Factors contributing to PEO industry growth

Eight key factors have unfolded over the past few decades:

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.
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.
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.
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.
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.
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.
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.
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.

Instant Insights /

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