Professional Employment Organizations are still an unknown commodity to many business owners here, but if this $53 billion industry continues to grow at an annual average of 20 percent, more area workers will see a PEO company on their paycheck stubs.

“The way we look at it is that this is really an untouched marketplace,” said Robert W. Wilson, president of Employco in Westmont.

Wilson’s father started Employco in 1996; that year the firm recorded around $5,000 in sales. When this year is officially in the books, Wilson expects sales to reach $130 million.

Like Employco, myriad area PEOs are experiencing unprecedented growth. Their executives cite current market conditions and the health care environment as reasons for this expansion, but most of them seem to believe that the idea was bound to catch on soon anyway.

A PEO is not a new concept, but it has never been a popular option in the Chicago area. PEOs have been around for decades, but they traditionally have fared better in transient markets like Florida and Arizona that have experienced big population booms and a lot of new businesses via relocation or start-up.

However, with the changing marketplace, this may begin to change.

“PEOs have gone through a tremendous explosion, because in today’s workplace it is challenging to compete with big employers,” said Milan P. Yager, executive vice president of the National Association of Professional Employers, an organization that represents 530 PEOs. “To compete you need to have good employees and to attract these employees you want to offer good benefits. If you can’t pay top salary you can still offer great benefits.

The idea behind a PEO is that numerous small to medium companies can band together under one large company, in this case, the PEO, and pool their benefits package for better health benefits, HR services and retirement plans. Member companies pay for these services through a percentage of their payroll.

All member companies are officially employed by the PEO, but they are run autonomously by the original owner or CEO. The PEO has no decision-making power over staffing options or business philosophies for its members. It is there to handle payroll operations, legal notifications, and establish a benefit program for the entire pool.

This will take administrative pressure off the member companies and give them benefits that make them more appealing to potential employees.

Under the PEO model, an electrical engineering firm in Schaumburg can belong to the same PEO as a car dealership in Joliet, and while each firm has nothing to do with the other in the business world, they both are officially employed by the same company. They have options to the same health care packages and file taxes under the same company name.

Most PEOs report that they deal with companies ranging from 10-100 employees, but the majority of their business is found in the 10-25 employee range.

All of this may sound a bit confusing at first, but it is actually quite simple; the only requirement is that small business owners are willing to submit some of their control to a larger company.

“I’ve had an owner say that he wanted to personally sign each check every pay period,” said Employco’s Wilson. “I had to tell him that he can put them in the envelope if he wants to, but he can’t sign them any more.”

A PEO does not interfere in the hiring process, but can give best practices advice to its member companies. If a candidate were to fail a drug test, the PEO would likely strongly recommend that the employee not be hired, as the entire pool could be at risk. When an employee is hired, the member company sets the salary.

For many PEOs it is about building trust with potential member companies.

“Some PEOs got bad marks in the past,” said Lance Snider, managing director for Staffing Plus in Lombard. “In 2001 some were fingered for bad practices, but the majority are run by decent people.”

Snider said that Staffing Plus has grown 200 percent past four years and has a retention rate of 95 percent.

“When you talk about co-employing it can be a huge subject to chew on,” said Snider. “You have to build trust so a business owner will understand that they can relinquish some control and focus on their original vision.”

Still, some small business owners take a while to adjust the concept of PEOs and others will flat out reject it, not wanting to pool risk with other unknown companies, but PEOs are rather selective themselves, as they take a risk with each company they sign into the pool.

“We reject about 25 percent of the business that we could write,” said John Driscoll, district manager for Administaff, a nationwide PEO with 100,000 work-site employees that experienced 20 percent growth last year. “This is the business of risk management and we have to manage the entire pool.”

Driscoll said the ideal candidates are business owners who want to liberate themselves from the administrative duties that bog down so many start-ups and dedicate the business to sales and growth.

“We are looking for businesses that want to invest in growing their company,” said Driscoll. “The mentality of saving nickels doesn’t really fit our mold. We want them to grow resources and develop employees. That translates into success.”

While a business is concentrating on growth and expansion, a PEO will work behind the scenes to make sure its member companies are up to code with new laws and regulations and implement programs, like a 401(k) plan, that many small businesses would not be able to implement, said NAPEO’s Yager.

However, while many companies have turned to PEOs for administrative service, they are not always recommended as certain businesses will see more benefits than others.

“I don’t really consider them a viable plan for HR, but they are good for benefit plans for small employers,” said Mary Lynn Fayoumi, president and CEO of the Management Association of Illinois in Downers Grove. “It’s a good way to get competitive rates from health care providers.”

Fayoumi recommends PEOs for firms with fewer than 20 employees, but for firms larger than that, it may be a costly expenditure.

“They are not supercheap options,” said Fayoumi. “They are based on a percentage of payroll, not on how much you use them. Rates will go up if you continue to add staff.”

Fayoumi said that because PEOs are not prevalent in Chicago, she does not consider them competition. And while they may be an option for small businesses seeking health benefits, there still are risks involved.

“A PEO may not be able to hold rates low as they add more companies,” said Fayoumi. “There is potentially high risk there.”

Tandem, a PEO firm in Oakbrook, began in 1998 and has experienced a five-year growth of 425 percent.

Like most PEOs, the firm has expanded with little marketing and instead relied on referrals and word of mouth.

Gail Nichols, managing director for Tandem, said that recently the company did away with its group health plan and decided to implement individual plans for its members.

While this may seem more costly, Tandem is able to still get favorable rates for its employees, said Nichols.

“As time goes on, high-risk companies can pollute the pool,” said Nichols. “We went away from the big pool method in medical and now use individual plans. Because of our large buying power, we are still able to get good rates from large providers.”

The Management Association’s Fayoumi also said that companies looking to join a PEO should do extensive research and shop around.

“Do your homework and do a cost benefit analysis,” said Fayoumi. “Get multiple quotes from PEOs and make sure that you are getting a plan that is designed for your company and not a vanilla form. Kick the tires and make sure you are happy with what you are paying for.”

Fayoumi also said that the length of contract is important and that a company should be able to get out fairly easily if it wants to.

Most CEOs offer a one-year contract that can be opted out of with ease.

“We need a 30-day notice when a company chooses to opt out,” said Staffing Plus’s Snider. “It’s a pretty slick process; nothing has to be dissolved.”