Welcome back. If you have been following our last two posts, we asked our readers to participate in a quiz. We are at the final phase of comparing PEO quotes from three different professional employer organizations. Our goal is to determine which PEO has the lowest rates. The answer may have surprised many of our readers. If this is your first visit, click on the link to Part 1, PEO Pricing – Smoke and Mirrors?
Congratulations!!! If you answered # 4 None, you had the correct answer. Did you get it right? What did you think of the answer? In part two, we compared the employee leasing proposals between companies A and B. Today, we are going to compare the rates of PEO C with our other two employee leasing companies.
Level the Playing Field Before Starting a PEO Rate Comparison
In part 2, we learned that PEO’s A and B actually have the same rates by class. The format used to show the billing charges were different, but the rates by employee class add up to the same cost for professional employer services.
Our example on the right shows the employee leasing burden for employees by class. For office workers, the total rate for PEO A is 16.70% vs 116.70% for PEO B. The same is true for sales 17.50% vs 117.50%, and for delivery 26.45% vs 126.45%. The basic difference is in the way it is presented to a prospective business owner.
Since we now know that PEO A and B have the same cost, all we need to do now is compare rates for employee leasing company C. Unfortunately, they are presenting our client with a blended proposal that shows a combined staff leasing burden for the entire company. In this case, PEO C is charging 119.05% of payroll or 19.05% added to payroll. How will we be able to figure out which PEO has the best rates?
Blending to Compare Employee Leasing Company Rates
We know that PEO C has, not only bundled their rates by class, as PEO B has done. They have gone a step further and “blended” or combined the three workers compensation classes into one. Let’s see what happens when we do the same thing with the proposal from PEO B. When we add up the payroll for office, sales and delivery, the combined payroll adds up to one million dollars ($1,000,000).
The next step is to calculate how much of the total payroll each employee class represents. Our example above shows that office employees total $300,000 in payroll. When divided by the total million dollar payroll, you get .30 or 30% of the payroll. Using the same formula, the sales department represents 50% of the payroll, and the delivery department makes up the remaining 20%.
Now that we have calculated the percentage of the total payroll for each employee class by workers compensation, it is time to multiply each rate class by their respective percentage of payroll.
In the example to the left, we have identified the three payroll classes, the PEO billing rate, and the percentage of total payroll. We know that office workers represent 30% of the total payroll, and that the rate is 116.70%. When we multiply the PEO rate by the percentage of payroll the answer we arrive at 35.01%. Let’s do the same calculation for the Sales and Delivery departments. Sales equals 58.75% and Delivery equals 25.29%. When we add up all three deparments together, the answer we get is 119.05%. As you can see, all three PEO quotes show the same total billing rates in three different formats. How many of you came to the same conclusion?
Does this mean that the cost for all three PEO companies will be the same? Not necessarily, but that is a topic for another post. Look for our next revealing installment about the secrets of the Professional Employer and HR outsourcing industry, and the games that some employee leasing companies play.