An recent study shows small businesses in the U.S. turning rapidly to outsourcing to manage human resources, including the complexities of regulatory compliance. Professional employer organizations (PEOs) are increasingly making a comeback as the HR outsourcing (HRO) service model of choice for some smaller organizations, buoyed by the improving small business economy.
The research shows the estimated value of the total addressable market for comprehensive HR outsourcing to the small market is a staggering $44b per year in potential recurring revenue in the United States, based on 2004 employment figures.
PEOs assume responsibility for all facets of their clients' human resources function, including overall employee relations. As co-employer, the PEO pays the wages and employment taxes for worksite employees out of its own account; collects and reports taxes to state and federal jurisdictions; maintains a long-term relationship with worksite employees (WSEs) that is not temporary; and retains the rights to hire, fire, and reassign WSEs. Although some PEOs offer services to larger clients, the majority of PEO business is conducted with firms that employ 50 or fewer.
The majority of PEOs are small businesses themselves with fewer than 3,000 WSEs in five states or less. Despite the size of the average PEO, the study found that 5% of U.S. small businesses with 50 or fewer employees utilize a PEO for managing their HR administration.
The number of PEOs in the United States declined in 2003 over 2000 but made a dramatic rebound in 2006. The increase is attributable to improved business conditions, lower unemployment, and renewed vigor in the small business market in the United States, according to the U.S. Small Business Administration's 2006 study of the small business economy.
Source(s): IDC Research, PEO Network