1. PEO stands for ‘Professional Employer Organization’, a company providing key HR and compliance services for businesses in growth-mode, both domestically and 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 PEO solutions include fast-tracked entry to foreign markets, more cost-effective expansion, and assurance of full legal compliance.
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/initialism 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 handles 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 examine the definition of PEO, and then look at what PEO stands for in a range of different contexts including HR, payroll, insurance and benefits administration. We then look at how you can utilize the services of a PEO to quickly hire and deploy an international workforce in a new country of operations.
What is the definition of PEO?
The meaning of PEO, or, Professional Employer Organization, is a company that offers HR and employment management services to various businesses, 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 workforce, where it doesn’t have the expertise or infrastructure to provide employe-related services to those employees. It does this either by acting as a “co-employer” or, as an “employer of record”.
By using a PEO in an international expansion context, 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 (more on the distinction between the two below).
Does PEO mean the same thing as 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.
Co-employment is one way in which a PEO can operate: When PEOs act as co-employers for 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 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 those employees that wouldn’t otherwise be available. Some examples of common employee benefits that are available in a co-employment arrangement include:
- Medical and dental care
- Retirement plans
- Competitive pension schemes
- Short-term and long-term disability insurance
- Educational programs & assistance
- Enterprise training programs.
And because the PEO is able to access these on behalf of the client company, there’s no need to do things like negotiate rates and terms or manage employee enrollment.
Does PEO mean the same thing as Employer of Record (EOR)?
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:
- Arranges all work permits and visas for employees, avoiding delays
- Provides a registered entity for operating compliant payroll
- Meets all local laws and customs relating to the host country
- Advises the client business of things like notice periods and severance pay
- Acts as the interface between the international employees and the authorities.
Does PEO have the same meaning as GEO (Global Employment Organization)?
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 of facilitating employment of workers overseas. Sometimes, the term ‘GEO’ is broader than ‘PEO’, covering related employment services such as recruitment or visa acquisition.
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.
What does PEO stand for in HR?
- Providing compliant employment contracts
- Onboarding employees
- Dealing with complaints, grievances, and performance management issues
- Employee dismissal, in line with local employment laws.
What does PEO stand for in payroll?
As mentioned, in the payroll context, a PEO means a company that takes over payroll processing and tax compliance on behalf of a client company. This includes:
- Maintaining complete payroll records
- Ensuring all workers receive the correct remuneration according to their pay cycle
- Making the necessary payroll deductions
- Checking/auditing delivery
- Ensure that any bonuses are paid according to legal requirements
- Check that relevant tax payments are deducted
- Carry out direct deposits (or instruct their banks to), and
- Deliver any relevant paperwork.
What does PEO stand for in benefits administration?
PEOs are in charge of administering employee benefits for all workers that they employ. This includes both mandatory and non-mandators benefits such as:
- Annual leave or vacation leave, whether paid or un-paid.
- Sick leave
- Parental/maternity/paternity leave, whether paid or unpaid
- Workers’ compensation, covering workplace-related injuries
- Disability insurance, covering contributions related to long-term injury
- Retirement contributions, covering payments to retirement and pension schemes.
What does PEO stand for in insurance?
Due to economies of scale and the breadth of their operations, PEOs are often be in a position to secure the most cost-effective insurance packages for employees. The PEO also regularly reviews compliance and market offerings to ensure that client companies are getting the best deals possible at all times.
Read all about how PEOs enable beneficial insurance packages at What Is PEO Insurance? In summary, the kinds of insurance often offered by PEOs include:
- Health insurance. Whether compulsory or optional, PEOs can often get a better deal on health insurance for employees than client companies themselves can get.
- Workers’ compensation. This is a type of insurance replacing employee wages in case of injury
- Disability insurance. This insurance covers long-term disability
- Life insurance. This provides a lump sum for distribution to the family in case of death
- Unemployment insurance. This provides an enhanced entitlement for wage-replacement (e.g., 80 percent) than is available under general social welfare systems.
Video: The meaning of PEO in a professional practice
PEO solutions are wildly popular in a range of professional practice situations. In the video below from the Physician Resource Center learn about they can be use in a healthcare/medical practice setting.
Why Use a PEO?
It’s important to remember that 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 (NAPEO), 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 overseas, 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, employee onboarding, compliance, payroll, and more.
2. Lower Costs
Establishing an international entity isn’t just time-consuming; it’s expensive. Most jurisdictions want you to prove yourself by making sizeable “investments” into their country, such as by opening up a local bank account and depositing a substantial amount as paid-up share capital.
Using a PEO means you can avoid this expensive and time-consuming step.
3. Limited Risk
Laws related to employment, taxes, and employee benefits are constantly changing, as are local attitudes and customs. A specialist PEO with in-depth local knowledge is able to stay up to date with these changes, which means that you can rest assured your business operates in a compliant manner.
Furthermore, by using a PEO, you’re afforded a unique opportunity to test a new market while limiting the amount of risk that you’re exposed to. This means that should everything go horribly wrong, and your international expansion fails, your overall losses will be limited and much lower than what they would have been if you hadn’t partnered with the PEO.
4. Streamlined Compliance
By far one of the biggest benefits of using a global PEO is being able to outsource the regulatory compliance stuff to a local expert.
An international PEO can provide complete guidance to client businesses through the process of hiring international employees in a way that’s both efficient and compliant with local laws and customs. PEOs can also ensure that workers are compensated in accordance with these laws and, if necessary, that any terminations are carried out lawfully.
Additionally, international PEOs will ensure that companies withhold the correct amount of tax from an employee’s compensation; and that employees receive their statutory benefits, in compliance with local laws.
5. Complete Flexibility
Due to their size and access to resources, PEOs are very flexible to work with, and this is something that has been important during the COVID-19 pandemic.
When the pandemic first hit , companies working with PEOs were able to immediately adjust their contracts with new working hours to account for the short-term immediate impact of the pandemic. This allowed these workers to be retained rather than outright terminated.
COVID-19 aside, PEO flexibility works on the ground, too. They’re able to make prompt point-in-time changes in response to market conditions, such as reassigning workers, hiring temporary workers to meet short-term demand, and adjust salaries and benefits packages. This kind of flexibility helps to keep your business competitive in the international marketplace.
Who Should Use a PEO?
The services of a PEO are available to all businesses; they’re not restricted to a certain type or size. Some of the business types that regularly use our services include:
Start-up firms often need scalable solutions for their human resources functions, and it’s one of the first things that a start-up company will outsource. This is because they have limited staff numbers but still need to adequately take care of their growth. Global PEOs with their international networks and local recruitment contacts are able to increase the size of their workforce rapidly and with an eye to cost-minimization.
2. Small and Medium-Sized Enterprises (SMEs)
Small and medium-sized enterprises are one of the most common business types to make use of a PEO’s services. This is because more and more SMEs are leveraging globalization and digital transformation to build global operations. Global PEO services can be an effective and transformative expansion solution for ambitious SMEs, enabling the business to begin offering its products and services in entirely new markets.
3. Large Enterprises
PEOs don’t just work with start-ups and SMEs; larger businesses such as existing international corporations and Fortune 500 companies can benefit significantly by using a global PEO to further their international expansion efforts or to hire remote talent overseas. While it’s true larger enterprises have the resources to handle this themselves, it’s usually much quicker for them to leverage the existing services of a global PEO.
Implement a PEO Solution
It is one thing asking ‘What does PEO stand for?’, it is another thing knowing whether a PEO is right for you and which PEO to choose. With a number of PEO companies and firms available on the market, choosing the right one for your business can be hard.
When you partner with Horizons, you are able to immediately tap into valuable, emerging international markets without needing to establish a local entity or subsidiary, and in full compliance with local and international laws.
Contact Horizons PEO to discover how you can fast-track your international hiring, and save thousands of dollars along the way.
Frequently Asked Questions (FAQ)
A PEO means a Professional Employer Organization. This is a company that specializes in taking over HR, payroll and compliance tasks on behalf of client companies.
Companies use PEO solutions as they:
- Streamline compliance
- Save money
- Allow for faster entry into foreign markets
- Enable the company to focus on their core business.