If you are considering expanding your business to another country, you may have considered setting up a foreign company in your targeted location. However, for many companies, there is a more affordable, faster, and less stressful way of hiring employees in a compliant manner in another country. That solution is using a Professional Employer Organization (PEO).
Here, we explain what the PEO meaning and model are so you understand how you can rapidly deploy labor to a new country of operations
First of all, let’s consider what does PEO stand for. PEO is the acronym for Professional Employment Organization. It is currently the best option for startups and growing companies requiring administrative work.
The technical PEO meaning is an entity that provides employee management services and administrative assistance, including payroll processing, onboarding, recruiting, benefits management, and HR services to other businesses in a foreign jurisdiction.
What Is a PEO
PEO is a company that manages human resource (HR) outsourcing and other administrative tasks for client companies.
A PEO is an innovative means of having a human resource (HR) infrastructure without the need for spending the usual efforts required to make the organization run successfully.
It cannot be denied that among growing businesses, the same focus on all aspects of the organizations may not be achieved. There simply is not enough time to take care of everything.
This is where the value of PEOs comes in. Through a PEO, companies could be relieved of obstacles relating to the administration and other employee-related operations that could keep them from achieving their objectives.
This article will serve as an exhaustive guide of all you will need to know about a PEO. You need not look anywhere else for added information as you will find it all here.
Structure of a PEO
In some markets, PEOs are referred to as co-employers, an apt name given the structure of a PEO.
PEOs hire employees directly and handle administrative tasks like processing payroll and tax distributions. Meanwhile, the client business maintains day-to-day control over the employees. In this type of partnership, PEO serves as the “employer of record” for insurance and tax purposes so it takes on administrative burdens and all legal compliance matters.
The employees, however, still receive their work assignments and instructions from the client company.
This arrangement helps reduce costs because the responsibilities of the employment relationship are shared between the parties. Additionally, it lowers the costs of operations in the new country, allowing the company to be competitive with larger companies that might already be established there.
As we mentioned, the PEO serves as a co-employer of the clients, which are typically small and medium-sized organizations. It is focused solely on the HR and administrative needs of the business, thereby making the latter more productive.
The partnership existing between the PEO and the client company is referred to as a co-employment relationship.
Under this arrangement, the PEO shares employer responsibilities with the client company depending on the terms of their contract. Under this model, the employees serve as the workforce of both the PEO and the client company, thus giving the latter access to a ready-made HR, payroll, benefit, taxation and compliance infrastructure.
Figure 1 diagram illustrates this co-employer relationship.
The co-employment arrangement with a PEO not only allows company executives and managers to focus on how the business can gain profits but also reduce its legal risks and liabilities. PEOs also help mitigate normal costs relating to health insurance and employee benefits. This is made possible by the fact that PEOs take on various clients, thus pooling employees of the clients on its payroll.
This model is, therefore, able to allow a PEO to have a huge number of employees, even hundreds of thousands across client companies in a country or worldwide. As such, it is able to easily standardize HR processes and drive down costs of health insurance. This enables a PEO to gain scale economies when providing services and performing tasks.
Given the advantages brought about by the co-employment partnership between a PEO and a client company, the former is able to provide employees with above-average remuneration and Fortune 500-level benefits package, while the client company is able to access high-quality personnel at a most cost-effective manner.
Besides an excellent and unlimited number of employees, the client company is also able to partake in standardized HR practices and policies, training resources for employees, risk management support, workers’ compensation, health insurance coverage, benefit plans, and many other administrative and HR-related operations and requirements without lifting a finger.
The PEO will provide it all for the company.
It is the co-employment model existing between PEOs and client businesses that differentiate them from such similar entities as Administrative Services Organizations (ASO), HR outsourcing entities, HR consultant firms or employee leasing companies.
What Is a Global PEO?
A Global PEO also referred to as International PEO is a legal entity and “employer of record” for international employees.
As an employer of record, the International PEO is legally liable for the employees it employs in a particular country.
Instead of launching a subsidiary or an umbrella company overseas, a foreign organization’s life will be greatly simplified by acquiring the services of a Global PEO to act as the employer of record.
As the term suggests, rather than the client company, it is the International PEO which legally employs the staff in the country where the client wants to expand its business. In turn, the client company directly transacts with the Global PEO.
Given the highly specific duties International PEOs have, they have turned into experts in meeting statutory requirements by the respective government where they operate.
They are able to effectively implement employment laws, best practices, and compliance in relation to recruitment, management, termination, and other HR legal matters, thus considerably decreasing the client company’s legal risks and liabilities.
How Does a PEO Work
PEOs differ from one another particularly with the services they offer. However, no matter how varied they are from each other, they offer some fundamental services to client companies.
The specific services that a PEO provides are outlined in the service agreement with the client business. Common services provided by PEOs include:
- Human Resource Services – PEOs are experts in local laws and regulations. They can assist foreign companies with compliance adherence, severance pay, and other human resources services. They can also provide compliant labor contracts that adhere to local and national regulations and market norms.
- Payroll Services – PEOs handle the payroll process in a manner that complies with the local jurisdiction and make payments to employees. This involves such work as payroll/wages/salary reparation, tax solutions/contributions, check deliveries, the filing of taxes, application and implementation of related laws, ensuring on-time payment of employees, and other payroll-related matters;
- Benefit Administration – This service is quite comprehensive and small businesses that partners with PEOs benefit greatly from high-quality benefits normally offered to employees by PEOs, which are on par with big organizations. PEOs administer benefits and coordinate insurance schemes. They handle the administration of allowances, vacation pay, sick leave, and other benefits provided by the client company.
- Tax – PEOs calculate and distribute tax contributions, including social security contributions.
- Risk and Compliance Services – While all businesses involve risks, exposure to them can be minimized, particularly with the help of a PEO. Startups and small/medium-sized companies may not immediately determine the possible risks involved in the business, which PEOs can do for them. Moreover, the expertise of PEOs with regard to compliance and statutory requirements, especially in other countries, may not be paralleled by the company itself. PEOs handle matters under this service such as employee complaints/lawsuits, workplace safety requirements and implementation, Workers’ Compensation management, etc.
PEOs may provide additional services according to their contracts, but those mentioned are typically provided.
Figure 2 shows a diagram of such basic and essential services an ideal PEO must be able to provide.
At New Horizons Global Partners, we go beyond the basic services and give our clients added features, especially businesses expanding overseas. These services may vary from country to country and the applicable laws.
Such services include the following:
- Migration services;
- Provision of a legal team;
- Global entity solutions for the workforce;
- Annual tax declaration;
- Training services;
- Background screening;
- Visa consulting;
- Onboarding and outplacement services;
- Employee performance management;
- Drafting of relevant contracts;
- Market research;
- Market-entry advisory;
- Other services as may be agreed upon by the PEO and client company.
The current trend in HR services is the customization and personalization of employee benefits.
Unique solutions, particularly in relation to technology and innovations, may likewise be utilized. All these may be applied by the PEO as required by the client company. At New Horizons Global Partners, we can customize our offers in accordance with your needs.
Benefits of Using a PEO
PEOs are often staffed with experts in human resources, tax, legal, and payroll functions. Having a business arrangement with a PEO can often allow a company to expand faster, more affordably, and with less risk than other alternatives.
Some of the most important benefits of using a PEO include:
Using a PEO allows you to skip the expensive and time-consuming process of establishing a separate legal entity in the country. Additionally, PEOs use best practices and help streamline the onboarding process.
According to the National Association of Professional Employer Organizations, small businesses that work with PEOs have an employee turnover rate that is 10% to 14% lower than others and grow 7% to 9% faster.
Costs to administer benefits are also decreased when using a PEO. Experienced PEOs use best practices to further cut administrative costs. Working with a global PEO can also help you streamline the expansion process so that you have predictable expenses.
Faster Market Entry
Because your company does not have to wait for the bureaucratic approval associated with establishing a separate entity, you can enter the market faster and take advantage of opportunities faster. In many situations, you can deploy staff in a matter of days.
One of the biggest challenges for foreign companies expanding to new markets is implementing a compliant payroll system. Countries have different laws regarding payroll, so it is often difficult for foreign companies to understand the nuances of each new region that is part of their expansion plan.
One of the most significant benefits of using an experienced PEO is being able to outsource the complex task of regulatory compliance to a local expert.
Foreign businesses may be hesitant to get involved with bureaucratic agencies. A PEO can help guide client companies through the process of hiring international employees in a compliant manner, compensating them according to local laws and regulations, and severing the employment relationship if this becomes necessary.
Additionally, PEOs can ensure that the proper amount of tax is withheld from employee compensation, that employees receive their statutory benefits, and that employees are paid consistently with the law.
Simplified Termination Procedures
International laws on termination and on the winding down of a business can prove highly complex and involves lengthy and costly procedures and compliance issues. Failure to properly wind down a foreign business may even result in the continuous accumulation of taxes even if the business no longer operates. With a Global PEO, all these can be achieved at less effort and time, with less cost.
Testing a New Market Limiting Risks
Any business has its risks. It may or may not succeed especially in a country where it has yet to test the market. However, doing so can prove quite expensive. By getting the services of a Global PEO, a foreign business is able to mitigate the cost of building a new branch or subsidiary and save time and effort of doing so, especially when the main purpose is to find out the feasibility of the business.
Partnering with a local expert helps reduce risk and offers valuable peace of mind. Laws related to employment, taxes and employee benefits are constantly changing, and a good PEO stays up to date with these changes, so you can rest assured that your business runs in a compliant manner.
The best PEOs have local in-house experts that carefully research and monitor any changes to ensure that their clients always remain compliant, even amidst legislative changes.
To sum it all up, a Global PEO will help a foreign company expand its business overseas in a quick, less costly and efficient manner.
When all these HR and administrative tasks are outsourced to an effective and expert entity as an International PEO, the client company will have the time to concentrate on the more important goals of the business.
The funds saved on hiring a PEO can instead be used to further expand the business.
Who Should Use a PEO?
Any company that wants to expand to a foreign market and wants assistance with their HR, compliance, payroll and tax functions should carefully consider using a PEO. Startups, small, mid-sized, and even Fortune 500 companies have successfully used PEOs.
A wine export company that used New Horizons Global Partners, for example, was able to develop brand recognition among Chinese importers and establish new business relationships with local Chinese partners within six months of engaging PEO services.
Not only can a PEO offer a cost-effective, efficient and less time-consuming means of delivering the HR functions of the company but also provide legal and statutory expertise ideal for compliance requirements.
New and small businesses normally do not possess such capabilities on its own.
Big corporations, including those belonging to the Fortune 500, may also benefit from a Global PEO. This is especially true in situations where the company is expanding its business across countries.
No matter how deeply funded an organization is, it may find the cost of directly hiring employees and providing the necessary HR infrastructure abroad too high. Such spending can be mitigated by hiring Global PEOs.
Moreover, international expansion can be done faster and more efficiently.
Regardless of the sector or industry, the company is involved in, it may use a PEO. These industries may include the following:
- Real Estate
- Health Services
- Computer services
- Technology, etc.
Costs Involved in Getting PEO Services
The costs involved in getting the services of a PEO to vary depending on the type of services required of them.
The location of the business will also be a determining factor. Most PEOs charge a client company with an annual flat-rate fee for each employee or a percentage of the employee’s salary.
This rate may go higher depending on the terms of the agreement, eg whether the client wants to give an added contribution to existing employee benefits/salary, to the number of employees needed, etc.
The greater the amount of tasks required, eg training or performance monitoring on top of recruitment, the higher the rate becomes.
Some PEOs may also base their rates on such factors as the risk level of the client company, credit rating, health benefits history, etc., and therefore the rate could be higher.
Given the foregoing facts, it is best to closely consider the PEO that will give you the best value for your money, but at the same time ensure high-quality, efficient and accurate services according to your actual needs.
Brief History of PEO
A PEO is not a new business or concept. It has been in existence for the last two or three decades now.
Today, PEO’s are becoming very popular. This can be attributed to the fact that many companies are now realizing its usefulness, particularly when expanding their businesses globally.
While the PEO as it is known today emerged in the 1980s, employee leasing had been in existence since the late 1960s. The business of leasing employees was made popular by Marvin Selter when he spearheaded the leasing of employees to a doctor’s office located in Southern California.
However, while the concept of employee leasing is similar to a PEO in terms of providing employees to a client company, they are not the same.
PEOs started out as entities that provided payroll processing services to client companies in the 1980s. Prior to its proliferation, HR management is simple and straightforward. Handling it is pain-free for small and medium-sized businesses.
However, labor and employee issues emerged during the period. As a result, a number of HR and employment laws and regulations were enforced. In fact, there was a two-thirds increase of relevant labor laws at the time.
This made HR and administrative matters time-consuming and complex.
HR managers needed to have the necessary expertise and skills to be able to run the department successfully. Small companies and startups are unable to afford the cost involved and lacked the required expertise.
This is when the outsourcing of administrative and HR work became prevalent.
Statistics showed that without a PEO, owners of small companies use 25% of their time solely on paperwork relating to employment matters. It was also recorded in the US that companies having less than 20 employees and 500 employees spend very high compliance costs, ie US$6,795/employee/year and US$5,000/employee/year, respectively.
The PEOs became the less costly and efficient solution to the intricate employment and labor laws that confronted small businesses.
PEOs also managed to minimize the legal liabilities and responsibilities that were handled by the companies before.
A survey in 2014 showed that companies that made use of PEOs for at least a year are 50% less likely to be out of business. Even employee turnover was mitigated by the use of a PEO, at 10 to 14 percent less yearly.
Currently, over 150,000 startups and small businesses utilize PEOs. In the United States alone, over about 800 PEOs exist in all 50 states serving numerous small companies.
The growth of the PEOs is quite considerable during the last two decades. It is expected to further grow and proliferate globally given that more and more companies prefer to partner with PEOs, especially when expanding abroad.
Learn More About the PEO Meaning and Model
Given the number of PEOs today, choosing the right PEO for your business can prove overwhelming.
It is important to pick the one that will be able to meet the unique requirements of your company. New Horizons Global Partners will provide you all these needs.
Our recruitment services transcend beyond borders, allowing us to find and recruit the most suitable talents appropriate for your needs.
Contact the expert consultants at New Horizons Global Partners today to learn more about the PEO meaning, model, and how you can use the solution to make your expansion a success quickly, flexibly, and compliantly.