NAPEO estimates the PEO industry grew a very robust $10 billion to $81 billion in gross revenues in 2010. (The industry defines gross revenues as the total of its clients' payrolls and the fees PEOs charge them for taking on their human-resource activities.) Small- and medium-sized businesses outsource to PEOs everything from administering the payroll and paying employment related taxes, to risk management, recruiting, providing health benefits, and securing workers' compensation coverage.
About 700 PEOs are operating in 50 states. The industry's gross revenue has grown as PEOs attract more diverse, fast-growth clients and the typical salary of the worksite employees increases. PEOs' expanded human resources services and employee benefits provide a high value and efficient outsourcing option for businesses from many different industries.
PEO Growth Trends
A relatively youthful industry — around 30 years old — PEOs have vast room to grow. The PEO industry has barely scratched the surface of the potential market, but the current projected growth rate for PEOs, coupled with their high client retention rates, supply ample evidence of an industry on the move.
The average client of NAPEO members is a small business with an average of 19 employees.* Increasingly, larger businesses are signing up, too. Clients range from accounting firms to high-tech companies to manufacturers to government agencies.
Between 1980 and 2000, the number of labor laws and regulations grew by almost two thirds, says the federal Small Business Administration, which estimated owners of small or mid-sized business spent up to a quarter of their time on employment-related paperwork. PEOs assume much of this burdensome responsibility and help companies comply with all these regulations.
PEO Worksite Employees
PEOs provide enhanced access to employee benefits for 2-3 million working Americans. This number is growing at a phenomenal rate every year because of the savings and benefits that a PEO can provide to small businesses. PEO expertise improves the work environment and increases safety. The average gross pay of a PEO worksite employee is about $34,000 annually.* Because the average client of NAPEO's member PEOs has only 19 worksite employees, without the PEO relationship these workers would not have protections under Consolidated Omnibus Budget Reconciliation Act (COBRA) or the Age Discrimination in Employment Act (ADA).
PEOs help tens of thousands of companies provide benefits such as healthcare plans, 401(k) tax-free savings accounts and other perks to working Americans. Forty percent of businesses that use PEOs upgrade their benefit packages as a result. PEO sponsored benefit programs can include major and supplemental healthcare choices, including vision and dental care, employee assistance programs and even adoption assistance. Workers at small businesses with access to a 401(k) dropped from 28 percent to just 19 percent, the Small Business Administration estimates. However, an estimated 95 percent of workers in a PEO arrangement have access to a pension plan.*
PEOs also improve the work environment and make it safer. They focus on workplace risk management, safety programs and good human resources practices. PEOs arrange workers' compensation coverage with major insurance carriers and manage the claims. They also offer human resources services delivered by certified professionals. Nine out of 10 PEOs provide services such as customized employee handbooks, recruitment, pre-employment screening, wage and compensation planning, and assistance with job descriptions.*
PEO Long-Term Retention
PEOs and clients develop long-term relationships. PEOs that are members of NAPEO retain 86 percent of clients for a year or more.* They allow clients to "reduce costs and free up time to devote to revenue generating activities, improvements that can be instrumental to gaining competitive advantage," according to research by the Society of Human Resource Management Foundation.
*Source: NAPEO's 2009 Financial Ratio and Operating Statistics Survey. A copy of the full survey report is available for purchase through NAPEO's Bookstore.