What Does PEO Stand For?
Before we answer the question of “What is a PEO?” and “What does a PEO do?” it’s important to ask ‘What does PEO stand for?’.
PEO is an acronym for ‘Professional Employer Organization’, a company that offers co-employment and employer of record services to companies that are looking to expand into international markets.
A PEO organization handle all the human resources and administrative work that comes with managing employees in different countries. This makes it much easier for businesses like yours to grow overseas because they don’t have the time-consuming burden of having to assimilate with a new market and all its unique regulations, laws, and cultural differences.
In this guide, we’re going to look at all the important things that you need to know about PEOs and how you can utilize the services of one to quickly hire and deploy an international workforce in a new country of operations.
1. PEO stands for ‘Professional Employer Organization’, a company providing key HR services for businesses that want to grow internationally.
2. All PEOs usually have a range of “core” services that are similar, plus a range of other non-standard services that are specific to individual PEOs and jurisdictions.
3. With a PEO or Global PEO solution, a PEO becomes the legal employer for your workforce, taking over compliance, tax, and payroll responsibilities. However, the workers still operate at the direction of your company on a day-to-day basis.
4. Benefits of Global PEO solutions include fast-tracked entry to foreign markets, more cost-effective expansion, and assurance of full legal compliance.
What is a PEO?
A PEO is a company that offers HR and employment management services to businesses like yours all across the spectrum, from the smallest of start-ups to the biggest of international firms. Examples of services offered can include hiring and firing employees, managing payroll, and putting together employee benefits packages.
PEOs first started out in the United States in the 1980s as entities that provided payroll processing services to client companies. Shortly after this, labor and employment compliance issues emerged and, as a result, state governments enforced a number of HR and employment laws that were designed to better protect the interests of employees. This made it more difficult for companies to handle their own growing human resources tasks, and thus they began outsourcing them to external PEOs.
Today, PEO services are used by a huge range of businesses to cover everything from payroll to international expansion.
The simplest way to think of a PEO is as a company that acts as an “employer” of another company’s international workforce in a jurisdiction where it doesn’t have the expertise or infrastructure to hire and manage its own employees. It does this either by acting as a “co-employer” or an “employer of record”.
By using a PEO, a business gets instant access to an international market and all the benefits of having an international workforce without actually having to go through the time-consuming and expensive process of setting up a foreign company, complying with laws and applicable regulations, and jumping through administrative hoops.
This is usually achieved through either i) co-employment or ii) an employer of record setup.
What is Co-Employment?
Co-employment is a work arrangement where two companies (in this case, the client business and the PEO) have obligations as an employer.
When PEOs act as co-employers for international employees, the client business typically retains responsibility for managing these employees’ day-to-day job duties and functions.
Meanwhile, the PEO manages functions like payroll, preparing taxes, and human resources. Because the PEO has certain obligations to these international employees, it means that these people are technically employed by both the PEO and the client business.
Most PEOs are large firms, and this means that they’re able to tap into a whole range of benefits for your employees that wouldn’t otherwise be available. Some examples of common employee benefits that are available in a co-employment arrangement include:
And because the PEO is able to access these on your behalf, there’s no need to do things like negotiate rates and terms or manage employee enrollment.
What is an Employer of Record?
An alternative to the co-employment relationship is something called “Employer of Record”. This is where the PEO acts as the sole employer of its client’s employees in a particular jurisdiction, usually when the client doesn’t have its own legal entity but needs to expand its operations there quickly.
Put simply an Employer of Record is any third-party organization (such as a PEO) that hires and pays employees, with compliant fixed-term or indefinite employment contracts, on behalf of another company. It differs from the co-employment relationship because the PEO takes on all responsibility for employment and all the formalities that come with it.
Using an Employer of Record service enables companies to quickly, legally, and efficiently engage with and utilize an overseas workforce without having to set up a local entity or risk violating local employment laws and customs.
Read more about Employer of Record solutions at What Is an Employer of Record and How Does It Work?
As an Employer of Record, the PEO:
What Does a PEO Do, Exactly (& is a PEO the same as a GEO)?
Once we have answered the question ‘What does PEO stand for’, we need to ask ‘What does a PEO do?’. This is a question that’s difficult to answer. Not every global PEO service (or ‘international’ PEO service) works in the same way, nor do all PEOs offer the same services.
Some PEOs also call themselves ‘Global Employment Organizations’, which muddies the waters further. Generally speaking, they are the same in that they offer a similar set of services to achieve a common goal.
That being said, there are a set of more ‘general’ services that most decent PEOs/GEOs will offer. As with anything, it’s important to do your research and due diligence when working with a PEO/GEO to find out exactly what’s on offer.
Common Global PEO Services
Here are some common global PEO services:
Global PEOs/GEOs take care of international payroll processing in compliance with the relevant employment and tax rules that apply to their local jurisdiction.
This involves using both manual and automated processes to ensure that all workers receive the correct remuneration on time, therefore enabling the correct deductions to be made, checking/auditing delivery, and other payroll-related matters.
PEOs will also:
Tax is important to get right. When you throw unfamiliar international jurisdictions into the mix, it’s easy for mistakes to be made, and these can be expensive.
PEOs help to avoid this by using their local expertise to calculate and pay any tax liabilities that arise through areas like payroll. They’re also able to ensure that client companies optimize their tax bills by making any allowable deductions and enrolling in applicable tax relief schemes.
Global PEOs are also in charge of administering all employee benefits for international workers. This includes mandatory benefits like annual leave, vacation leave, and sick leave, as well as optional benefits such as health insurance, workers’ compensation, allowances, retirement contributions.
Read all about how PEOs enable beneficial insurance packages at What Is PEO Insurance?
Due to economies of scale and the breadth of their operations, global PEOs will often be in a position to secure the most cost-effective benefits packages. The global PEO also regularly reviews compliance and market offerings to ensure that client companies are getting the best deals possible at all times.
Risk & Compliance
There’s an inherent risk in international expansion. For example, small and even medium-sized companies are unlikely to have the expertise and resources necessary to adequately assess all the risks that are associated with expanding into certain jurisdictions. This is an area where the benefits of global PEOs can truly be realized.
Global PEOs are particularly familiar with the risks associated with managing employees in international jurisdictions, such as managing employee complaints, lawsuits, workplace safety requirements, and workers’ compensation.
Employee misclassification is a great example of a huge risk that’s easy for client businesses to fall victim to. This is where workers have been classified as contractors when they should have been classified as employees owing to the scope of their work and the working relationship they have with the business, and laws relating to this vary between different jurisdictions.
A global PEO can ensure that you don’t fall into the trap of misclassifying employees—a simple mistake that’s easy to make—and thus avoid hefty penalties and reputational damage.
Other Examples of PEO Services
The services provided by global PEOs do not fit neatly into a single box; each firm will have its own suite of bespoke offerings.
Most PEOs will offer the same or a similar range of “core” services (e.g., payroll, risk management & compliance) and then tack on a range of other additional non-standard services that help to aid international expansion. These will vary between different PEOs and jurisdictions.
International Entity Setup
In most cases, setting up a legal entity in another country isn’t as simple as filling out a few forms and getting approved.
More often than not, it’s a heavily bureaucratic process that requires your business to jump through lots of different hoops, meet a whole load of compliance obligations, and spend a significant amount of money “investing” into that particular jurisdiction. This is exactly why global PEOs and employer of record services are so popular: they eliminate this bureaucratic headache and enable businesses to dive right into international operations.
However, for some companies, setting up an international entity such as a subsidiary is an inevitability that will eventually need to be tackled. A global PEO can not only provide assistance in the short-term by acting as an employer of record but also leverage its jurisdictional expertise to provide long-term consultancy and advisory services relating to international entity setup.
For more information about setting up your own legal entity read Should You Switch from a Global PEO to a Local Entity?
When a company expands internationally, staff often move with it either permanently or on a temporary secondment while things get established and settle down. For businesses that need support with mobility, a global PEO can provide assistance with applying for visas and other immigration formalities.
Market Entry Consultancy
Let’s face it: local knowledge beats anything you could possibly learn from researching a country on the Internet. While a specific jurisdiction may seem like the obvious and perfect growth destination in theory, it could be anything but. The last thing you want to do is expand to a new jurisdiction only to realize that you’ve made a huge mistake.
A global PEO can ensure that your international expansion is fully informed by up-to-date, relevant local knowledge and market information prior to market entry.
5 Key Benefits of Using a Global PEO
It’s important to remember that global PEOs are staffed by specialists in areas like human resources, tax, legal, and payroll.
Add this expertise on top of in-depth local knowledge and you’re onto a winner: There’s nothing better to partner with if you’re looking for the best shot at a successful international expansion.
According to research by the National Association of Professional Employer Organizations, small businesses that work alongside PEOs benefit from an employee turnover rate that’s up to 14% lower than businesses that go it alone. They also grow up to 9% faster than their counterparts.
The benefits don’t stop there, either. Here are some more:
1. Fast Market Entry
We’ve already touched on this one—because your company doesn’t have to undergo the bureaucratic process of establishing a new entity, you can quickly enter the market and begin trading.
This allows your business to take advantage of opportunities much faster and hit the ground running. In many situations, you can get going in a matter of days because your PEO partner will be able to support you with services relating to recruitment (including direct sourcing), employee onboarding, compliance, payroll, and more.
2. Much Lower Costs
Establishing an international entity isn’t just time-consuming; it’s expensive. Most jurisdictions want you to prove yourself by making sizable “investments” into their country, such as by opening up a local bank account and depositing a cool half million.
Unfortunately, not every business has that kind of cash just lying around that they can simply move into a foreign bank account and forget about.
Using a PEO not only helps you avoid the expensive and time-consuming bureaucratic process of establishing an entity, but it also delivers cost savings by: