Larkin said that PEOs provide small employers with the expertise they need to assist them in their business operations and protect them from a variety of liabilities. For example, he said that his company provides its client employers with quality risk management and such benefits as administering 401K accounts. At the same time, the PEO relieves the employer of having to monitor a vast array of legal obligations. He pointed out that some of those obligations, such as paying payroll taxes on time, come with substantial penalties that could jeopardize an employer's investment. “Say you take your life's savings and buy four Dairy Queens,” he said. “You have to comply with state and federal regulations, which you don't even know about.”

While Larkin stresses the services a PEO can provide to client employers, he also says it's just as important to ensure that the leasing company is on solid ground. Southeastern has four safety consultants and two licensed claim adjusters, who are constantly checking in with their clients' employers. He also says that the company turns away roughly 25 percent of the clients it contracts with after it conducts a thorough underwriting exam. One crucial area of interest is the business owner's attitude. “If the owner has no interest in developing a safety program, or we visit the work site and see it is carelessly organized, this is not somebody we want to work with,” he said.

On the other end of the spectrum are those PEOs that specialize in larger clients, such as the Boca Raton-based Alpha Staff. The company has client employers with roughly 25,000 work-site employees and revenues of $100 million, which doesn't include such monies that are passed through like payroll taxes. The PEO's main clientele consist of larger employers with roughly 60 to 70 employees. Alpha President and CEO Jay Starkman said that the trend among large employers is to outsource their human resource needs. “One of the things a company wants to grow is their core business without diverting its resources,” he said. “It makes sense then to use the aggregate resources, expertise, and efficiencies of a PEO.”

As an example, Starkman pointed out that when a company grows to 50 or 100 employees they have almost no choice but to develop a human resource department. To do that in-house requires a company to hire another executive, more staff personnel, not to mention the cost of creating the infrastructure for the department. By contracting with a PEO, they can access the same services and at a cost that provides more value for its cost than building an in-house operation. “Once a company contracts with a PEO, less than one percent takes back those operations in-house,” he said.

Like others in the field, Starkman noted that human resource functions have become more important due to the morass of state and federal regulations. For large employers, he said, a PEO can offer even more value by helping to recruit and train employees. He said typically, employers that use a PEO have a slightly higher employee retention rate than other employers.

Alpha Staffing is different from the majority of other PEOs in that it doesn't market directly to employers as do the majority of other leasing companies. Instead, the company relies on its relationship with agents to get business. “PEOs tend to compete with agents,” Starkman said. “We took the position that rather than compete, we would establish a partnership and use that same channel to employers. Insurance agents give us a referral, which is then passed to our sales force, and we split the commissions 50/50,” he said.

Insurance Prices a Boom to PEOs

The fate of the PEO market has always been tied in part to the availability of affordable insurance. Although health-care insurance is becoming an increasing concern among employers, the leasing industry market is more closely associated with workers' compensation coverage, which employers are mandated to purchase. State law allows leasing companies to purchase coverage through a master policy, which allows PEOs to combine the loss experience and payroll per class codes of all employers to develop a single experience modification factor. By being able to combine the loss experience of all client employers, the PEOs' experience modification factor is potentially lower than what an individual employer might pay.

The master policy has always had its supporters and critics. Those in the PEO industry maintain that employers benefit from the use of master policy since it increases their purchasing power in the workers' comp market. They also point out that many client employers are either new or small businesses, which do not have the loss experience necessary to generate a separate experience modification factor. Critics, however, maintained the use of master policies allowed employers to evade coverage requirements, which increased the amount of fraud in the system. A Division of Workers' Compensation study backed up many of the critics' claims when it reported that between 2001 and 2004, it issued 11 stop-work orders to PEOs on the basis they failed to maintain proper workers' comp coverage. Those stop-work orders resulted in the division levying $3.2 million in fines. The Division of Insurance Fraud is also investigating eight cases involving PEOs, which represented an estimated $18 million in avoided premium.

Along with the fraud problems, in the mid 1990s, when workers' comp coverage was widely available, some PEOs used it as a marketing tool to attract a larger share of client employers. In so doing, however, those PEOs overlooked the potential loss exposure from those employers, which resulted in the organizations running into significant financial troubles.

Both Larkin and Starkman noted that the industry is not free from “a few bad apples.” But they said the actions of a few poorly run PEOs shouldn't overshadow the stringent business practices of successfully run companies. Both Larkin and Starkman stressed the need to thoroughly examine prospective client employers and apply stringent underwriting criteria. They also stress that successful PEOs closely monitor the loss experience and other data from their client employers and pass that information on to insurers.

When the workers' comp market experienced a sharp downturn in the late 1990s and early 2000s, it crippled the PEO industry. Decisions such as the one by CNA Ins. Co., to stop writing PEOs, left leasing companies scrambling for any coverage. Paul Hughes, president of the Orlando-based Risk Transfer, which brokers insurance contracts for 33 PEOs in the state, says those days are behind the industry since the legislature enacted the 2003 workers' comp reforms. Those reforms led to a roughly 30 percent decrease in workers' comp rates over the past three years and since 2004, 16 new insurers have been licensed to write workers' comp insurance in the state. Several of those insurers have specialized in providing PEOs coverage. Those companies included Pegasus Ins. Co., Guarantee Ins. Co., and TNUS Ins. Co.

“The state of the PEO market has stabilized due to the softening of the workers' comp market,” Hughes said. “In 2002-2003, you were lucky to get one quote. The other day I had one client that had seven different options.”

The PEO industry has also entered a period of consolidation and acquisitions. Analysts say the merger activity is a positive development since the financial trends favor PEOs with more clients and work-site employees. It is also pushing up the values of leasing companies, in some cases by two and three times much. Wanda Silva, of the Atlanta-based Silva Capital Company, who specializes in PEO acquisitions, says it makes sense for PEOs to expand since it is a stable financial and regulatory environment. “It makes a lot of sense to merge and grow larger because the more work- site employees you have the less you pay for workers' comp and health care,” she said, adding, “The Florida market is more competitive than other states.”