The cost of a PEO (Professional Employer Organization), like ADP TotalSource®, varies from one business to another due to several factors. A PEO evaluates a business risk profile, employee headcount, payroll and benefits choices to determine pricing. As a result, two companies with the same number of employees but operating in different industries or states can have different PEO costs.
Generally, the overall cost of a PEO covers payroll processing, payroll tax withholding and remittance, workers’ compensation insurance and administration fees. Administration covers areas such as HR administration, employment practices liability insurance (EPLI), HR compliance support, benefit administration, employee support, unemployment insurance, workers compensation claims management, guidance and expertise across payroll, worksite risk, HR, benefits, talent management, and access to the technology platform.
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How do PEO providers structure costs?
All PEOs bill payroll taxes and workers’ compensation as a percentage of payroll, which is exactly how businesses pay these costs before joining a PEO.
Where cost structures differ is how PEO providers structure their administrative costs. There are two primary cost structures:
- Percentage of payroll administration fee
In this model, the PEO’s administration fee is also charged as a percentage of payroll. This fee can range from 2–12% of total employee payroll wages, depending on the services included and other factors, such as location1. - Set dollar amount administration fee
The administration fee for some PEOs is set at a dollar amount rather than a percentage. PEOs that use this pricing approach may set the rate by company, employee, year or payroll cycle. This fee can range from around $40 to $160 per employee per month, depending on the services included and other factors, such as location and number of employees1.
Beyond payroll tax, workers’ compensation and administration fees, a PEO also invoices for employee benefits. Healthcare insurance is different from other types of insurance because the industry does not price it as a percentage cost. Instead, healthcare and ancillary benefit costs are determined by the benefit plan design and employer/employee contribution amounts, which are both unique to each company. Many PEOs treat benefits as a pass-through cost and bill separately for transparency.
In a PEO partnership, businesses pay one flat fee for numerous disparate services — potentially saving you big money in the long run.
Different ways in which a PEO can provide cost savings for small businesses
Competitive benefits and workers’ comp premiums
PEOs can use their scale and group purchasing power to negotiate competitive rates for employee benefits and workers’ compensation insurance. By pooling employees with thousands of others, small businesses can access plans and premiums similar to those offered by larger companies — something they could not do by negotiating benefits on their own. And PEOs provide economies of scale with the administration and commission costs of the plan.
Reduced risk costs
A reputable PEO will conduct upfront risk assessments and maintain strict underwriting standards to ensure every new client fits their risk profile. Additionally, businesses in a PEO gain access to worksite safety loss control specialists, safety training resources and workers’ compensation claims support. This can help reduce workplace injuries, lower claims and minimize hidden expenses.
Reduced compliance costs
A PEO becomes a go-to resource for understanding and managing HR and employment-related compliance changes, helping you navigate and address employee relations incidents, and more. Businesses can find savings by relying on the PEO’s expertise and protection. Similarly, businesses that find themselves paying fines for HR-related non-compliance can find savings with a PEO’s proactive guidance that helps keep them in compliance and avoid the need to potentially pay unnecessary penalties.
Save time and focus on growth
One of the most overlooked but important cost savings when it comes to a PEO is time. For many business owners, outsourcing HR means reclaiming hours spent on non-revenue-generating tasks like administering benefits, handling HR and employment-related compliance paperwork and managing employee claims. With a PEO assisting in streamlining these tasks, business owners and managers can focus on their business.
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