In an effort to further the understanding of the benefits that a PEO provides on an empirical basis, the National Association of Professional Employer Organizations contracted with Laurie Bassi and Dan McMurrer and their firm, The McBassi Group to conduct a series of PEO-specific White Papers. Starting in 2013, the McBassi Group has prepared a White Paper of significance regarding the PEO industry each year. An overall overview of the White Paper project can be found here…
https://www.napeo.org/what-is-a-peo/about-the-peo-industry/napeo-white-papers/overview
Ms. Bassi is an internationally renowned human resources analytics expert and runs a think-tank research group with the co-founder and lead analyst Dan McMurrer https://mcbassi.com . The firm is extremely credible at the process of evaluating economic impact.
McBassi and company has now produced a series of nine white papers addressing the core functionality and value proposition of PEO. They are incredibly written and on point to the value PEO brings the business owner in terms of growth, retention, profitability and other macro key economic indicators. This is now the ninth white paper on PEO that Ms. Bassi and Mr. McMurrer have collaborated on to benefit the holistic understanding of an often misunderstood value proposition called coemployment. It is hard to not refer to them as the most expert group in understanding the macroeconomic impact of the PEO model on American employment.
NEW! White Paper 9 (May 2021): The 2021 PEO Industry Footprint
All of the historical White Papers can be found below:
- White Papers – PEO White Papers that are available on napeo.org
- White Paper 1 (September 2013): Professional Employer Organizations: Fueling Small Business Growth
- White Paper 2 (September 2014): Professional Employer Organizations: Keeping Turnover Low and Survival High
- White Paper 3 (September 2015): An Economic Analysis: The PEO Industry Footprint
- White Paper 4 (September 2016): The State of the PEO Industry 2016: Markets, Value, and Trends
- White Paper 5 (September 2017): PEOs: Good for Businesses and Their Employees
- White Paper 6 (September 2018): An Economic Analysis: The PEO Industry Footprint in 2018
- White Paper 7 (September 2019): The ROI of Using a PEO
- White Paper 8 (September 2020): How PEO Clients Fared in the First Months of the COVID-19 Pandemic: A Comparative Analysis
As you will note, there is a wide range of data and findings found in the nine White Papers now written. The focus of this post is the comparison of the three reports that evaluate the “PEO Footprint”. This analysis is meant to bring to light what I deem to be the key performance indicators most relevant in explanation of its overall economic impact. This is interpretation of NAPEO’s findings.
The biggest difference in the three is the calculation used in measuring the size of the industry, from a gross revenue, client and employee count basis. As the report in 2015 was the first report of any credibility on the PEO space with the exception of the three reports done by the National Council of Compensation Insurance (“The NCCI”) a few years earlier, at the onset of this exercise, it was understood that there was going to be some element of estimation and assumption in part based on the following:
- Confusion of difference between PEO (coemployment) and staffing (sole employment)
- Lack of consistent definition of PEO/coemployment on a federal level
- Lack of mandatory registration/licensure on a federal level
- Confusion of difference between PEO and payroll/HR companies
- Multiple PEOs part of same control group with different names
- Steady M and A volume
- Non-NAPEO members and others “off the grid”
The below table highlights key differences in the three studies and the methodologies used to forecast the results. The most important difference in the studies was how the number of PEOs was calculated. As a result of the change in methodology (which makes sense), the estimated amount of PEO’s in the country in 2021 was 487, a steep 54% drop from the 907 estimated in 2018. That said, payrolls went up 18%, worksite employees 9% (even with COVID) and the most important statistic of all; 15.3% of all civilian, private employees employed by businesses from 10-99 employees are coemployed by a PEO. This up from 12.1%, or a nice 21% uptick.
Through the use of the following four footnotes, I tried to address material changes in methodology and data sets that contributed to the overall results by each White Paper with focus only on the findings from the table below.
| Year | 2015 | 2018 | 2021 |
| # of Professional Employer Organizations (“PEO”) | 880 (1) | 907 (2) | 487 (3) |
| # of PEO Clients | 168,000 | 175,000 | 173,000 |
| # of PEO Worksite Employees | 3,050,000 | 3,700,000 | 4,000,000 |
| Annual PEO Gross Worksite Employee Wages | $ 147,000,000,000 | $ 176,000,000,000 | $ 216,000,000,000 |
| % of Private, Civilian Population – Overall Business | 2.4% | 2.7% | |
| % of Private, Civilian Population – with 10-99 Employees | 12.1% | 15.3% | |
| Average PEO Annual Growth Rate (4) | 8.3% | 7.6% | |
| ….excluding COVID-19 | 8.3% |
1) Multiple Data Sources Used
-NAPEO Membership Data
-BLS Data
-NAPEO’s 2014 Financial Ratio and Operating Statistics (FROS) Survey
-Hoovers/Dun and Bradstreet on all companies classified as PEO’s by Hoovers
-Detailed Administrative Data from five selected states
(2) Changes in Data Sources Used in 2018 v 2015
-Based on comparison of PEO WSE’s with US Bureau of Labor Statistics data on an employment level by firm size for 2017
-For the purpose of these calculations, firms with 10-99 employees were used.
-Based on comparison of PEO WSE’s with total employed civilian labor force from the US Bureau of Statistics Current Population Survey, www.bls.gov/cps/cpsaat01.pdf.
-Based on comparison of PEO clients with total number of firms with 10-99 employees from US Bureau of Labor Statistics. Www.bls.gov/web/cewbd/table_g.txt.
For verifying # PEOs
-Employer Services Assurance Corporation (“ESAC”) members
-PRISM HR Client List
-Slavic 401k Client List
-McBassi PEO Benchmarking Survey
-Reduced list by 67 due to reasons deeming the business unlikely to be a PEO
(3) Changes in Data Sources Used in 2021 v 2018
What companies counted as a PEO further refined as defined?
-Company registration as a PEO not an automatic qualifier that a PEO is operational. Change made after it was found that a significant amount of payroll and HR companies that are registered, do not offer PEO services
-Expanded industry partner lists for new data to Stonehenge and McHenry
-Corrected duplicates and “doing business as” entities that were redundant
-Purchased two third-party vendor data lists (Data Axle and Siccode.com) to cross-reference PEO through NAICS and SIC classification codes
-Website verification of “PEO and/or “coemployment” services offered
-Combined initial list was +2,000, cut by 75%
4) Growth Rate Change Methodology
This estimate is based on calculating annually “same-store” PEO growth (i.e. growth for those PEOs for which we had data for both the current year being calculated and the previous year). As a result, the study excludes any specific growth effects of PEOs that were involved in mergers and acquisitions as well as the impact of the formation of new PEOs and the departure of PEOs that went out of business. The growth rate for the PEO industry if not for the pandemic would have held true at 8.3%, but instead came in at 7.6%.
Some other things to reflect on as we understand what the footprint will look like going forward… Let’s hope we can beat even these numbers!
- It seems like employee count per client company continues to grow and health insurance a greater part of the coemployment decision
- Workers’ compensation rates will continue to decline in 2022 under current environment
- Unscientifically, I would estimate that there was some sort of transaction impacting one of every four PEO’s between 2018 and 2021
- There is a huge increase in start-up PEO and convergence with existing benefits and payroll providers
- There is still not one State that I know of (would love to be corrected) where statute, insurance regulations and actuarial rules integrate which helps fuel the confusion of what is and is not a PEO
- Have I mentioned I hate the term employee leasing
- No barrier of entry to staffing and major confusion between it and coemployment
- Competition continues to try and legislate the industry into a weakened position; be vigilant
- It was great to see everyone at PACE !
It is always nice to have empirical evidence to prove out what those in PEO already know; by far, it is the most efficient and effective business model to manage the non-operational tasks of being an employer.
Let us know what you think about the study, what popped out at you and what you’d like to see different in the next one…
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Contact Professional Employer Organization (PEO) Expert, Paul Hughes
Paul Hughes has been working with the Professional Employer Organization (“PEO”) industry since 1995 and data management since 2005. He is responsible for the day to day operations of both Libertate Insurance Services, LLC and RiskMD, which reports into the overall Ballator Insurance Group family of companies. Learn more about Paul.
Specializing in PEO Services: Workers Compensation, Mergers & Acquisitions, Data Management, Insurance Focus on: Employment Practices Liability (EPLI), Cyber Liability, Health Insurance, Occupational Accident, Business Insurance, Client Company, Casualty, and Disability Insurance.
