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PEO Trends: Consolidation, New Markets

John Erik Savitsky
John Erik Savitsky, owner of 10-employee IT marketing firm Click And Bind, turned to a PEO after he grew tired of spending too much time on employment issues and preparing payroll. [Photo: Mark Wemple]
With only 10 employees, business owner John Erik Savitsky found he had limited clout negotiating insurance and retirement benefits for his staff. Even more, he was spending time worrying about employment law concerns and preparing payroll checks. He found the best way to get back to concentrating fully on growing his St. Petersburg IT marketing company, Click And Bind, was to hire a professional employer organization.

Savitsky had used a PEO, a business that provides human resources outsourcing services, at previous companies he had owned and had once turned to the PEO's stable of lawyers to avert a wrongful termination lawsuit. "It has saved me an awful lot of anxiety and money," he says.

Originally, PEOs were known as employee leasing companies. Today, they handle much more — employment taxes, workers' compensation, unemployment insurance, regulatory paperwork, and benefits packages that include 401(k) plans. The worksite employer maintains daily supervision of the employee while running the business.

"A PEO can help small- and medium-sized businesses achieve economies of scale that they may not be able to achieve on their own," says Robert Skrob, executive director of the Florida Association of Professional Employer Organizations.

PEOs are a formidable force in Florida. They employ about 900,000 and dole out $25 billion in payroll, making the industry one of the largest employers in the state, according to a 2009 report by the Florida Association of Professional Employer Organizations. On a national and state level, the industry has been a vocal presence in Tallahassee and Washington D.C., lobbying for small-business interests in the healthcare reform debate.

» PEO Power

» An estimated 50 PEOs operate in Florida, providing human resources and related services to various industries.

» In Florida, PEOs employ more than 900,000, serve more than 60,000 companies and have a combined payroll of $25 billion.

» The PEO industry is one of the largest in Florida.

» Nationally, the PEO industry grew $5 billion in 2008, to $68 billion in revenue.

» 939 PEOs are operating in 50 states.

» The average client of a PEO is a small business with about 19 employees.

Source: National Association of Professional Employer Organizations, Florida Association of Professional Employer Organizations

Unemployment data show businesses that use PEOs grow faster than those that don't, says John Slavic, president of Slavic401k.com in Boca Raton. "They truly help them increase productivity by removing non-core functions," says Slavic, an administrator of retirement savings plans for PEOs.

Florida was one of the first states to have a licensing statute, which provides some oversight in the PEO industry. During the recession, the industry has continued to grow. The industry, founded in the 1970s, now has 939 providers nationwide, 50 of them in Florida, says longtime industry consultant Carrie Aaron, president of PEO Network. "There's still a viable, untapped market of potential customers," Aaron says. She calls the industry fragmented because PEOs use a variety of models and service delivery methods. More recently, companies such as insurance agencies, human resource consulting firms, accounting firms and payroll service providers, are adding PEO divisions to their arsenal of services.

"Most businesses start to use a PEO service because the PEO can solve a specific problem," Aaron says. "They stay on because they discover there are many problems they can solve." Some of those concerns include benefits packages or employment law liability protection. Research shows the average PEO client longevity is eight to 12 years.

In the last few years, the industry has seen some trends emerge:

Some PEOs still provide their services solely to customers with blue-collar employees, but more now have a mixed customer base. In 1996, the split nationwide was 80% of PEO customers were blue collar and 20% were white collar; today the split is closer to 50-50, Aaron says.

» The Evolution of PEOs

The PEO industry started in earnest about 40 years ago to provide pension benefits to professionals such as physicians and attorneys.
» In 1986, some of these companies went out of business, and rumors started circulating that the employee leasing industry would disappear.

» In 1989 and 1990, the industry began to flourish.

» The National Staff Leasing Association changed its name in 1994 to the National Association of Professional Employer Organizations.

» The heyday for PEOs was from 1995 to 1999 with explosive growth until the difficult workers' compensation market of 2000 and the economic slowdown of post-9/11.

» In 2004, PEOs made a comeback along with the economy as a whole. Despite the recession, which has brought some consolidation and new players to the marketplace, the industry has about the same number of providers it did in 2000.
The industry has undergone consolidation, particularly in Florida. Bradenton-based Gevity and Sarasota-based Selective HR Solutions both were bought out during the past couple of years. "Bigger players have been swooping up smaller players who grew tired of fighting the fight," says Mark Lettelleir, CEO of Modern Business Associates in St. Petersburg.

In Florida, the PEO industry suffered when clients in construction and hospitality downsized their staffs. Skrob of the Florida PEO association estimates the state has about half the number of PEOs it did 10 years ago. PEOs have maintained revenue growth by bringing on new clients in industries that hadn't previously outsourced HR services. "The recession caused employers to evaluate processes and expenses and where they had eliminated PEOs as options, they now are looking at it with a fresh perspective," Skrob says.

Some industries that use PEOs today include physicians' offices, light manufacturing, mail-order companies, retail stores and restaurants. The bulk of PEO clients fall in the business and professional services industry, according to the national PEO association. "Business-to-business is our best target market," says Brent Tilson, CEO of Tilson HR of Greenwood, Ind., and a board member of the National Association of Professional Employer Organizations.

Market penetration is an estimated at between 5% to 10% nationwide. However, the actual percentage is difficult to quantify because not all businesses are candidates for PEO services.

Florida is one of the strongest markets for PEO services, Tilson says. "I still run into companies that have never heard of a PEO," says Mark Perlberg, CEO of Oasis Outsourcing. "That's a great opportunity for us." However, PEOs in Florida are facing cost pressures from the rise in unemployment insurance prices, healthcare costs and changes to workers' compensation.

As the nation emerges from the recession, the PEO industry plans to capitalize on the increasing regulatory burden for business posed by healthcare reform and the new Hire Act enacted over the last two years.

» Next page: CEO profiles for PEO organizations in Florida

CEO PROFILES - PEOs in Florida

Burton Goldfield
CEO - TriNet
Bradenton (Florida office)

Burton Goldfield
Burton Goldfield [Photo: TriNet]
TriNet entered Florida in June 2009 when it purchased Bradenton-based competitor Gevity for $98 million. The deal gave TriNet a risk-management operation, an East Coast presence and relationships with insurance companies that it had been lacking. Today, TriNet has more than 7,000 small-business clients, with more than 100,000 employees and more than $200 million in revenue, making it one of the nation's largest PEOs. It kept Gevity's former headquarters building in Bradenton. More employees work there in the company's payroll processing center than at TriNet's other two main centers in the San Francisco area and Reno, Nev.

TriNet's got its start 22 years ago servicing the high-tech industry in California. Like most PEOs, TriNet earns a monthly fee for each employee that it manages for a customer. In the co-employment arrangement, both the PEO and the worksite employer have mutual liability for employees. CEO Burton Goldfield says the arrangement gives it a unique relationship with the customer. "No other industry has the same level of intimacy with the customer. If an employee has a problem, the PEO gets sued along with employer." The PEO also has another risk: "If a member goes out of business, we have to come up with the payroll."

Mark Perlberg, CEO
CEO - Oasis Outsourcing

West Palm Beach

Mark Perlberg
Mark Perlberg, CEO of Oasis Outsourcing, is known for keeping up on the latest laws that affect employers and employees. His clients look to outsource their human resources functions and typically want to know how to prepare for healthcare reform or comply with workers' compensation laws.

Wackenhut Corp. formed Oasis in 1996 and spun it off in 2003 to management and a private equity firm. "They brought me in to run the business," says Perlberg, who has held his post for seven years. "It was not a distressed situation. The business was profitable, and it has been my task to take the business to next level."

Today, the company has more than 3,000 clients with a reach well beyond Florida. The types of service its customers buy differ with smaller companies most interested in human resources support, affordable workers' comp and employee benefits and larger businesses using the PEO for training and development, compliance issues and strategy and organizational development.

Going forward, Oasis is working to expand its products and services. "There is a lot more opportunity in front of us," Perlberg says.

Mark Lettelleir
CEO - Modern Business Associates
St. Petersburg

"Our clients can call in with a question about a discrimination filing or wage-and-hour concern and not be billed at $400 an hour by an outside attorney."

— Mark Lettelleir
[Photo: Mark Wemple]

In 1997, when Florida's economy was booming, Mark Lettelleir saw an opportunity to sell small businesses HR-related services on an outsourced basis. His partners, Jack and Jay Rice, were running an independent insurance agency and saw opportunity, too. The three were convinced that professional employer organizations had potential and founded Modern Business Associates in St. Petersburg.

Today, the PEO has clients in 42 states. "We're mainly focused around white-collar industries," says Lettelleir. Clients include restaurants, law firms, doctors' offices and small marketing companies.

While the recession hit small businesses hard in Florida, it has had a mixed effect on PEOs such as Modern Business Associates. Lettelleir says some clients have downsized; others have closed their doors. But at the same time, companies that could no longer afford an HR manager or payroll department outsourced those functions. Modern Business Associates provides services to about 30,000 employees at customers' workplaces. "We can go to insurance carriers and providers and say, ‘We have 30,000 employees. What discounts can you provide us?' Then we can pass those savings on to our clients."

Modern Business Associates has four main services: Payroll; workers' compensation policies and procedures; benefits such as health insurance and 401(k)s; and management of compliance with federal regulations. Lettelleir says his PEO has eight labor attorneys on staff, which has proven a huge advantage to its customers.

"Our clients can call in with a question about a discrimination filing or wage-and-hour concern and not be billed at $400 an hour by an outside attorney."

» Next page: More CEO profiles

Richard McKenzie Jr.
Co-owner - Administrative Concepts / Mckenzie joint venture

Richard McKenzie
In the PEO industry, Richard McKenzie Jr. is an odd combination of user and owner. A longtime citrus harvester in Polk County, McKenzie & Sons finds using a PEO allows it to avoid keeping a human resources director on staff, someone who would have to keep up with the concerns of an agricultural employer with a seasonal staff of up to 200. That could include everything from posting workplace safety rules to handling workers' compensation claims to filing year-end tax forms.

McKenzie bought the 60-year-old business from his father in 1979. Two years ago, he formed a joint venture with Administrative Concepts, the southwest Florida-based professional employer organization that his company uses. "I saw how well it works for me," he says.

McKenzie has helped Administrative Concepts, which had focused on white-collar businesses, tailor its services to the needs of the agriculture industry, from small family-owned farms to conglomerates. The joint venture has potential. Agriculture is Florida's second-largest industry with an estimated payroll of $80 million to $100 million. "Controlling costs is one advantage, but most of us in this industry want to pick up the phone and call someone who is knowledgeable on the latest issues with workers' comp or workplace safety regulations," McKenzie says. "That's the reason for using a PEO."

John Gibson
CEO - AlphaStaff Group
Fort Lauderdale

John Gibson
[Photo: Andrew Duany]
As the economy sputtered, AlphaStaff advanced its vision to become a national player. In January, it bought Selective HR Solutions, the Sarasota-based PEO division of Selective Insurance, adding clients in North Carolina, South Carolina, Maryland, Virginia and Tennessee and giving it a new sales network. "Our national accounts now represent about half our business," says CEO John Gibson.

While most PEOs sell their services directly to businesses, AlphaStaff is the only PEO that distributes its services exclusively through insurance agents, just as Selective had done. The advantage, Gibson says, is a dedicated sales force, while the benefit to the insurance agents is commissions.

Gibson says new federal regulations such as the Hire Act and healthcare reform have made outsourcing HR functions more alluring. Small and medium businesses under intense price and regulatory pressure are leveraging his PEO's expertise and scale to proactively manage HR issues, he says. For example, he notes: "We engaged a company to design a healthcare strategy for our clients in relation to healthcare reform. That's an investment small businesses couldn't make on their own."

The last two years have been especially good for AlphaStaff. The number of worksite employees it manages has doubled to about 70,000, Gibson says, adding, "The acquisition represents only about 20% of that growth."

» Last page: Chart of PEOs in Florida.

» PEOs in Florida
A-1 Contract Staffing a-1contractstaffing.com
Accord Human Resources accordhr.com
Administaff Inc. administaff.com
Administrative Concepts accpeo.com
ADP TotalSource adptotalsource.com
Advantec advantec-hr.com
AllStates Employer Services d/b/a AES HR Solutions aeshr.com
AlphaStaff Group alphastaff.com
CoAdvantage coadvantage.com
Employee Leasing Solutions myels.com
Enterprise HR enterprisehr.com
First Financial Employee Leasing ffel.net
Fortune Business Solutions fortune-hr.com
FrankCrum frankcrum.com
Global Employment Solutions gesnetwork.com
Howard Leasing howardleasinginc.com
Human Resources humresources.com
Integrity Employee Leasing integrityel.com
Landrum Professional Employer Services landrumHR.com
Matrix Employer Services matrixpeo.com
Modern Business Associates mbahro.com
Oasis Outsourcing oasisadvantage.com
Omega Business Solutions omegapeo.com
Paychex Business Solutions paychex.com
Payroll Management pmipeo.com
Progressive Employer Services progressiveemployer.com
Simple HR simplehr.com
Smart Payroll Solutions smartpayrollonline.com
SOI soi.com
Southeast Personnel Leasing southeastpersonnel.com
StaffLink Outsourcing stafflink.net
Talagy talagy.com
TriNet trinet.com
Veritas Employer Services goveritas.com