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/terminations, and 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 administration fee pricing models that PEOs use: a flat fee per employee (monthly or annually) or a percentage of gross payroll.
Which is better?
General Rule of Thumb
Flat Fee is best higher wages.
Percentage of Payroll is best for lower wages.
To know which is best, you need to do a true comparison.
The answer depends on your business model, but you’ll generally 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 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 the same services. PEOs love this and derive most of their profit from the admin fee.
Companies 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.
Ask these Administration 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. Ask these questions:
How do you bill for administration fees? (If they charge a percentage of payroll/bundle, ask for a breakdown of each cost.)
Detail clearly which services are part of the admin fee and which are not. (ATS, Time Clocks, EPLI, etc.)
Ask how, as you grow, your administration fees change. (Ideally, you want your administration fees to go down as you grow per employee.)
Get a clear understanding of what other fees are and how they will impact you.
And that last part might be the most useful. When you ask a PEO questions about their admin fee, you’ll understand 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 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.
What if I’m using a PEO now and think I am paying too much or have no idea what we are paying?
Don’t be alarmed. Many overlook their administration fees, only see the outcome or significant bottom-line savings, and never question their fees. But it doesn’t mean you shouldn’t.
You should request a breakdown of your administration fees at each yearly renewal. If your PEO happens to charge a percentage of payroll or bundle it together, then you should request a breakdown of each of the fees. Some PEOs may push back on the information, but they know what each item costs if they can calculate how much to charge in the bundle.
If they are reluctant to answer and give you the breakdown, it’s time for a new PEO. We can also unbundle it for you, and you can also use our Administration Fee calculator for a quick overview.
