Professional employer organizations (PEOs) are on the rise, and benefit advisers who may have once viewed them as a threat have begun recommending them to their small employer clients.

PEO revenues, operating income and average number of clients were all higher in 2017 than they were a year earlier, and the industry is optimistic that the growth will continue. Citing a recent survey of 50 industry executives, Pat Cleary, the president and CEO of the National Association of Professional Employer Organizations, says there is “a continued pattern of sustained, vibrant growth by PEOs.”

PEOs serve smaller clients with an average workforce of 22. That number has been “inching up a little,” Cleary says, as the number of pain points grow for small-business owners. He points to two factors behind the sector’s growth. The first is the push to outsource all non-core business functions, so that companies can focus on what they do best.

Bloomberg/file photo

The other factor is mounting government regulation. Despite the Trump Administration’s pledge to lighten the regulatory load on business, Cleary notes that a growing number of local and state governments have been eagerly instituting their own rules governing minimum wage, overtime, paid family and medical leave and other workforce-related issues.

While Cleary says an exact figure is hard to come by, he estimates that there are about 700 PEOs in the U.S serving between 2 million and 3 million employees. While some of NAPEO’s members focus on certain industries, he says PEOs serve virtually every sector of the U.S. economy. But they have an especially strong presence in the technology sector, he adds, because venture capitalists don’t want the startups they fund distracted by administrative tasks, like managing a payroll, setting up a 401(k) plan or choosing a health plan.

Given their increasing popularity, should benefit advisers at least consider suggesting that their small business clients work with a PEO?

Acknowledging that PEOs and benefit advisers once perceived each other as a potential threat, Cleary says “now our message is that a PEO is a benefit broker’s best friend” – a resource that enables them to develop more strategic relationships with their clients.

“If you’re a broker, it would almost be malpractice to not give your client this option,” he says of suggesting a PEO to their small-business customers.

Rhonda Marcucci, vice president of the HR and benefits technology practice at Gallagher Benefit Services in Rolling Meadows, Illinois, agrees with this assessment. While noting the occasional competition between both parties, she believes more PEOs now see the value in partnering with brokers as the client’s trusted adviser.

“PEOs should be on the radar as a potential solution for smaller clients,” she says. “We see them as a potential option for a complete insurance and HR administration solution.” But, she adds that as employer groups get bigger, “we find that they can usually be served more cost-effectively outside a PEO environment.”

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