Part 1 – Smoke and Mirrors?
Why Is It So Hard To Compare Rates of Professional Employer Organizations?
Are you shopping for employee leasing or professional employer services? Have you ever tried to do a comparison of the rates and fees charged by one PEO versus another? Very often, this can be a challenging task requiring the services of a Wharton MBA. The reason is that employee leasing companies and PEOs use different methods of charging and billing for their services.
The Whole is Greater Than The Sum of It’s Parts
Most small business owners use the services of a PEO because they integrate several employer services into a seamless cost efficient platform. I like to say that Professional Employer Organizations make managing your employees as easy as A-B-C. They save business owners time and money, and relieve busy executives from thehassles involved with tasks of employee Administration, Benefits, and Compliance.
Human resource outsourcing simplifies the delivery of payroll administration, employee benefits, HR compliance and workers compensation coverage for a fee that is usually based on a percentage of payroll.
When you request a proposal for employee leasing services, it is not unusual to receive employee leasing quotes from companies showing a billing rate with only a total workforce factor or “burden”, without revealing what the cost is for the each individual component.
The chart below compares billing PEO rates from 3 different Professional Employer Organizations. In this example, PEO A provides a “full disclosure” proposal identifying the individual billing components. PEO B provides it’s prospective clients with a bundled proposal which combines their administrative fee, payroll tax rates, and insurance cost into a rate by occupation. In this example, creating 3 rate classes. PEO C provides a single rate for the entire company blending all 3 classes into one.
Part 2 – How to Compare PEO Rates?
Did you take our quiz on finding the lowest PEO rates? If not, then read the last post entitled “PEO Pricing – Smoke and Mirrors?”. This is where we challenged our readers to see if they could figure out which of our 3 professional employers was the PEO with the lowest rate. Have you tried yet? Couldn’t figure it out. Want to take a guess? Don’t be upset. As they saying goes …. “You are not alone”. The answer below may surprise you.
Can’t take the suspense any more?
The answer to our quiz was # 4, none of the PEOs offered the client a lower rate, all 3 PEOs would cost exactly the same amount. How can this be? Simple, but in order for you to arrive at the correct answer, you first have to analyze all of the parts.
Looking at the Parts of a Professional Employer Organization
Some professional employers and staff leasing companies may confuse you by bundling all of their costs together, while others will lay everything out in the open. If we look a the fee schedule for PEO A, you see that they fully disclose all of the charges that a professional employer organization is responsible for. They identify each of the employee classes by workers compensation code, as well as a breakdown of all payroll and unemployment taxes. Even their administrative fee is separated from the other costs.
Unfortunately, PEO B is showing our client bundled rates by worker comp class. To make things even more confusing, PEO C is blending all 3 classes together into one rate for the entire company. How can we ever come up with an answer? It would take a Wharton MBA? Not quite, let’s take a closer look.
The example above shows how challenging comparing PEO rates can be. In this case we have to level the playing field by calculating the lowest common factor. Since each quote in our example uses a different method, it will require a 2 step process to arrive at the answer.
The first step is to compare PEOs A and B. Since PEO B is using a totally bundled proposal by class, we have to convert PEO A into bundled rates as well. As you can see, the quote for PEO A shows us all of the components totaled at the bottom. If you look closely, and compare each workers compensation class, they are exactly the same for each class, but PEO B is using a different format.
Let’s look at the clerical rate for PEO A, it is expressed as percentage of payroll, in this case 16.70%. However, this is the billing rate that is added to the payroll. The quote for PEO B clerical is 116.70%, which is also shown as a percentage of payroll, but in their case it includes the payroll. So in the final analysis, ASSUMING both companies are charging the exact same SUTA “State Unemployment Tax” rate, (the topic for a future post), the quotes from both professional employers are the same.
Step 2 – Leveling the Playing Field
Our next post will focus in on Step 2. This is where we compare the rates from PEO C, with the proposals from our other two professional employers. The challenge next time, is to compare PEO charges from employee leasing company C, who is using a billing method that not only bundles the charges for all of the PEO components, but then blends them together into one consolidated rate for the entire company. Do you think you’re up to the task? Want to know how we arrive at the answer? Then check back or link a feed for our latest updates to learn more insider secrets about employee leasing, HR outsourcing and professional employer organizations. Till next time.