Running a small business is no joke. As an owner, we wear so many hats – from HR to marketing, operations to customer service. We’re always looking for ways to streamline and optimize, especially when it comes to costs. That’s why today, we’re diving deep into the world of payroll service pricing.
You’ve probably come across two main pricing structures when shopping for payroll services: Per Employee Per Month (PEPM) and Per Process. You may have even scratched your head wondering if one is better than the other, or at least, wondered how they compare. So, let’s decode these and see which might be the better fit!
What is the Per Process Payroll model?
In the per payroll process model, a company is billed based on the number of employees paid when payroll is processed. Typically, there is an invoice being generated and fees are being paid automatically with the payroll. There are a couple of benefits to a pricing model like this:
- Pay As You Go: Think of it like a prepaid cell phone plan. You’re only paying for what you use. If an employee goes on leave and needs to skip a check, you do not get charged a processing fee for that employee
- Flexibility: If you are in an industry with fluctuating staff counts, such as a seasonal business, this type of model may be perfect as you do not get left stranded for paying fees on people that are no longer actively employed.
The per-process model has been around forever, and it is what most service providers use to bill their customers, but with the increased use of technology in the HR space, there is beginning to be a shift in billing models. Some drawbacks of this model are as follows:
- Incomplete Billing: As many payroll providers offer services beyond issuing payroll checks, the pricing of additional services can get complicated. While paying for a check to be issued based on an employee getting paid makes sense for payroll, does that mean it also makes sense for things like HR services, ACA compliance, leave management, and other items that extend beyond traditional payroll?
- Inflated Flat Fees: Many providers that bill in this model also have flat fees incurred each time payroll is processed, making it easier to hide actual processing costs. It’s not as simple as saying, “I’m going to be billed $3 for every employee I pay.”
What is Per Employee Per Month (PEPM) Payroll?
Because of some of the changes in the industry, mostly around technology, payroll providers have moved away from a Per Process billing model into a Per Employee Per Month (PEPM) model. The PEPM model allows for providers to bill similarly to a technology or software provider that charges “per user” or “per license.” This change brings along some benefits:
- Predictability – Many seasoned businesses have a good idea of headcount trends throughout the year, which allows predictability in payroll costs. Employee count multiplied by the PEPM fee gives you a true representation of anticipated costs.
- Simplicity – With the PEPM model, service providers can bundle together additional services in a way that is more reasonable. This allows small businesses to consolidate multiple systems and the fees that come with them into a single provider.
- Frequency – many PEPM providers do not charge based on how often payroll gets processed, which can be a game changer as it relates to fees for businesses with a weekly pay cycle.
The changeover to a PEPM billing model by some providers has shed some light on to the drawbacks that come with this model that may prove to be disadvantageous for some businesses.
- Unnecessary Services – if you get cornered into buying a package that includes add-ons that aren’t needed for your company, this will be reflected in your bill. It is important to understand your purchasing options so that you aren’t paying for items that are not needed.
- Less Flexibility – let’s say you scale down temporarily, you may be paying for people that are no longer employed by your company. For example, if you are paying a fee based on your active employee count and you do not terminate employees timely within your HR systems, you may be billed for those individuals who are no longer working for you.
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The numbers behind per process and PEPM
Okay, enough talk, let’s do the math! Let’s pretend you run a bakery that sales fresh baked cookies and you have 15 employees that get paid every other week.
Per Process Fee Model:
If all 15 employees get paid each time payroll is processed, you may be paying around $2,200 per year for payroll services. The assumptions used to get here are that you are paying $3 for each check written plus a flat fee of $40 each payroll run (which is pretty close to what many providers charge):
- $3 per check times 15 checks plus a flat fee of $40 = $85 per payroll
- $85 each payroll times 26 payrolls in a year = $2,210.00
Per Employee Per Month Model:
Using the same set of assumptions, in a PEPM model, you could be paying around $1,800 per year for the same set of services. Again, the assumption here is that you are paying $10 per employee, per month which is standard within the industry
- 15 employees multiplied times $10 PEPM = $150 per month
- $150 per month times 12 months = $1,800 per year
The savings seen here in the PEPM model are even larger if you are running a weekly payroll:
- $85 each payroll multiplied times 52 payroll in a year = $4,420.00
What’s the Verdict?
As you can imagine, there is no one-size-fits-all answer. That would be too easy! Instead, consider this:
- Stability: If your employee count remains the same and everyone is consistently receiving a check, the PEPM model may be a simpler, cost-effective solution
- Fluctuations: If your staff count changes often, or if you frequently have employees on leave, a per process model could be easier to keep up with
- Frequency: As we just saw, a PEPM model can equate to significant savings the more frequently payroll is processed.
In any case, think about what works for you and your business’s specific needs. Take a moment, do the math, get to an apples to apples comparison and make the decision on what is best for your organization!