19 May Top Ten Issues Facing PEOs in 2025

As businesses adapt to post-pandemic realities, regulatory shifts, and workforce evolution, the demand for PEOs is undergoing major transformations.  Industries, once reliant on traditional HR models, are now turning to PEOs to manage growing complexities from multi-state compliance to workforce risk mitigation.  Meanwhile, new sectors are emerging as top users of PEO services, reshaping how HR outsourcing functions in 2025.  This article explores the most significant industry changes driving PEO adoption and what it means for the future of outsourced HR.
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1. Workers’ Compensation Volatility

•Higher premiums across industries with increased claim frequency and litigation.

• Carrier tightening: Fewer insurers are writing WC policies for staffing-heavy or higher-risk sectors.
• Compliance overload with multi-state WC rules, especially for remote workers.
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2. AI & Automation Pressures
• Clients expect automated HR tools (onboarding, time tracking, payroll, benefits enrollment).
• PEOs that don’t modernize their tech stack are losing competitive edge.
• AI-driven competitors are entering the market, offering cheaper, leaner services.
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3. Regulatory Complexity (State & Federal)
• State-by-state employment law changes (minimum wage, leave laws, pay transparency) are hard to track across client bases.
• 1099 vs W-2 classification is under tight scrutiny — especially for gig and remote workers.
• Affordable Care Act (ACA) enforcement is back in full swing — PEOs are on the hook for accurate reporting.
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4. Client Retention & Margin Compression
• More clients are in-sourcing HR or choosing niche HR tech over full-service PEOs.
• Margins are squeezed as clients demand more for less — especially small businesses hit by inflation.
• Startups and SMBs are budget-conscious, but still expect full compliance and support.
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5. Remote & Multi-State Workforces
• COVID-normalized remote work left PEOs managing tax, HR, and legal compliance in 5–15 states per client.
• State unemployment insurance (SUI) registration and tracking is a mess for many.
• Clients expect PEOs to solve mobility problems — instantly.
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6. Cybersecurity & Data Breaches
• PEOs store SSNs, banking, health, and payroll data — they are prime cyberattack targets.
• Must comply with FTC Safeguards Rule and state privacy laws (e.g. California, New York).
• Clients demand proof of SOC 2 compliance, disaster recovery plans, and 24/7 breach response.
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7. Benefits Inflation & Healthcare Costs
• Health insurance premiums are skyrocketing — clients blame PEOs.
• Hard to balance plan affordability with offering decent coverage.
• Clients want custom plan designs, but PEOs are locked into master policies or limited carriers.
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8. Legal Risks & EPLI Claims
• Surge in employment practice liability claims: discrimination, harassment, wage & hour.
• Many PEOs underestimate cost of EPLI (Employment Practices Liability Insurance).
• Must help clients stay compliant or risk shared liability.
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9. PEO Certification & Accreditation Demands
• More clients (and insurers) want certified PEOs (CPEOs) via the IRS for tax assurance.
• But maintaining certification is time-consuming and requires financial transparency.
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10. M&A and Consolidation
• Larger PEOs are acquiring smaller competitors, leaving fewer mid-sized players.
• Private equity is entering the space — driving profit focus over client service.
• Smaller or independent PEOs are being pushed out unless they specialize or innovate.
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