The Role of PEOs in Today's Workplace

American business is undergoing fundamental changes in human resource management, and the PEO industry is a response to market demands. There are several factors driving the growth of the industry. First, over the last two decades, this nation has seen a significant increase in employment-related federal, state, and local laws and regulations. Second, the expertise required to manage a small to mid-sized business has outgrown the experience and training of many entrepreneurs who started these businesses. Third, working Americans demand comprehensive, affordable health care, retirement savings plans, and other employee benefits for themselves and their families. In response to these demands, the PEO industry has divided business into several manageable parts.

PEOs offer to their clients and worksite employees the services and expertise of a personnel department within a large corporation. Few, if any, small businesses can afford a full-time staff consisting of an accountant, a human resource professional, a lawyer, a risk manager, a benefits manager, and a manager of information services. PEOs offer this expertise to their clients.

By providing these services, PEOs enable their clients to concentrate on their core business without the challenges and distractions associated with the "business of employment." As a result, PEOs enhance the profitability of their client companies. The PEO's economy of scale enables each client company to lower employment costs and increase the business's bottom line. The client can maintain a simple in-house HR infrastructure or none at all by relying on the PEO. The client also can reduce hiring overhead. Costs related to monitoring of, and compliance with, employment laws are reduced, as are the often significant costs of failure to comply with such laws. In addition, the PEO provides time savings by handling routine and redundant tasks for its clients. This enables the business owner to focus on the company's core competency and grow its bottom line.

In addition to providing important services to their business clients, PEOs offer substantial advantages to worksite employees. In many cases, these employees would not be provided the number, or quality, of benefits that a PEO can offer. These benefits may include health insurance, retirement savings plans, disability insurance, life insurance, dependent care reimbursement accounts, vision care, dental insurance, employee assistance plans, job counseling and educational benefits. Each individual small business's cost of establishing and administering this range of plans would be prohibitive. However, due to economies of scale, PEOs can sponsor and offer these plans at an affordable cost.

In many cases, employees of small businesses would not be protected by employment laws in the absence of the PEO relationship. Because worksite employees are included in the larger workforce of a PEO for purposes of determining statutory coverage, they are in many cases covered by employment laws that would not have otherwise applied. Further, there is generally a higher rate of compliance with these laws by a PEO than by its clients because PEOs provide full-time staff who are responsible for monitoring and ensuring compliance with such laws.