When it comes to outsourcing human resources management, many business owners focus on the sticker price of professional employer organizations (PEOs). However, the real PEO cost encompasses a broad spectrum of services and savings that are not immediately apparent when you first look at the price tag.
If you're looking for hard numbers, PEO pricing varies greatly. In general, though, HR administrative costs for a small to medium-sized business using a PEO average about $450 less per employee compared to companies that don’t work with PEOs, according to The National Association of Professional Employer Organizations (NAPEO).
The Association further reports the average annual return on investment (ROI) from using a PEO is more than 27.3% in cost reduction alone.
Let's dive into what you're really paying for with a PEO and why it's a strategic investment for your business.
Five PEO Cost Considerations
PEO outsourcing is an investment that pays off for small businesses. When performing a PEO cost analysis, it's important to consider these five things:
1. Workers' Compensation: A Safer Bet
One of the prime areas where a PEO can save your business money is workers' compensation. By pooling the employees of many client companies, PEOs obtain workers' comp coverage at a lower rate than a small business could on its own. This collective bargaining power translates to lower costs for your business, not to mention the PEO’s expertise in claims management and safety programs that can reduce accidents and, consequently, claims.
No Down Payment Required with PEOs
An important financial benefit that deserves special mention is the structure of payments for workers' compensation premiums. Typically, annual premiums can be a substantial financial outlay, reaching into the thousands or even tens of thousands of dollars, which can create a significant strain on your cash flow.
PEOs can offer a financial cushion by eliminating the need for a lump-sum annual premium or a down payment before installment payments. They manage the payment of workers' compensation insurance premiums, distributing the cost evenly over time and aligning it with your cash flow. This approach allows small businesses to avoid the financial stress associated with large upfront payments, ensuring a more manageable financial operation.
Pay-as-You-Go: Financial Flexibility
Further enhancing financial flexibility, PEOs also provide a pay-as-you-go billing option for workers' compensation. This approach eases the financial and administrative burden, as premiums are paid in installments that coincide with each payroll period, based on the actual payroll wages at that time. This not only improves business cash flow by spreading out the cost, it also ensures that companies only pay for the coverage they need, directly tied to their real-time payroll. It's a tailored solution that keeps costs aligned with your current operations, avoiding the pitfall of overpaying for insurance coverage.
Another significant financial benefit comes from the PEO's ability to negotiate with health insurance carriers. Again, the concept of group purchasing comes into play, offering you access to better health benefits at more competitive rates than you would likely negotiate on your own. Moreover, these benefits are often of a higher quality, which can be a powerful tool in attracting and retaining top talent.
A 2023 CNBC reportfound a staggering 96% of workers are looking to change jobs this year. When considering a career opportunity, 88% of these job seekers will take health, dental and vision benefits into consideration.
The vast majority of job seekers– 88%– give either "some consideration" or "heavy consideration" to better health, dental, and vision insurance benefits when making a decision between a high-paying job and a lower-paying job with better benefits, according to a SHRM article.
Businesses that cannot meet this need will lose top talent to the competition.
Axcet brings the collective bargaining power of all its clients to the table when acquiring health insurance, dental insurance and other important benefits. This enables our small business clients to offer their employees competitive benefits without the business owner having to oversee benefit plan administration, Affordable Care Act (ACA) management or HR compliance.
Time is money, as the saying goes, and nowhere is this truer than in HR management. The administrative burden of tasks like payroll processing, benefits administration and regulatory compliance is lifted when you partner with a PEO. This liberation of time allows you and your team to focus on core business activities that drive revenue and growth.
Not only do you gain time, but you'll experience less stress knowing the PEO's team of industry experts won't just lift the administrative burden, but they will leverage best practices to ensure accurate payroll, reliable legal compliance, premium employee benefits administration and turnkey HR solutions.
Staying compliant with ever-changing employment laws is a job in itself. One minor misstep can lead to significant financial penalties. A PEO stays abreast of these laws for you, reducing your risk of non-compliance and the associated costs. A PEO cost analysis reveals this peace of mind is invaluable and difficult to quantify in dollars and cents.
Workplace Safety Compliance: A Particularly Thorny Matter
Keeping employees safe is both a moral and a legal obligation. It requires proactive, ongoing risk management, both to help prevent accidents and to mitigate claims losses.
A PEO like Axcet can help smaller employers develop safety policies and implement practices that contribute to a safer workplace. A PEO’s safety professionals also can train employees to understand the importance of following established protocols.
Starting with a risk assessment and mock OSHA audit, the safety team at Axcet helps small businesses identify and address safety deficiencies before they turn into problems – or, if a smaller company already has received an OSHA citation, Axcet helps the company understand its rights, responsibilities and options to minimize financial penalties. A PEO like Axcet also can provide workers’ compensation insurance and, if a claim is filed, help the small company manage the claim and contain costs.
5. The Bundle of Services: A Comprehensive Solution
When you partner with a PEO, you're not just purchasing a service; you're investing in a comprehensive solution that addresses multiple facets of your business operations. From HR to legal compliance and employee training to performance management, a PEO brings a suite of services that can streamline your business processes and enhance your operational efficiency.
Here are a few more benefits PEOs offer as part of their comprehensive HR solution that you may not have considered:
Finding quality candidates to apply and interview for open positions is an important and time-consuming process. The best PEO companies for small businesses work with clients to develop an individualized plan for effective recruitment.
This includes such things as developing on-point job descriptions and managing an applicant tracking system. Although the interviewing and hiring decisions are always up to the client, outsourcing much of the administrative work to a PEO helps to save considerable time and expense.
Complex Payroll Administration
Payroll and payroll tax administration responsibilities get bigger, more complicated and more costly as a company grows. A PEO like Axcet can take on both the responsibility and accountability for payroll administration, giving employers peace of mind that their employees will be paid exactly what they earned, precisely when they expect it.
A PEO’s payroll tax administration and payroll compliance services are flexible, secure and, in most cases, provided by a dedicated administrator. With Axcet, state-of-the-art technology also gives client employees 24/7 access to their personal payroll information from any device.
Engaged employees who feel satisfied with their employer and position are essential to long-term retention strategies. Small businesses increasingly turn to PEOs to help improve workplace culture and employee performance. Specifically, PEOs can assist clients with:
Creating new performance appraisals
Providing online resources for employees, such as benefits enrollment and payroll data
Designing reward programs to recognize employees who put in exceptional effort
Developing and implementing new training courses
Supporting clients with ongoing efforts to improve employee performance
Partnering with a PEO can reduce a small company’s employee turnover rate by up to 14% each year. Turnover creates huge disruption for current employees, not to mention the thousands of dollars small businesses must spend to replace each outbound employee. When calculating PEO cost, one must factor in the cost savings associated with a significant reduction in turnover.
Higher-Quality HR Services
HR is all a PEO does. Reputable PEOs employ experienced, highly credentialed HR professionals and invest in leading-edge technology that allows them to provide a first-rate employee experience.
Because PEOs specialize in HR, they understand ever-changing employment laws, trends and best practices that help small companies compete for top talent.
How Much Does a PEO Cost? Evaluating the Investment
Before deciding on a PEO based on the PEO cost alone, consider the value of all these factors combined. It's not just about how much you pay, but about how much you save and gain in return.
Independent studies from NAPEO show companies that hire PEOs experience invaluable benefits such as growing 7-9% faster, having 10-14% lower turnover and being 50% less likely to go out of business than small businesses that don’t work with a PEO.
A PEO might not be the cheapest option on paper, but when you factor in the potential savings, the expertise brought to your business and the time you reclaim, the investment often pays for itself.
Axcet HR Solutions: Your Premier Certified PEO Since 1988
Selecting the best PEO for your small business is not always an easy task. Certification is the differentiator. Axcet belongs to an exclusive club of just 10% of PEOs in the United States that have received certification from the Internal Revenue Service (IRS). The top criteria that must be met to earn the designation of certified PEO include financial stability, organizational integrity and proven experience. To remain certified, a PEO must continue to prove they meet these standards each year.
Axcet provides a full suite of PEO services and expertise to help grow your business. Partnering with a trusted PEO like Axcet for day-to-day HR needs translates to a smoother-running operation, more time for expansion efforts and a higher-performing workforce.
Have PEO cost questions? Axcet HR Solutions invites employers with fewer than 250 employees to request a consultation to learn more about our PEO costs in addition to our HR, benefits administration, payroll, risk management and compliance services. As a proud Midwestern business since 1988, we look forward to helping our small business neighbors succeed.