PEO
Slowing U.S. Hiring Creates Revenue Pressure for PEOs Despite Rising Employee Earnings
By Anthony Beck, . Insurance Wire.
U.S. employment growth has slowed considerably since 2022, with recent hiring concentrated in healthcare, education and a limited number of other industries.
According to an analysis published by PEO Insider, employers are increasingly maintaining existing workforces rather than expanding headcount, even as some employees work additional hours.
The publication describes this environment as a period of limited hiring and limited layoffs, sometimes called a "no hire, no fire" labor market.
Industry conditions also vary. Manufacturing employment and hours worked have not necessarily moved in the same direction, while construction activity remains uneven between infrastructure development and residential building.
For Professional Employer Organizations (PEOs), these distinctions matter because revenue depends partly on the number of employees serviced, total payroll processed and the pricing structure established with each client.
---
How Slower Hiring Affects PEO Revenue
PEOs commonly charge clients through a per-employee administrative fee, a percentage of payroll or a combination of pricing methods.
Under a fixed per-employee-per-month arrangement, revenue generally increases when clients add employees and decreases when their workforces shrink.
If employees work additional hours without an increase in headcount, the PEO does not necessarily collect additional administrative revenue.
Percentage-of-payroll arrangements operate differently.
When employees work more hours or receive higher wages, total payroll increases, potentially generating additional revenue even when employee counts remain unchanged.
For example, a PEO charging $125 per employee per month for 100 employees would generate $12,500 in monthly administrative revenue.
Increasing those employees' hours would not change that amount under a strictly fixed per-employee fee.
By comparison, a PEO charging a 2% administrative fee on $500,000 in monthly payroll would generate $10,000. If payroll increased to $550,000, the fee would rise to $11,000, assuming the same percentage applies.
Actual PEO pricing can include minimum fees, workers' compensation charges and other components that respond differently to changes in payroll or employee counts.
The distinction is important when evaluating PEO revenue growth during periods of weak hiring.
---
Health Insurance Costs Continue to Pressure Small Employers
The National Federation of Independent Business (NFIB) has consistently identified health insurance costs as a concern among small-business owners.
PEOs may provide access to group health insurance arrangements that differ from those available to employers purchasing coverage independently.
Depending on the PEO, these arrangements may offer different carrier options, plan designs, administrative services and pricing.
However, larger group purchasing arrangements do not automatically guarantee lower premiums.
PEOs offering health benefits must also manage the financial implications of medical claims, carrier renewals and participation changes.
The degree of exposure depends on whether the arrangement is fully insured, self-funded or structured through another funding mechanism.
In arrangements where the PEO assumes or shares financial risk associated with medical claims, higher-than-expected utilization can affect profitability.
For clients already experiencing financial pressure, substantial renewal increases may make the overall PEO arrangement more difficult to sustain.
---
Recruiting Challenges Create Demand for Additional HR Services
Despite slower overall hiring, many small businesses continue to report difficulty finding qualified employees.
PEO Insider cites NFIB survey findings indicating that 27% of small-business owners identified finding qualified workers as their most important problem.
Among businesses actively hiring, 85% reported receiving few or no qualified applicants.
These challenges can create demand for recruiting assistance, applicant screening, compensation benchmarking and workforce planning.
Some PEOs offer these services through internal HR teams or partnerships with recruiting and technology providers.
For employers struggling to fill positions, assistance with recruiting and retention may be more immediately valuable than improvements to routine payroll administration.
However, the availability and scope of recruiting services vary significantly between PEOs.
Employers should distinguish between access to applicant tracking software, general recruiting guidance and actual candidate sourcing or placement services.
---
How Interest Rates Affect PEO Revenue
Some payroll providers and PEOs can earn interest on funds temporarily held before payroll, tax or other disbursements.
This income is commonly referred to as float income.
When interest rates are higher, eligible funds held in interest-bearing accounts may generate additional revenue.
However, the amount depends on the provider's banking arrangements, the volume and duration of funds held, and applicable contractual or regulatory restrictions.
Not every PEO has the same ability to retain interest earned on client funds.
Float income may help offset weaker revenue growth in certain arrangements, but it does not replace the recurring administrative revenue associated with maintaining and expanding client workforces.
---
Why Client Retention Becomes More Important During Slow Hiring
Slower hiring limits the organic growth PEOs receive when existing clients add employees.
Financial pressure on small businesses can create a separate problem when employers reduce their workforces, discontinue services or cease operations.
Losing a client affects more than administrative fees. Depending on the arrangement, it can also reduce payroll volume, workers' compensation premiums and participation in other services.
The impact varies based on the client's size, pricing structure and the profitability of the account.
For PEOs, client retention becomes particularly important when new employee growth is limited.
Service quality, competitive pricing, benefits renewals and the ability to address clients' operational needs can influence whether employers continue their PEO relationships.
However, PEOs cannot eliminate the financial risks associated with clients experiencing declining revenue or business closures.
---
What PEOs Should Monitor
PEO Insider identifies small-business hiring plans and actual employment changes as indicators of whether workforce growth may improve.
For PEOs, the more useful internal measures include changes in worksite employee counts, average payroll per employee, client retention and revenue per worksite employee.
These measures help distinguish growth resulting from additional employees from growth generated by higher wages or longer working hours.
A PEO experiencing rising payroll volume but stagnant employee counts may perform differently depending on how its administrative fees are structured.
Benefits costs and client profitability should also be evaluated separately, since increased payroll does not necessarily improve margins when insurance and service expenses are rising.
The broader implication of PEO Insider's analysis is that headline employment figures alone provide an incomplete picture of PEO performance.
Understanding how employment, hours worked, wages and client retention affect each revenue component provides a more accurate assessment of growth and financial exposure.
---
Sources
PEO Insider — Hours, Not Headcount: What the Labor Market Is Actually Telling Us https://peoinsider.org/articles/hours-not-headcount-what-the-labor-market-is-actually-telling-us/
National Federation of Independent Business — Small Business Economic Trends https://www.nfib.com/surveys/small-business-economic-trends/
U.S. Bureau of Labor Statistics — Employment Situation https://www.bls.gov/news.release/empsit.toc.htm
U.S. Bureau of Labor Statistics — Consumer Price Index https://www.bls.gov/cpi/
Source: https://peoinsider.org/articles/hours-not-headcount-what-the-labor-market-is-actually-telling-us/
Insurance Wire provides news and information, not insurance, legal, or financial advice. Consult a qualified professional about your specific needs.