Professional employer organizations (PEOs) provide an array of HR services and employee benefits to client organizations, typically small- to mid-sized businesses. This frees those clients to focus their primary efforts on the core business itself, including operations, strategy, and innovation. Our previous research on a variety of measures has found that this arrangement yields significant benefits to PEO clients, as they grow more quickly than comparable other businesses, doing so with lower rates of employee turnover and higher rates of year-to-year business survival. Anecdotally, evidence points to a growing PEO industry driven by a rebounding small business sector, an increase in the use of outsourcing by small businesses, and the rise of complicated employment regulations such as the Affordable Care Act (ACA). Precisely calculating the size of the industry, however, has proved to be tricky due to the
fact that traditional sources such as the U.S. Bureau of Labor Statistics (BLS) and Hoovers do not accurately define PEOs and often include non-PEOs in the category. This white paper therefore examines that question from multiple perspectives using a variety of data sources.
We calculate the current size of the PEO industry to be between $136 and $156 billion, as measured in gross revenues (which includes clients’ payrolls as well as the fees charged to clients). PEOs provide services to between 2.7 and 3.4 million worksite employees for 156,000 to 180,000 clients, and employ between 21,000 and 27,000 internal employees. We estimate there are between 780 and 980 PEOs currently operating in the United States.
These numbers indicate the PEO industry has grown significantly since the PEO concept first began to take hold three decades ago. In each of the last 30years, the industry has added, on average, roughly 100,000 worksite employees and 6,000 net new clients. For perspective, that means that every five years, the PEO industry has added the employment equivalent of the entire utilities industry in the United States.
Multiple data sources were used to make the calculations in this paper, with primary focus on the following:
• NAPEO membership data;
• BLS data;
• NAPEO’s 2014 Financial Ratio & Operating Statistics (FROS)
• Hoovers/Dun & Bradstreet data on all companies classified
as PEOs by Hoovers; and
• Detailed administrative data from five selected states. No single data source contains enough information by itself to accurately estimate the size of the industry, so we sought to combine the best (and most reliable) components of each in order to make the most accurate estimate possible. The lower-bound estimates are based on the most conservative assumptions for those areas where quantitative parameters are not precisely known, while higher-range estimates are based on less conservative assumptions.
We found that data on the PEO industry (from major business databases such as Hoovers, as well as from the BLS), often over-counts PEOs, typically by including businesses that do not meet the traditional definition of PEO and/or by mixing worksite employees and internal employees in reporting employee counts. Our calculation methods and manual data reviews were therefore designed specifically to avoid both of those problems, which can be inherent in more automated data gathering and reporting methods. The estimated 2.7 to 3.4 million employees who benefit from PEO services is a number larger than the size of the entire agriculture/forestry industry in the United States (and close to the size of the federal government, the education sector, or the information sector), based on data from the BLS.1
The estimated 780 to 980 PEOs operating in the United States thus touch a substantial number of U.S. employees across some 156,000 to 180,000 different client organizations. And, earlier findings2 that PEO clients have higher rates of growth, are significantly less likely to go out of business from one year to the next, and have notably lower rates of employee turnover suggest that PEOs are exerting a positive influence on the U.S. economy as a whole, making it possible for many small- and mid-sized enterprises to focus more successfully on their core work, while simultaneously serving as a stabilizing force in employment by reducing unwanted employee turnover among PEO clients. Notably, PEOs are doing this despite employing only a modest number of internal employees of their own: fewer than 30,000 total internal employees in total.
This underscores the tremendous leverage of those internal PEO employees, whose positive effects are felt across an employee base larger than the entire U.S.agricultural sector.