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With the growing number of state and federal regulations and the mutability of modern workforces, it is becoming increasingly difficult for human resource (HR) departments to remain in full legal compliance while also meeting the needs of employees. It's no surprise, then, that the use of professional employer organizations is on the rise. These companies specialize in comprehensive HR outsourcing services.
When a company hires a professional employer organization (PEO) a co-employment relationship is formed with the PEO becoming the "employer of record." Under this arrangement the client maintains responsibility for workers' day to day activities. Meanwhile, the PEO takes over the administrative aspects of employment including payroll, providing benefits, hiring and firing, and filing taxes, as well as ensuring full legal compliance and assuming liability. Because PEO companies actually hire a company's employees and then leases them back to the company the process is referred to as "employee leasing." Continue reading this buying guide to find out how employee leasing can benefit your business and what the costs associated with hiring a PEO.
The Benefits of Using an Employee Leasing Company
Employee leasing companies can provide a number of advantages to your business and its employees, including:
- Competitive employee benefit rates: PEOs pool the employees of all their clients, which allows them to secure very competitive benefit rates. For many small businesses staff leasing is the only way they can afford to offer health insurance, life insurance, 401(k) plans, and other benefit packages that are key to retaining current employees and attracting new ones.
- Cost control: According to the Small Business Administration businesses with less than 500 employees pay an average of $5,000 per employee per year for regulation, paperwork, and tax compliance. By using a PEO company, businesses can reduce administrative costs by one-third to two-thirds.
- Full compliance, reduced liability: Keeping up with the regulations set forth by the 100+ agencies that regulate business can be a full time job itself, and failure to comply with them could spell serious trouble. It is the job of PEO companies, however, to make sure that your business is in compliance with all applicable state and local laws and regulations. A PEO organization is additionally responsible for safety and risk management, meaning that they assume liability for workplace injuries, harassment, discrimination issues, and even federal tax obligations.
- Dedicate managers' time to what matters most: One of the greatest benefits of leasing employees is that it allows a company's HR department to focus its efforts on operations critical to success. By using PEO services, HR departments can key in on how to keep workers happy, attract the best new talent, and implement cutting edge policies rather than spend large amounts of time on mundane administrative processes such as payroll, benefits, and compliance.
Additional PEO Benefits
Depending on the CSA you sign, you get even more benefits. For example, you may choose to have the PEO manage every step of the hiring process, including:
- Writing job descriptions
- Recruiting new employees
- Screening job applicants
- Performing background checks
- Onboarding new employees
- Creating employee handbooks and other resources
They also offer performance management services, including appraisals, pay structures, and performance improvement protocols. The PEO will also create leadership development programs if one of your goals is developing talent from within the organization.
Potential Disadvantages of Partnering with a PEO
There are potential disadvantages to a PEO. Only you can decide whether they outweigh the pros. These include:
- You may pay for unneeded/unwanted services, since most PEOs offer their services in bundles.
- You must make employee decisions jointly with the PEO, which takes away some of your autonomy.
- You must offer health insurance through the PEO, which means you lose the ability to use the ACA SHOP Exchange.
- You still have some HR responsibilities, no matter how comprehensive your CSA.
Employee Leasing Average Costs
Use the following pricing information to get an idea of how much human resource outsourcing through a PEO might cost your company. PEO services typically have an up-front, one-time fee of between $1,000 and $5,000. After that, you pay a percentage of your company's gross payroll. This works out to be 1.5% to 8% of your total payroll or 2% to 6% of the employee's salary, per pay period. Keep in mind that pricing will vary depending on your industry, the services you require, and the size of your company. Large companies often receive volume discounts. On the high end, employee leasing could cost up to 15% of gross payroll. Fixed pricing is available from some vendors, too, rather than paying percentages.
PEO companies can provide employee screening services such as background checks, drug testing, and more for around $50 to $100 per employee. Advertising, training, and other services can be provided, as well, for an added cost.
Employee Leasing Sample Costs
Check out the following prices paid by actual PEO clients to better understand what employee leasing might cost:
- A North Carolina startup paid 12.5% of its payroll
- A California information services company paid $600 per employee, per year
- A Texas manufacturer paid around $100 per month, per employee
- A New Jersey consulting firm paid around $125 per worker, per month, plus a $3,000 initial fee