A PEO (Professional Employer Organization) is a third-party organization that provides complete HR services, such as onboarding and off-boarding, and benefits administration, to its client business.
PEOs enter into a co-employment agreement and manage payroll processing, employee benefits, tax filings, workers’ compensation, and compliance. It handles administrative and regulatory duties, while the client company maintains control over daily operations and employee management.
The history of PEO is found in the 1960s and 1970s, when it was first established as an employee leasing company that provided payroll taxes and employment laws. The industry was standardized by the NAPEO (National Association of Professional Employer Organisations) in 1984. PEOs had become well known by the 2000s, and today, the IRS formally recognizes them, and different states regulate the PEO industry.
What is the history of PEO?
The history of PEO is found in the late 1960s when it was first known as ‘Employee Leasing’. Three businessmen, Eugene Boffa, Louis Calmare, and Joseph Martinez, helped establish the first employee leasing model in the United States based on leasing agreements.
Marvin Selter, a financial consultant from Southern California, promoted the concept in the early 1970s by leasing the internal staff of a doctor’s office through his company, Practice Service Corporation. These early efforts set the foundation for today’s professional employer organizations by allowing businesses to manage HR tasks and offer benefits through employee grouping.
Why did the PEO model evolve?
The PEO model evolved mainly to handle rising administrative costs, manage complex employee regulations, meet the need for competitive benefits, and focus on core business activities.
Rising administrative costs
Rising administrative costs are the increasing expenses that an organization pays for general administration and overhead activities, such as administrative staff salaries, legal and accounting fees, and benefits administration. These costs have no connection to production or sales, and their increase affects total profitability.
Rising administrative costs became a major issue for businesses, particularly SMBs (Small and Medium-sized Businesses), as time, money, and effort were required to handle HR tasks, which include benefits administration, payroll, and tax filings.
The PEO model started to change as businesses realized that handling these difficult tasks internally was costly and time-consuming. The model allows businesses to outsource to expert companies that accurately perform HR administration tasks on a wider scale, which reduces costs and internal staffing.
Complexity of employment regulations
The complexity of employment regulations means businesses have to comply with difficult legal requirements, such as employee rights, working conditions, benefits, and workplace safety.
The PEO model evolved to help companies manage the complexity of employment regulations, which include record-keeping, compliance with labor standards, health and safety rules, and protections for employee transfers and contracts. The PEO serves as the employer of record for tax and regulatory purposes, which include payroll, benefits administration, tax filings, and labor law compliance.
This co-employment arrangement allows companies to focus on their core operations, such as sales and marketing, while the PEO handles the complexities of employment regulations, such as managing employee classification (W-2, 1099), OSHA (Occupational Safety and Health Administration) compliance, and handling new hire reporting requirements, which reduces administrative burdens and legal risks.
Need for competitive benefits
The need for competitive benefits means employers have to provide better employment benefits and advantages to attract and keep skilled employees, such as health insurance, retirement plans, flexible schedules, and professional development.
The PEO model evolved to meet the need for competitive benefits by using its collective purchasing power to provide small and medium-sized businesses with high-quality, cost-effective benefits packages similar to those of bigger companies.
PEOs handle benefits administration for client companies, which includes health insurance, retirement plans, such as 401(k), dental, and vision coverage. The PEO model helps companies hire and retain skilled employees without paying the high expenses or administrative burden of operating these programs on their own. This method allows organizations to give competitive benefits while focusing on their routine operations.
Desire to focus on core business activities
The desire to focus on core business activities means an organization aims to concentrate on its important, income-producing operations, like product development, sales, or customer service, while outsourcing support functions, like payroll or human resources, to outside professionals.
The PEO model evolved as businesses desire to concentrate on their core activities and spend less time and money on administrative tasks like payroll, benefits administration, and regulatory compliance.
Businesses realized that outsourcing these duties to PEOs saved them from the burden of HR responsibilities and allowed them to focus on strategic priorities, growth, and development. This change took place due to the desire to save expenses, maintain competitiveness, and obtain HR knowledge without creating big internal departments.
How has the PEO model developed?
The PEO model has developed through the early phase (1960s-1980s), Growth Phase (1990s–2000s), Regulatory Phase (2000s–2010s), and Modern Phase (2010s–Present). Every one of these stages shows a different way that PEOs have developed in response to market demands, company requirements, and regulatory changes.
Early phase (1960s-1980s)
The early phase (1960s-1980s) was when PEOs were founded, mainly to help businesses with HR administrative duties by providing basic payroll services and employee leasing.
PEOs developed from the employee-leasing concept in the late 1960s and were first introduced by operators such as Eugene Boffa and Marvin Selter. The concept allowed companies to outsource payroll, benefits, and workers’ compensation, originally to take advantage of legal inaccuracies and reduce expenses.
There were over 275 staff leasing businesses by 1985, according to the article “Employee Leasing: Implications for State Unemployment Insurance Programs” published by the DOL (United States Department of Labor).
Growth phase (1990s-2000s)
The growth phase (1990s-2000s) is the time when the PEO industry was quickly growing and moving, from basic employee leasing to providing complete HR services and establishing industry standards.
The early 1990s saw the beginnings of the current idea of PEOs as businesses were looking for relief from growing HR and compliance responsibilities. The PEO model was developed to meet these objectives, in which the client monitors daily operations like product development and sales and marketing, and the PEO serves as the employer of record for tax purposes and benefits administration, like access to affordable health insurance.
Regularity phase (2000s-2010s)
The regularity phase (2000s-2010s) is when state and federal laws were introduced, such as the ACA (Affordable Care Act) of 2010, and IRS certification programs, to formalize and legitimize the PEO industry.
This phase was marked by strict state and federal regulations to protect businesses and employees using PEO services. The rise of IRS certification criteria, SUTA-dumping laws (State Unemployment Tax Act) of 2004, and accreditation organizations like ESAC (Employer Services Assurance Corporation) have improved the credibility of the PEO industry and offered clarified legal frameworks.
Modern phase (2010s-Present)
The modern phase (2010s-Present) is the current time where PEOs are recognized as strategic partners who help companies manage compliance and employee services while offering advanced, technology-based HR solutions.
PEOs have developed into important service providers for companies of all sizes in the present time by providing a range of services related to payroll, benefits administration, compliance, and human resources.
They currently use cloud-based HR solutions, AI (Artificial Intelligence), data analytics, and global EOR capabilities to help client businesses scale operations accurately and maintain compliance. They also give SMBs access to resources that are available to larger companies, such as employee benefits, retirement plans, and health insurance.
PEOs have branded themselves as important to small and medium-sized businesses looking to manage risk and compete for talent by adjusting to technological improvements and more complex employment rules.
What are the major milestones in PEO industry growth?
The major milestones in PEO industry growth include formalization and industry association formation, legislative measures and tax acts, co-employment model and industry expansion, regulatory and certification developments, and market growth and recognition.
Trade organizations like the National Staff Leasing Association, later NAPEO (National Association of Professional Employer Organizations), were established in 1984 to advance industry recognition and standards, which was a major milestone towards the legitimacy and expansion of the PEO industry.
The TEFRA (Tax Equity and Fiscal Responsibility Act) of 1982, which promoted the expansion of employee leasing agreements, was a major milestone in the PEO industry. TEFRA managed this through the establishment of regulatory rules and tax benefits for leased employees under tax-qualified pension plans.
The TRA (Tax Reform Act) of 1986 later reduced some of the tax benefits by providing strict regulatory guidelines. These guidelines defined the relationship of PEOs and employee leasing agreements to the tax code and helped legitimize the PEO industry’s ongoing expansion and acceptance.
The adoption of the co-employment model in the 1990s represented another major milestone in the PEO industry, which allowed it to offer services other than payroll, such as compliance, benefits, and risk management. So it became easier for PEOs to be viewed as strategic partners rather than just service providers.
The IRS created the CPEO (Certified Professional Employer Organisation) program in 2014 as part of the Tax Increase Prevention Act of 2014. This program further legitimized the position of PEOs by establishing a government certification process and formalizing industry standards.
PEOs are an important resource for businesses today, particularly small and medium-sized businesses, and handle complex labor demands because they help businesses develop more quickly, reduce employee turnover, and increase survival rates.
The PEO industry has 523 providers, which employ 4.5 million people across 208,000 client organizations and account for 17% of businesses with 10–99 employees. It has brought in $358 billion and expanded by 7% a year between 2020 and 2022, since 2012, according to an article titled “PEO INDUSTRY FOOTPRINT 2023” published by the NAPEO (National Association of Professional Employer Organizations).”
Why do growing businesses choose PEOs?
Growing businesses choose PEOs because they handle HR administration, payroll processing, employee benefits, compliance management, and risk mitigation.
PEOs handle HR administration for growing businesses by simplifying hiring, onboarding, and employee record management processes. This allows employers to concentrate more on growth strategies than on daily employee duties.
The PEO also manages payroll processing because it guarantees that employees receive their payments on time and accurately. They also manage payroll tax filings, reporting, and withholdings, which reduces administrative costs and errors for the company.
Growing businesses choose PEOs because they provide retirement plans, health insurance, and other benefits to their employees. PEOs offer access to better benefits at more reasonable pricing by grouping employees from different client companies.
PEOs also handle compliance management, which helps growing businesses stay updated with changing tax laws, employment standards, and labor laws, such as the FLSA (Fair Labor Standards Act) and FMLA (Family and Medical Leave Act). This reduces the possibility of costly fines and legal problems for growing businesses.
A PEO also helps with risk mitigation, which includes handling claims, safety programs, like risk management strategies, training and development, and workers’ compensation. Growing businesses choose PEOs because they protect them from possible liability and reduce dangers at work.
How do PEOs help small businesses scale faster?
PEOs help small businesses scale faster by managing time-consuming HR duties like payroll, benefits administration, and compliance. They offer small businesses access to premium, affordable benefits that help in attracting and keeping skilled employees. PEOs for small businesses help them grow with competence and productivity when they have scalable facilities, professional HR support, and a smooth onboarding process.
How do PEOs simplify legal and compliance responsibilities?
PEOs simplify legal and compliance responsibilities by serving as co-employers and handling payroll tax payments, benefits administration, such as ACA (Affordable Care Act) and ERISA (Employee Retirement Income Security Act) compliance, workers’ compensation, safety standards, record-keeping, audits, employee handbooks, and training.
Why is HR outsourcing through a PEO ideal for startups?
HR outsourcing through a PEO is ideal for startups because they handle administrative duties, such as payroll, benefits, and compliance, so that employers concentrate on their main business operations, like product development, sales, and marketing. They are ideal partners for growth and success as they offer expert advice on regulatory compliance and affordable access to employee benefits.
What are the long-term advantages of using a PEO?
The long-term advantages of using a PEO are ongoing HR support, access to premium benefits, compliance with tax and labor laws, and accurate payroll management that improves employee engagement and retention. These PEO benefits help a business attract and keep talent by improving long-term cost savings, employee satisfaction, scalability, and growth.
Why are PEOs beneficial for businesses expanding to new locations?
PEOs are beneficial for businesses expanding to new locations because they reduce complexity and risk by managing local payroll, benefits, and compliance with different local labor laws. An international PEO helps companies quickly and legally enter new markets without creating separate entities by providing economical, scalable solutions that guarantee smooth staff management globally and promote development.
