.
PEOs that charge a flat fee per employee per month only benefit when you grow and hire more employees. This way of pricing allows for you to know exactly what you are paying for, and it’s transparent - transparent is always good in business. In most cases, PEOs that charge a flat fee per employee will offer price breaks as you grow and increase your staff, therefore lowering your per employee spend.
Back to the question of what should your administration fee for your PEO. That’s impossible to answer but here are some good guidelines to keep in mind when negotiating the administration fee.
- Administration fees should be fixed. Never a percentage or variable amount. There are a lot of moving parts in PEO. Employee benefit, workers’ compensation and all insurance renewals are variable, administration fees should not be.
- Administration fees should be clearly defined and detailed in your Client Service Agreement with the PEO.
- Each renewal year you should inquire about your administration fees. You never know unless you ask - right?
If you are thinking of PEO or currently in PEO and want to know if you are getting the best deal on your administration fees, feel free to contact us, and we will help you.