Professional employer organizations (PEOs) are increasingly making a comeback as the HR outsourcing service model of choice for some smaller organizations, buoyed by the improving small business economy.

"It is difficult for small businesses to manage all facets of human resource administration associated with their workforces," said Lisa Rowan program manager for HR and talent management services for IDC. "There are an increasing number of options for comprehensive HR outsourcing services for the small market; the oldest of these is the professional employer organization (PEO) model, which actually is a precursor to and grandparent of HR business process outsourcing (BPO)."

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, IDC finds that 5% of U.S. small businesses with 50 or fewer employees utilize a PEO for managing their HR administration

This IDC study, HR BPO and PEO Outsourcing Options for the Small Market, discusses comprehensive HR outsourcing services for small businesses with a focus on the professional employer organization market. This study includes the results of a survey of the PEO industry conducted by PEO Network Inc. in the fall of 2006.