PEOs Rolling Through Rocky Economic Times

For Florida's professional employer organizations (PEOs), these are the worst of times - and the best of times. The faltering economy means many of the small firms the PEOs usually count on for business are feeling the pinch and can't afford to hire PEOs. But the poor economy is also motivating other businesses to give PEOs a try in an effort to cut costs.

"It's really a mixed bag," said Mark Perlberg, president and chief executive officer of Oasis Outsourcing, a PEO based in West Palm Beach. "You can definitely see the pain of the economy in our client base, where more than a usual number of customers are going out of business or not growing and hiring," he said.

But Perlberg sees a bright side to the tough times as well. "There is a robust sales environment for PEOs, as we can be particularly appealing to companies looking to save costs in certain areas," he said. "Amazingly, 2008 will be one of the best sales years in our history."

Perlberg's Oasis has some 3,000 clients that have 80,000 employees - about half in Florida. Internally, Oasis has 475 employees - a mix of sales managers, information technologists and human resource administrators.

Nationally, it is estimated that nearly three million workers are currently co-employed in a PEO arrangement with about 700 PEOs. In Florida, there are approximately 100 PEOs touching at least 200,000 workers and handling $20 billion in annual wages.

Before the national economy nosedived this year, the National Association of PEOs estimated America's PEO industry would grow by 20 percent, to $61 billion in gross revenues. The average client of a PEO is a business with 17 worksite employees. But increasingly, larger businesses are hiring PEOs to take advantage of their human resources expertise and web-based technology to handle everyday chores such as payroll and taxes.

Workers at small businesses that contract with PEOs often receive added benefits. For example, the proportion of small business employees with access to a 401(k) dropped from 28 percent to just 19 percent in the past decade. However, an estimated 95 percent of workers in a PEO arrangement have access to a pension plan.

PEOs are typically paid an administrative fee between two to five percent of payroll to handle various human resource duties. As a result, PEOs make more money when they work with companies that are growing and adding workers. Conversely, when a PEO client's workforce contracts, as many are today, so does revenue to the PEO.

Florida's Perspective

In Florida, the construction industry was a big driver behind PEO growth in the 1990s. The market has since diversified, and today's PEO clients include many different types of businesses, from high-tech companies and small manufacturers to doctors, accountants, mechanics, engineers, plumbers - the list is varied and seemingly infinite.

Perlberg said Oasis has been trying to adjust its risk profile by diversifying its client base and signing up more stable businesses such as light manufacturing and hospitality firms like hotels and restaurants.

Michael Corley, president of the Florida Association of PEOs and chief executive officer of Sarasota-based Progressive Employer Services, also sees less emphasis on the construction industry. He noted that PEOs are enjoying a wider market as companies across many industries look to outsourcing solutions to help lower costs.

Obtaining lower health insurance and workers' compensation costs have been two of the main reasons businesses seek out PEOs. PEOs can obtain better rates than small companies because they have more bargaining power with their large numbers of employees. "Health insurance is the No. 1 reason far and away," Corley said. "We can offer Fortune 500 benefits and get them at affordable prices.

"Companies in the past that never considered us are now becoming open to us, and as a result there are increased opportunities across all PEOs," he said. Progressive has 1,600 customers with more than 16,000 workers.

A Bright Future

Compared to most other states, PEOs are reaching a level of maturity in Florida. But that doesn't mean there's not plenty of room to grow. "Our industry penetration is still relatively low and we still see clients that have never had a PEO before," Perlberg said. Just how low a penetration? Perlberg estimates it at about 10 percent. "We are very bullish on future prospects for the industry - there is still a lot of untapped potential."

Even as the economy and population growth have slowed the past few years, the number of PEOs in the state has remained steady, according to Corley. "Out of lemons we are making lemonade," he said, noting that PEOs are trying various methods to appeal to businesses. PEOs are even marketing to downsizing industries because companies that are laying off or doing buyouts need human resources officials to provide legal expertise. PEOs also offer businesses training in wage-and-hour violations and other types of HR counseling.

Unlike temporary staffing companies, PEOs are usually a long-term relationship for businesses, with most assignments spanning years. "It's particularly important to have stable relationship to protect you longer in this type of environment," Perlberg said. His company is dealing more and more with businesses that are struggling. "We get a lot more questions on employee terminations," he said. "When things get bad, businesses want a strong partner they can count on for support to handle the difficult human resources issues about layoffs and unemployment claims."

Greg D'Ambrosio, director of operations and risk management at Modern Business Associates, a St. Petersburg-based PEO, said the good news for the industry is that it has a different model than temporary staffing firms that often take a hit when demand for business falters. "Our business is more recession proof," D'Ambrosio said. Businesses still need to offer workers' compensation and payroll even when they downsize - services that PEOs can offer at better prices than businesses can typically get on their own. While PEOs have been hurt by Florida's demoralized construction industry, fast-food chains have become a surprisingly new business source, he said.

D'Ambrosio notes that his 11-year-old PEO has labor attorneys on its staff, which comes in handy when questions arise about hiring and firing employees. PEOs can also help in performing employee background checks, developing employee handbooks and conducting pre-employment testing.

"We feel like we have a lot of product to offer," D'Ambrosio said. And when the economy finally does turnaround, his PEO and others plan to be there to help guide growth.