What Are PEO Services?

PEO services are payroll, employment and HR solutions provided by Professional Employer Organizations (PEOs). Here, we look at PEO services in detail and explain when your company might benefit from them. 

Key Takeaways

1. PEO services include payroll, Employer of Record, and compliance solutions, though the precise service offering will depend on PEO firm in question. 

2. Global PEO services (sometimes called international PEO services) expand on those offerings to also provide solutions targeted at international expansion

3. PEO services can benefit organizations of different sizes and in different industries, from large enterprises to startups. 

4. The benefit of PEO services derives from the time savings, cost savings, and the added compliance assurance of an expert taking on employment and tax liability. 

What Does ‘PEO Services’ Mean?

A Professional Employer Organization (PEO) takes over a range of administrative and compliance tasks relating to employment. Like a contract staffing agency, it provides staff for use within a client company. It differs from a contract staffing agency, however, in engaging permanent employees on behalf of clients, as well as temporary or project staff.  Services offered vary depending on the provider, but often include: 

  • Payroll processing
  • PEOs can set up employee payroll information, process and distribute salaries and wages, withhold taxes and social contributions, and submit required amounts to the authorities. 
  • The PEO also ensures that any essential payroll and tax filings are made with the tax and employment regulators. 
  • Benefits administration
  • PEOs often source and manage benefits for employees including, health insurance, retirement/pension contributions, workers’ compensation and unemployment insurance contributions.
  • PEOs can ensure that employees receive the benefits that they are legally entitled to. They may also be able to offer more competitive benefits packages than a client company would be able to source on their own. 
  • Insurance management
  • PEOs sometimes handle insurance matters on behalf of company clients, such as professional practice liability insurance. 
  • Employer of Record
  • An ‘Employer of Record‘ service means that a third party acts as the legal employer of staff for a client company. This allows the PEO company to file employment taxes (including income and payroll taxes) through its own tax identification number. 
  • HR consulting and strategy
  • PEOs often provide advice on how a company should best structure HR within the company. This might include, for example, the ideal split between fulltime and parttime employees and the split between independent contractors and employees
  • It might also include advice on performance management and bonus and incentive structures. 
  • Employee HR training
  • Sometimes PEO services include general employee training, such as as health and safety and anti-discrimination policies.
  • Note, this does not usually include training in the mechanics of the job itself. 

How Are PEO Services Regulated? 

In the United States, PEO services are regulated at both the state and federal levels. 

According to the federal tax law, the Internal Revenue Code, a PEO can be classified as a ‘third party payer’ and becomes liable for a range of employee taxes and compulsory contributions. The IRS also has a voluntary certification program for PEOs. 

In addition, PEO services in the United States are often regulated on a state by state basis. For example, the New York Professional Employer Act requires all PEOs in New York state to register with the Department of Labor before commencing operations in the state. A range of obligations are applied to PEOs through this law (such as the obligation to make contributions to the Unemployment Compensation Fund). 

In the United Kingdom, the UK -equivalent to PEOs, umbrella companies, are strictly regulated by HMRC (the UK tax authority). 

Global PEO services are regulated differently depending on the country of operation (more on this below). 

What Is the Difference Between PEO Services and Global PEO services?

A global PEO (sometimes called an ‘international PEO’) provides PEO services internationally, facilitating global, rather than simply national, recruitment and employment. 

Sometimes a global PEO has a particular regional focus, and may be known as a Europe PEO, or an Asia PEO and so on. 

As well as carrying out the same services as a PEO within a country that it operates in, a global PEO often provides the following services: 

  • International payroll processing
  • A global PEO facilitates payroll across all countries that a client company operates in. This means, for example, that if a company has staff in the United States, India and the United Kingdom, the global PEO can process payroll for staff based in each location. The client company is then invoiced once per month for an amount covering staff all over the world. 
  • International expansion strategy
  • A global PEO often advises companies on the best way of structuring an international expansion. This might include advice on outsourcing options, international contractor management, and potential mergers and acquisitions.  
  • International compliance advice 
  • A global PEO will often be able to advise on how to deal with payroll and tax for internationally mobile professionals. For example, when workers are temporarily based in another country, but still paid in their ‘home base’, a global PEO can arrange for a ‘shadow payroll‘ arrangement to ensure compliance. 
  • International recruitment 
  • Global PEOs often recruit staff internationally, as well as hiring them. A global PEO may be able to advise on which country is the best option for acquiring talent ina. particular industry. 
  • Global mobility
  • Businesses operating across international borders need to ensure that staff are in full compliance with visa and immigration requirements when overseas. A global PEO can advise on the appropriate arrangements here. 

How Does PEO Work? 

When a PEO is engaged by a client company there is no standard process. Every PEO firm is different. However, the broad steps involved include: 

  • Negotiation on services
  • The client company and the PEO services company enter into discussions about the services to be provided. This could include recruitment, payroll processing, benefits administration, tax withholding and other services. 
  • This discussion will be constrained by the legal requirements for a PEO in the jurisdiction of hire.
  • Engagement contract signed
  • The client company and the PEO will sign an agreement setting out how PEO services will be provided, as well as the responsibilities of each party. 
  • In many cases client companies will have an online portal where they can observe the status of each individual’s payroll and personal information. 
  • Recruitment/staff acquisition
  • Sometimes a client business already has workers who are engaged as contractors or direct employees. In that case, the PEO can hire those existing workers as employees of the PEO. 
  • In other cases (commonly when expanding internationally), the client business does not have any staff in the location in question and wishes the PEO to recruit on their behalf. 
  • Employee onboarding
  • Employees are provided with legally compliance employment contracts and onboarded to the company.
  • Payroll is set up for each employee to ensure that wages are paid, and taxes and social contributions withheld. 
  • Ongoing administrative and HR management
  • As well as processing payroll, the PEO deals with ongoing contractual renewal and termination issues, and submissions to tax authorities and other regulators. 

What Are the Benefits of PEO Services? 

PEO services can benefit organizations in the following ways: 

  • Speed to market
  • Payroll setup, employee tax compliance and human resources are time-consuming activities. Whether locally or internationally, outsourcing the task to a company that specializes in those services allows businesses to focus on business expansion. 
  • The time saving is compounded when expanding globally as, without a PEO, a local subsidiary might need to be set up. 
  • Compliance
  • Employment and tax regulations are complex, and increasingly so. It is difficult for any non-specialist to be confident that they are in  full compliance
  • Liability
  • As the Employer of Record, the PEO services firm usually becomes liable for employment and tax compliance. This does depend partially in jurisdiction, as sometimes the client company will remain liable as well as a ‘co-employer‘. 
  • This means that the PEO firm, rather than the client company comes liable for any unpaid employee income taxes, payroll taxes and social contributions, as well as any interest and penalties. 
  • Multiple locations
  • Often PEO services can be provided by the one PEO company, across all of a client company’s branches and/or subsidiaries. This means dealing with only one payroll, HR and compliance point of contact despite many locations.

Which Organizations can Benefit from PEO Services?

PEO services are used by organizations of all shapes and sizes, including: 

  • Large enterprises. The simplicity of one PEO services firm operating across multiple locations of the enterprise can be appealing to larger companies;
  • Startups. Startups often benefit from the transparent cost structure (usually on a per employee basis), and the scalability of PEO services;
  • Small and medium-sized enterprises (SMEs). SMEs often benefit from outsourcing the employer legal responsibilities and liabilities that are difficult to stay on top of with a lean staff and flat hierarchy; 
  • Non-profits/Non-Governmental Organizations (NGOs). As employment and tax compliance is often a contractual requirement for non-profit/NGO funding, PEO expertise can be crucial to maintaining this;
  • Educational institutions and government agencies. When operating across multiple branches, or even overseas, schools, colleges and government entities can benefit from PEO guidance. 

It is quite common for PEO services to be used during business expansion (whether locally or internationally) due to their inherent scalability: Usually the service can simply be scaled up depending on the number of employees that the client company needs. 

In addition to popularity with organizations and businesses, PEO services are often sought out by individual contractors or freelancers who wish to ‘regularize’ their engagement and ensure full legal and tax compliance. 

International PEO Services 

New Horizons Global Partners provides international PEO services, ensuring compliance for global organizations, no matter where they are located. 

New Horizons provides Employer of Record, payroll, HR, recruitment and compliance solutions through its PEO service offerings. Get in touch today for more information about supporting your business expansion. 

 

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