During the past 30-plus years in Florida, Professional Employer Organizations (PEOs), like most business segments, have had to adapt to a variety of challenges. The roller coaster ride on Wall Street, legislative changes, and new privacy regulations have all impacted the industry’s results.
Also, there has been a lingering reluctance by employers to embrace PEO services. Part of that reluctance stemmed from the fact that for many years the industry was known as “employee leasing,” and the images that term conjured up were not attractive to many business owners.
To address the issue, the industry re-branded itself as PEOs. However, according to Frank Crum, Jr., president and CEO of Frank Crum in Clearwater, a name change takes time to filter through. “In Florida the PEO industry is still referred to as employee leasing in Chapter 468 of the Florida Statutes. That’s not how it works really, but that’s still in the statutes.”
How it does work, when done properly, is as an arrangement of combined responsibility between the business owner/client of the PEO, and the PEO. “Legally it is co-employment,” said Crum. “There is a worksite employer and the PEO is the co-employer for administration purposes.”
Mark Perlberg, president and CEO of Oasis Outsourcing in West Palm Beach, reluctantly acknowledged that the term “employee leasing” remains a source of confusion for some, but attributes that to a lack of experience with the PEO model. “An objection from someone who has never been in the PEO relationship might be about what sort of control they will have over their employees. But the truth is, the employer runs the worksite; nothing changes.”
The cost of various insurance premiums to an employer, particularly workers’ compensation premiums, has been and remains a key reason why an employer would look at a PEO. “Workers’ compensation is part of what we offer,” said Perlberg. “Almost all of our clients choose our workers’ compensation offering, but we don’t mandate that they do so.”
Even though a PEO has buying power due to the large number of employees it brings to the table, that does not mean that getting a deal done with a carrier is automatic. Nor does it mean that the PEO can dictate rates and underwriting. A PEO has the same pressure as any large insured to maintain a good loss history. An entity making application to a PEO may not be accepted or may have to be removed from the PEO plan.
“The PEO has to maintain a good workers’ compensation mod and a good health insurance group rate and the like, and all at least in part are impacted by the member’s loss ratios,” said Crum. “To achieve the best possible results, many PEOs have professional workers’ compensation underwriters to help maintain good loss histories.” By necessity, other services have evolved from that process, including risk management and loss control.
Like the insurance industry in Florida, competition in the PEO industry is intense, and the marketplace is not easy to navigate. Despite the challenges, PEOs in Florida continue to gain their fair share of the market.
For PEOs, the measurement regarding market share is based on a count of either worksite employees or payroll, or both. Based on statistics provided by the Florida Association of Professional Employer Organizations (FAPEO), there is a steady growth trend for the Florida PEO industry.
Florida statistics show that in 2010 there were over 949,000 worksite employees, 69,000 employers, and over $25 billion in payroll. By comparison, five years ago the numbers from FAPEO showed 700,000 worksite employees, 50,000 employers and payroll in excess of $17 billion.
According to FAPEO Executive Director Robert Skrob, the current FAPEO membership is 44, with another 20 or so licensed PEOs operating in Florida (not included in that count are out-of-state PEOs with a portion of their employees in Florida). Based on a rough estimate from a survey taken by FAPEO in 2010, the average number of employees in a PEO is 4,800, with about 13 employees per employer.
The National Association of Professional Employer Organizations (NAPEO) notes that there are more than 700 PEO members nationally, and that 30 states require some form of licensing, Florida included.
To understand why businesses would choose the services of a PEO it helps to know what a PEO could do for an employer customer. Some of the services available include:
- Help establishing a cafeteria savings plan
- Workers’ compensation loss control
- General HR administrative services
- Government tax credit monitoring
- Reduced costs of insurance
- Reduced plan costs, for example, in setting up a 401(k)
“The goal of a PEO is to deal with HR support, training, administration, insurance, 401(K), group medical, and so forth, so the business customer can focus on its core disciplines,” said Perlberg.
According to Crum, in the area of a retirement vehicle, flexibility in choosing a plan and the likely cost savings make it very attractive for the employer.
“If you take a 401(k) plan as an example, the employer can choose a plan with a four percent match, with a one percent or something in between,” said Crum. “It all depends on the employer, and the fees are probably going to be significantly less inside the PEO plan. Since most of the fees are already paid in the PEO plan, the cost to the employer would probably be a few hundred dollars in the PEO plan versus several thousand if the employer sets up its own plan.”
Over time, the PEO industry has moved away from generalists toward specialization. “Every PEO has its niche,” said Crum. “Some PEOs may be focused on tougher classes like roofers, flat bed truckers or USL&H, while others may specialize in white collar businesses. It’s not one size fits all.”
In addition to more specialized entities, PEOs are unbundling products where it makes sense or is necessary for them to compete. “Ala carte options are available to an employer, depending on the PEO you work with,” said Perlberg. “Typically the larger the PEO, the more services are offered and the more options you have.”
What is next for the PEO industry in Florida? The House and Senate will be looking at a possible overhaul of the unemployment mechanism, and while other entities like Associated Industries of Florida and the Florida Chamber of Commerce will be taking the lead in the lobbying efforts, FAPEO will be monitoring that process and offering its expertise as needed. As for where PEOs are headed in the near future, much of it sounds familiar.
“PEOs are always viable, but will excel in a hard market given the number of options we offer as alternatives to traditional insurance,” said Crum. “The PEO industry and how it grows is not unlike the insurance industry. It is very competitive and now is certainly a very tough environment. There will be some growth, but not fast growth.”