Dramatic changes in the way we work have brought about many innovations in the personnel and human resources industry, including the advent of flexible and temporary staffing agencies and the emergence of professional employer organizations (PEOs).

With the downsizing and outsourcing from many large employers, highly qualified professionals often find themselves out of work, seeking assistance from employment services and staffing agencies. In fact, in recent decades, the traditional employment agency has really transformed into the flexible staffing agency, with benefits for employers and employees alike

Business can benefit from the experience of others, particularly well-educated professionals who are willing to trade off steady salaries and solid benefits for the ability to spend more time with their families and choose when and where they want to work. Companies prefer flexible staffing as well, which allows them to take more time to make permanent hiring decisions, at the same time giving them an excellent pool of workers from which to recruit on a temporary – or even permanent basis.

According to the Bureau of Labor Statistics, temporary jobs accounted for 9 percent of the new jobs created in 2004. And the American Staffing Association reports that the daily employment of temporary and contract workers was nearly $3.5 million. In addition, research conducted at Lehigh University and the University of Oklahoma found that firms using contingent, or temporary employees had better gross margins than those that relied solely on a permanent workforce.

As businesses have expanded their staffing needs, employment agencies have had to expand the types of workers available. The staffing industry now provides a wide variety of services to clients, including light industrial and clerical staffing, information technology staffing, healthcare staffing, executive staffing and financial management staffing.

In general, the staffing industry can be categorized as follows:

• Temporary staffing services hire their own employees and assign them to client firms to supplement the client's permanent workforce, particularly in cases of long-term leaves of absence, vacations or temporary work overloads. One of the oldest employment service functions, dating back in some cases to the 1800s, today temporary staffing includes more than 60 percent of the staffing industries.
  
  
• Managed services include cases when the client firm wants to have a specific facility of function managed on an ongoing basis – sometimes referred to as outsourcing.
  
  
• Payroll services typically assign workers, who have been hired by the client, back to the client firm.
  
  
• Permanent placement services are provided when a staffing service screens, interviews and qualifies individuals for long-term placement in a client firm.
  
• Temp-to-hire services combine the services of a temporary staffing agency and a permanent placement service.
  
  
• Long-term staffing agencies provide employees from the firm to a client for work on a long-term or indefinite assignment.
  
  
• Employee leasing – today more often referred to as Professional Employer Organizations – involves relationships in which a client firm places its employees on the payroll of the PEO, a service that appeals to small and mid-sized firms that find it cost-effective to use a professional employer rather than provide their own human resource department.

Flexible staffing has gained in popularity for a number of reasons. With the advent of technology that enhances productivity and creates more intense competition, businesses are forced to become more frugal and profit-motivated. Flexible staffing is cost-effective.

Secondly, temporary staffing allows management to change its employment levels as it sees fit to respond to peak times and special projects. The savings enables firms to increase the benefits and compensation offered to permanent staff in order to attract the most highly skilled and qualified individuals.

In addition, the days of employees working for the same company for their entire career are past. Today's workers are exploratory, trying out one career and then another before settling on a permanent path. Many appreciate the freedom to change positions that flexible staffing allows.

The high cost of hiring, training and transitioning full-time, permanent employees has forced businesses to examine flexible staffing to accommodate part-time and seasonal work demands while maintaining a minimal permanent employee core.

Finally, flexible staffing allows businesses to shift some of the cost of employee benefits to the staffing company, which can gain the advantage of volume purchasing.

As human resource and employment law has become more complex and the associated paperwork more time-consuming, many business owners have turned to professional employer organizations, or PEOs, for assistance in everything from payroll to workers' compensation to tracking vacation hours. Other services often provided by PEOs include the preparation of W-2 forms, healthcare benefit plans, certificates of insurance, retirement plans, insurance options, college savings plans and employee assistance programs.

The Harvard Business Review called PEOs "the fastest growing business service in the U.S. during the 1990s." Now the PEO industry generates more than $50 billion in gross revenues annually. According to the National Association of Professional Employers Organizations, the average PEO client is a small business with 17 employees. Larger companies with existing human resource departments can benefit from partnering with a PEO to lower costs and realize efficiencies.

One of the most attractive features of PEOs is the business owners' opportunity to take advantage of economies of scale. Small firms with few employees will pay exorbitant costs for health care and other benefits. But when they combine their workers with others utilizing the PEO's plan, the costs go down dramatically. And the Society for Human Resource Management cites benefits as second only to job security on its list of job satisfaction factors.

Employees like PEOs because of the extra level of confidentiality they provide. Should an issue arise, the employee talks with someone at the PEO, not a coworker.

In addition, the U.S. Small Business Administration reports that many small businesses are minimizing the benefits they offer new employees. One reason is the cost barrier. For instance, it can cost an entrepreneur more than $7,000 just to establish a 401(k) plan, but an owner can avoid this costly set-up by incorporating its workers into the PEO's plan. And, to really compete with larger competitors, small business owners need to offer as comprehensive a package as possible. Partnering with a PEO allows them to focus on their core competencies and leave the benefit headaches to someone else.

See also: Human Resources Industry Focus List

Authored by: Mary Paulsell, Associate Director, University Center for Innovation and Entrepreneurship, Columbia, MO
Date Reviewed: 4/17/06