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Joleen Jernigan
Joleen Jernigan

How Do Professional Employer Organizations (PEOs) Make Money?

Updated:
August 17, 2022

As a quick reminder, PEOs (professional employer organizations) are essentially outsourced HR departments for small businesses, and they act as a co-employer for their partner organizations (AKA their clients). Business owners could piece together services that do some of what a PEO does (such as a payroll services provider, hiring a human resources team, or using an insurance broker for health insurance or workers’ compensation). The difference with a PEO is that it can do all of that under one roof, saving businesses oodles of time--and therefore, money. PEOs can take care of many HR services, employee benefits, payroll taxes, insurance plans, and even HR compliance (a biggie, this alone can be worth the price of a PEO). 
 

You may have heard that PEOs save business owners money while also making it easier to recruit top talent and improve employee retention. You also may be hearing about more companies turning to PEOs for their HR services and wondering why

If acting as a co-employer (and somewhat like a beefed-up HR outsourcing company) is how PEOs earn their money, then how do they actually make it? That is, how do they get the money rolling in to be able to provide all of these wonderful, necessary services? 

PEOs for Small Businesses: Earning vs. Making their money

The bottom line is that most PEOs make money by charging administrative fees (admin fees). What varies is what kinds of fees they charge, when they charge, as well as how much they charge. These fees vary wildly sometimes as high as $200/employee per month. (Decent’s fees are much different and we’ll get to that later.)

Add to that additional fees for various services, such as a startup cost to get the systems set up for the client, and admin fees for things like setting up a 401k plan, setting up dental/vision plans, or setting up a health insurance plan for employees. PEO health insurance plans also run the gamut in options and pricing. Some PEOs even get commissions from health insurance companies for selling those insurance companies’ plans (similar to insurance brokers). 

PEOs are often able to get unique often lower pricing by grouping together their small business clients’ employees through co-employment, so that they become a large employer. Thus, PEOs are able to leverage buying power for their clients to get access to cheaper prices (for dental plans, 401k services, etc.)
 

Decent is different because we offer one low-cost, transparent fee — just $25/employee per month for a whole lot of PEO services. No fine print. No ad-hoc admin fees for benefits or other services. We designed our own health plans, which means we're not a middleman for employee health insurance. Therefore, we don't have to tack on those extra fees. We make our money by offering great health plans that employers and employees want and need.

What PEO Services Do Small Businesses Need?

Deciding whether you need PEO services usually starts with understanding what you need for your small business. The main gist here is that there are a whole lot of employer responsibilities when it comes to taking care of people — not just hiring but also benefits to entice employees to join your company and the systems needed to support them and get them paid (not to mention all that tax filing stuff required by the IRS).

Some of the most popular PEO features for small business owners tend to be:

  • Benefits Administration
  • Benefits package: Health insurance, Vision/Dental, 401K
  • Payroll processing and administration as well as tax filings
  • HR support including onboarding
  • Extras like workers comp

PEO services small business owners often don’t know they need include:

  • Understanding employment law
  • HR Compliance
  • Improving risk management
  • Assistance with open enrollment and supporting employee benefits questions

There is a whole lot more that PEOs offer and what you need is often related to what size and stage your company is in as well as the type of industry and clients. Here is a list of Decent’s PEO features.

The Decent Difference

Besides being completely transparent and more affordable than your average PEO with our $25/employee per month charge, a major draw with Decent is our PEO health insurance plans. Most PEOs focus on payroll and compliance and simply partner with big insurance companies that already charge a lot for their health plans. 

On the other hand, Decent came to this whole PEO business by starting out with a health insurance plan that we built from the ground up with the mission of making healthcare affordable for small businesses to offer their employees and for the employees themselves. So instead of taking something already expensive and adding more fees to it, we created something accessible to more people and businesses.

We set up our health insurance plans with a $0 medical deductible, unlimited direct primary care, and a dedicated customer support team. Because by making our health plans affordable with features people like, our small businesses are reporting back that many of their employees are choosing health insurance for the first time.

That makes us proud.

Interested in finding out more? Get a quote here