THE EVOLUTION OF PEOS AS COMPLIANCE CHAMPIONS FOR SMALL BUSINESSES

In a time of shifting political dynamics, economic uncertainty, and a compliance spiderweb at both the state and federal levels, small and medium-sized businesses can now more than ever benefit from the steady beacon the PEO relationship provides.

A brief analysis of the evolution of the PEO industry is necessary to better understand the confidence this relationship provides to businesses. Today’s PEOs are derived from the 1960 and 1970s versions of employee leasing companies. Primary to this relationship was the outsourcing, or leasing, of the client businesses’ workforce to the employee leasing company, which in turn allowed the leasing company to become the legally responsible employer for tax and insurance purposes. This arrangement was the predecessor of today’s PEO.

One of the first federal legislative acts to impact the industry was the Employee Retirement Income Security Act (ERISA), which was passed in the mid-1970s. ERISA did not require organizations to be aggregated under a common owner, which allowed leasing companies to maximize the opportunity to offer more generous benefits to employees from unrelated entities. The employee leasing business model was further developed to provide small to medium-sized companies with a variety of services, including payroll management, benefits, and workers’ compensation administration, and assistance with a number of other compliance-related matters.

In 1991, the National Association of Insurance Commissioners (NAIC) adopted an Employee Leasing Model Regulation and the Employee Leasing Registration Model Act to recognize the employee leasing relationship and help regulate data collection, policy forms, and experience rating plans among companies using employee leasing companies. Over time, these models were discontinued, new guidance was issued, and the terminology was updated to professional employer organizations. In 1993, the Internal Revenue Service recognized PEOs as co-employers for purposes of employment taxes. However, this early lack of a strong regulatory framework generated the need for further oversight.

In 1994, the National Staff Leasing Association (NLSA) was rebranded into today’s National Association of Professional Employer Organizations (NAPEO). As the industry found its footing over the next two decades, it was able to further develop the PEO Model Act, allowing states to regulate the industry and the industry to show its commitment to small and medium-sized businesses. The regulatory framework surrounding the modern PEO structure provides the necessary guardrails within the industry like never before – instilling confidence in employers and employees alike.

With the help of NAPEO’s advocacy, the Tax Increase Prevention Act of 2014 (TIPA) was passed in 2014, which formally recognized a new category of PEOs known as Certified Professional Employer Organizations (CPEOs). In 2017, under the Small Business Efficiency Act (SBEA), part of the TIPA, the Internal Revenue Service (IRS) rolled out the CPEO program. The CPEO program allowed CPEOs to assume federal tax liability for their clients’ payroll taxes. This provided legitimacy and a path forward for PEOs to show small businesses the industry’s commitment to tax and regulatory compliance.

PEO awareness on the national front continues to gain traction, rising by 48% since 2018. During 2020, the global pandemic again showed the PEO industry’s value add for our clients. Suddenly, every business was thrust into uncharted territory, and regulations, rules, and guidelines were changing daily. PEOs had a unique opportunity to come alongside small businesses to assist with their Paycheck Protection Program (PPP) applications, Employee Retention Tax Credits (ERTC), and other pandemic relief programs. PEOs also provided key human resources assistance to clients who had to make critical employment decisions, including reducing staff and changing how they ran their businesses. PEOs were able to offer strategic guidance and assistance in navigating the unknown.

As of today, our influence with the federal and state governments has grown exponentially. Today, 48 states have some form of PEO recognition in law. NAPEO’s State Government Affairs Committee has a dedicated state action plan that it enacts yearly to broaden our influence and advocacy in specific states. NAPEO and its members regularly testify on behalf of the industry in state capitals, write articles targeted to professional bases, and industry experts have even written various books on leadership and HR. NAPEO has established its own PAC to support our federal advocacy priorities by strengthening and establishing relationships with influential policymakers.

The future is bright for the PEO industry. As federal and state actions continue to influence employers’ day-to-day actions, PEOs continue to represent our small business clients, and our industry continues to grow in recognition and stature.