The Top 5 Ways a PEO Reduces Your Expenses
By Chris PetersonFirst published Updated
The short answer
A PEO can lower costs in five places: health insurance premiums, workers' comp premiums, state unemployment tax, turnover, and the soft costs of running HR yourself. How much any company saves depends on its census, industry, states and contract, so the only real answer comes from comparing full quotes.
When you run a business, cutting expenses is a constant demand. It gives the company balance, makes growth possible and keeps investors happy. But the path to lower costs isn't always a straight line.
One avenue many CEOs don't know much about is a professional employer organization (PEO). A PEO works with companies that want to outsource HR, providing stronger benefit plans, better perks for new hires and lower HR costs, sometimes to the point that it largely pays for itself. Here are the five main ways it can reduce your expenses.
How does a PEO reduce your expenses?
1. Health insurance premiums
PEOs can get lower premiums by covering a much larger group of people under one plan. Your rate still depends on how your group is underwritten.
2. Workers' comp premiums
The same idea: covering a much larger pool of people spreads the cost of workers' comp, so each of your employees can cost less to cover.
3. State unemployment tax
PEOs may report state unemployment under their own account and rate, which can be lower than a small company's. It depends on the state and the PEO. In Colorado, each PEO tells the state whether it reports under its own accounts or under each client's, and with no election it reports under the client's (C.R.S. 8-70-114). PEOs also manage unemployment claims closely to protect their rates, something smaller companies rarely have time for.
4. Turnover costs
The strong benefits packages a PEO can provide help you recruit, and then help keep your best people engaged and staying.
5. Soft HR costs
Software upkeep, payroll management and hours lost to necessary but tedious paperwork. A PEO takes those on, so your HR people can work on projects that grow the company.
Will a PEO pay for itself?
Sometimes. By pooling many companies, a PEO has more ways to cut costs than one small company does. NAPEO's 2019 study (industry-sponsored, using 2018 data) estimated average savings of $1,775 per employee a year against an average PEO cost of $1,395, mostly from internal HR staff time and health benefits. Half of clients would fall below that average, which is why a side-by-side comparison of real quotes matters.