Get upfront PEO-contract clarity on HR and Payroll Outsourcing fee structures from a professional employer organization, to prevent hassles down the road.

With the changing business environment and the need to focus on generating revenues, many business owners are considering outsourcing the payroll, tax, insurance and employee benefits support tasks for their businesses. Professional Employer Organizations (PEOs) are designed to take on these duties for you. It is not uncommon for one PEO company to structure its fees differently from others. Building trust with your HR outsourcing company is critical to the relationship’s long term success.

When looking at a PEO contract, here’s a list of things to ask upfront, to prevent misunderstandings down the road.

“Do you bundle your fees?”

Traditionally, PEOs bill their service package in either a bundled or unbundled format.

PEOs opting for the unbundled invoice method list the services individually on the invoice.

  1. The payroll amounts
  2. Employment-related taxes (FICA, FUTA, SUTA)
  3. Workers' compensation premiums
  4. Administration fee charged by the PEO
  5. Benefit costs

PEOs using the bundled invoice approach combine all the service fees, occasionally breaking out the Benefit Costs. Either method is fine, just be sure that you understand what is included in a bundled fee.

“What if the workers’ compensation rates or group health insurance premiums change during the contract? How will those changes affect my bill?”

It’s in the best interest of the PEO company to secure the best rates from insurance carriers, but those rates do change. You need to have a clear understanding regarding how those rate changes will affect the PEOs fees during the contract period.

“Does your Client Service Agreement cover all of these questions?”

A PEO agent should be able to provide a well drafted client service agreement (CSA) that outlines the responsibilities of the PEO and identifies all services for which the client is being charged. Just like with any other contract, it is important that you, as a business owner, understand the agreement you are entering in to.

“Do you utilize an IRS Section 125 plan in calculating payroll taxes?”

PEOs can use an IRS Section 125 plan to reduce the tax liabilities for your company, which means they can calculate the payroll taxes based on the reduced taxable wages. Check to see if the PEO utilizes a Section 125 plan and find out how the tax reduction is reflected on your invoice.

The PEO contract should be drafted in such a way that little question can be raised during the contract period of how fees will be applied. The partnership between client and PEO can be mutually beneficial, provided these considerations are addressed early in the business relationship.

At Modern Business Associates, we handle these kinds of questions every day. Give us a call and we’ll be happy to professionally answer any questions you may regarding this topic and how it applies to your specific company.