St. Louis Post Dispatch - August 24, 1999

PEOs Change the Face of Human Resources

By William Flannery of the Post-Dispatch

Paul Sarvadi claims to "create instant infrastructure."

In a way he does. As president and chief executive of Administaff, Sarvadi is in the forefront of a growth industry – "professional employer organizations" or PEOs.

PEOs are subcontractors who take over the human resource management of small and medium-sized firms. Generally, these firms are white-collar or skilled blue-collar companies with 10 to 500 employees.

Depending on the contract, the PEO will handle general employment administration, payroll, taxes, benefit management, insurance and regulatory compliance with federal, state and local laws.

Administaff and 2,000 other PEO firms can also offer recruiting, selection and job training services.

Based in Houston, Administaff has grown from $750,000 in revenue in 1986 to nearly $1.7 billion in 1998. The firm has 2,300 client firms with 38,000 client employees.

Altogether, PEOs currently manage $18 billion in employee wages and benefits for more than 2 million employees nationwide.

When Sarvadi started out, his company immediately ran into many state-level regulatory roadblocks because PEOs are "co-employers" with the company.

Sarvadi said the state regulators handling unemployment and insurance regulations, workers’ compensation and other labor-related laws did not know how to handle PEOs.

"We affected the way they did business day-to-day. They had to look to us as the employer for certain purposes and to the client for others," said Sarvadi, who was interviewed recently after speaking at the Missouri Venture Forum.

An example, Sarvadi said, is that as a payer of wages, Administaff would be considered the employer, but for professional licensing requirements, the client would be responsible.

The liability for workers’ compensation and certain safety regulations will vary from state to state, Sarvadi said. Some of the responsibility can be shared, he added.

Administaff will send out safety inspectors. "When our safety person goes out there, it’s often the first safety professional to go into that business," Sarvadi said.

Sarvadi said Administaff is careful in picking its clients. Seventy-five percent of small businesses are potential clients, Sarvadi said.

But he adds, "Anywhere the employment risk is inordinately high, we generally stay away from."

Sarvadi said there are three main factors:

Where there is high (employee) turnover, there is high risk.
Where there is high risk of injury on the job.
Where there is an unfriendly employment environment, that’s where there is heightened risk of litigation.
Administaff would not take on logging or sawmill operations, Sarvadi said. But it would take on some construction companies like plumbers and electricians – but not roofers.

"Most of our client base is across the spectrum, but it’s more white-collar than blue," Sarvadi said.

Unionized companies present no problems for Sarvadi’s firm. "We work fine in a union environment. If there is a union in place, we will work with them to ratify our agreement," Sarvadi said. "We have actually had some union situations where they promote what we do, because they have the same problems with small business’ high cost and bad compliance."

Administaff will streamline the payroll and tax processes for both the employer and employee, Sarvadi said.

Administaff charges a fee of 3 percent to 4 percent of the client’s payroll costs, Sarvadi said.

Since Administaff has both economies of scale and can negotiate for large-scale insurance plans, the client firm can earn more money. The clients pay less in overall employee cost.

"In the log run, our clients say that we save them money, and it also gives them the opportunity to make more money," Sarvadi said. "That’s why they stay….We retain over 80 percent of our clients."