1997s Hottest Businesses

Professional Employer Organizations

A rash of small businesses are shrugging off the endless paperwork, unclear regulations and red tape involved in handling personnel functions and are leaving it to the pros--professional employer organizations (PEOs), that is. According to Bankers Trust Research, revenues and earnings for PEOs (formerly known as employee leasing companies) are growing at about 30 percent annually.

How do PEOs work? Unlike staffing services, PEOs form a co-employment relationship with a small business so both parties "own" the company's personnel. Then, PEOs handle all the personnel duties, including payroll, hiring and salary reviews. And because PEOs pool employees from multiple companies, they can offer lower rates on employee benefits such as health care and retirement packages.

One major change in the past year is a move toward PEOs targeting larger companies. Until now, most PEOs limited themselves to clients with fewer than 100 employees, says Milan P. Yager, executive vice president of the National Association of Professional Employer Organizations. But businesses with 200 or more employees are discovering PEOs can serve their personnel needs as well.

Because of the potential for lawsuits and the very small margins PEOs operate on, Yager cautions that successful entrepreneurs must be knowledgeable in benefits and payroll administration as well as taxes and employment law to understand all the rules and regulations.

Keeping clients satisfied is also a must. "Most of our business comes from referrals," says Fran Morrissey, president of Staff Management Inc. in Rockford, Illinois, "so providing quality service is what's really helped us grow through the years."

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This article was originally published in the December 1996 print edition of Entrepreneur with the headline: 1997s Hottest Businesses.

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