The rise of PEOs and their growing value to benefits advisors

The landscape of human resources (HR) for small and mid-sized businesses (SMBs) is undergoing a significant shift. One of the driving forces behind this change is the professional employer organization (PEO) industry. PEOs have seen a surge in interest in recent years, with a growing number of decision-makers acknowledging their growing role in HR solutions.

How the PEO industry has evolved

PEOs have been around for decades, but their initial model, often referred to as “employee leasing,” emerged in the late 1960s to help companies manage the rising costs of workers’ compensation insurance coverage. Over time, the industry has matured, shifting towards a shared employment model. This new model clarifies the division of responsibilities between the PEO and the client company, fostering greater trust and transparency. 

Factors contributing to PEO industry growth

Eight key factors have unfolded over the past few decades: 

1. Increasing cost of workers’ compensation insurance: Since their inception, PEOs have focused on offering affordable workers’ compensation insurance, a concern that remains relevant even today.
2. Expansion of PEO services: In the 2000s, there was a surge in regulations and legal requirements surrounding employment, making HR management a growing challenge for SMBs. PEOs emerged as a solution, offering expertise and streamlined processes.  PEOs also began offering comprehensive HR solutions, including employee benefit administration and HR support. This broadened their appeal and made them even more valuable to SMBs. The higher costs of health and workers’ compensation coverage, workplace safety programs and employee-related complaints and litigation fueled growth even further. 
3. Impact of the ACA: In 2010, the passage of the Affordable Care Act (ACA) further increased the complexity and expense of HR for SMBs, particularly regarding health insurance compliance. PEOs, with their expertise in navigating these complexities, became a natural fit for many businesses.
4. Growing SMB market: Throughout the 2010s, SMBs played a vital role in the U.S. economy, with their numbers reaching approximately 5 million, according to the U.S. SBA Small Business Profile. The strain of managing HR functions within these businesses fueled the demand for PEO services. During this time, the U.S. economy added nearly 8 million people to the labor force, U.S. Bureau of Labor Statistics, and also experienced substantial wage growth.
5. Accreditation and federal certification: In 1995, the Employer Services Assurance Corporation (ESAC) was formed as an independent, non-profit organization for accreditation and financial assurance for the PEO industry. In 2017, the IRS granted Certified PEO (CPEO) status to an initial group of PEOs that demonstrated a history of financial responsibility, organizational integrity, and state, local and federal tax compliance.  These designations have elevated the trust and confidence in the industry.
6. Higher awareness of PEOs: Unaided awareness of PEOs had increased to 65 percent by 2022, according to a NAPEO Market Research Tracking Survey Report. It was no longer the case that most SMB owners are unaware of PEOs,with 33% of decision makers saying they’ve used a PEO. Further, since 2018, the awareness of PEOs by decision makers has grown by 44%. This growing awareness has undoubtedly contributed to the industry’s expansion.
7. Technological advancements: Increased automation and technology solutions offered by PEOs in the 2020s further improved their value proposition. These solutions streamlined HR processes and offered greater efficiency to SMBs.
8. High cost of HR regulatory compliance: Today, the cost of non-compliance is all too apparent in the increased number of employee-driven complaints and litigation. The issues include discrimination, harassment, wrongful termination, and failure to promote/refusal to hire. In 2020 alone, there were approximately 99,941 charges of workplace discrimination filed with the U.S. Equal Employment Opportunity Commission (EEOC), according to Essential Employee Lawsuit Statistics in 2024. This likely represents only a portion of the total lawsuits filed. Moreover, the EEOC brought 50 percent more employment discrimination lawsuits against employers in 2023 compared to 2022.

With these eight factors, the rapidly evolving PEO industry has translated into real value for SMBs. 

Solving for the overwhelming complexities of HR

Brokers know their clients often lack the resources and expertise of larger corporations. While the complexities of HR can be overwhelming for SMBs, PEOs address this challenge by offering a bundled package of HR services. These include:

• Payroll administration: PEOs handle payroll processing, tax withholding and deductions, freeing up valuable time for SMBs.
• Employee benefits: PEOs leverage their buying power to offer SMBs access to competitive and often more affordable health insurance, retirement plans, and ancillary benefits that can help attract and retain employees. 
• HR compliance: PEOs take responsibility for ensuring compliance with complex federal, state, and local employment regulations. In some cases, PEOs can even provide personalized, one-on-one guidance to help employers handle employment issues without having to consult an attorney. The value of this can turn into tens and hundreds of thousands of dollars depending on the issue. 
• Risk management: PEOs act as a co-employer, sharing some of the legal and financial risks associated with employment, such as unemployment insurance and workers’ compensation. As with employee benefits, PEOs can provide competitive rates based on the volume. 

This comprehensive approach allows SMBs to focus on core business activities while ensuring they meet their HR obligations.

Building trust with benefits advisors

Initially, some insurance advisors viewed PEOs as competitors; however, the growing awareness of PEOs among brokers has fostered a more collaborative environment. Here’s how:

• Complementary roles: Advisors remain vital for providing specialized risk management and insurance solutions. PEOs, on the other hand, excel at streamlining HR administration and compliance. By working together, they can offer a more holistic solution to SMBs. Some PEOs offer non-competitive arrangements, so the advisor can retain their workers’ compensation and/or benefits offerings without having to worry that the PEO will try to claim this business. 

• Increased commissions and revenue streams: PEOs often offer attractive commission structures to brokers who refer clients. This creates a win-win scenario where brokers gain access to a new revenue stream, and PEOs benefit from the expertise and network of established benefits advisors.
• Reduced client burden: By partnering with a PEO, advisors can alleviate the burden of managing complex HR issues for their SMB clients. This allows brokers to focus on core insurance products and services, strengthening client relationships.

A symbiotic future

As technology continues to revolutionize the HR landscape, the collaboration between PEOs and benefits advisors can only deepen. Here’s how:

• Data-driven insights: Both PEOs and advisors collect valuable data on employee demographics, health trends and claims history. By sharing and analyzing this data, they can offer SMBs more targeted solutions and risk management strategies.
• Technology integration: Integration between PEO and advisor platforms can streamline communication and data exchange, enhancing efficiency and service delivery.
• Joint marketing initiatives: Collaboration on marketing efforts can help reach a wider audience of SMBs and raise overall awareness of the combined value proposition offered by PEOs and brokers.

Looking ahead, PEOs and benefits advisors have the potential to form powerful alliances, providing exceptional HR and risk management solutions to SMBs.

Conclusion

The PEO industry has undergone a significant transformation, adapting its model to better serve the needs of SMBs. The growing awareness of PEOs, coupled with a shift towards collaboration with benefits advisors, points towards a bright future for this segment of the HR landscape. Ultimately, a win-win partnership between PEOs and advisors will benefit both parties while empowering SMBs to navigate the complexities of HR with greater confidence and efficiency.