If you are considering expanding your business to another country, you may have considered setting up a foreign company in your target location. However, for many companies, there is a more affordable, faster, and less stressful way of hiring employees in another country. That solution is using a global Professional Employer Organization (global PEO).
In this complete guide to PEO, we explain the meaning of the term ‘PEO’, and provide you with everything you need to know in order to rapidly deploy labor to a new country of operations.
What is a Professional Employer Organization?
A Professional Employment Organization or ‘PEO’ provides employee management services and administrative assistance. In short, it acts as the employer for a workforce on behalf of a client company. While services offered by PEOs can vary between providers, services often include payroll processing, onboarding, recruiting, benefits management, and HR services to other businesses.
A PEO is an innovative means of having a payroll and human resources (HR) infrastructure, without the need to spend the usual efforts required to make the organization run successfully.
Engaging a PEO is a commonly chosen option for start-ups and growing companies requiring administrative support. We discuss the benefits of engaging a PEO in more detail under the heading ‘what are the benefits of a Global PEO?’.
What Process Does a Professional Employer Organization Follow?
PEOs hire employees directly and handle administrative tasks associated with employment such as processing payroll, employee benefits and essential taxes. Meanwhile, the client business maintains day-to-day control over the employees. Through this arrangement, the PEO serves as the “employer of record” for insurance and tax purposes, and takes on a range of other administrative and compliance burdens. The employees, however, still receive their work assignments and instructions from the client company.
In some markets, PEOs are referred to as ‘co-employers’. We provide more detailed information on the co-employment model further below.
PEO arrangement can significantly reduce costs of employment for client companies, as the PEO is a specialist and can often provide services more efficiently than the client company themselves.
The precise duties of the PEO will be determined by a written agreement that is entered into between the PEO and the client company. Commonly, this agreement will cover:
- Payroll administration;
- Essential taxes (e.g., payroll taxes) and tax compliance;
- Employee benefit administration (e.g., health insurance, workers’ compensation, retirement plans);
- Human Resources (HR) administration.
In addition, it is common for PEO agreements to cover a range of other related services such as employee recruitment and onboarding.
A Brief History of PEO
A PEO is not a new business or concept. It has been in existence for several decades now, but PEOs are becoming increasingly popular.
PEO, as it is known today, emerged in the 1980s, but a related concept, ’employee leasing’, has existed since the 1960s. Marvin Selter popularized the model when he leased employees to a doctor’s office in California. As discussed below, employee leasing is an older business model with some similarities and distinctions from PEO services.
PEOs started out in the United States as entities that provided payroll processing services to client companies in the 1980s. Subsequently, labor and employment compliance issues emerged during the period. As a result, governments enforced a number of HR and employment laws designed to better protect the interests of employees.
These changes have made HR and administrative matters increasingly time-consuming and complex. Since then, the HR function within organizations has needed to expand, and with it the cost of providing such a function has expanded: For small companies and start-ups, it has been difficult to afford the cost involved in providing this kind of function.
As a result, outsourcing of administrative and HR work has become more prevalent.
PEOs Emerged as the Solution
Statistics show that without a PEO, business owners spend approximately 25% of their time solely on employment paperwork. US companies, as one example, also spend significantly on compliance. The figures are US$6,795/employee/year and US$5,000/employee/year, respectively. In addition, companies that used PEOs for at least a year are 50% less likely to be out of business. PEOs also mitigate employee turnover, at 10 to 14 percent less yearly.
As a result of these advantages, engaging PEO services has become a less costly and efficient solution for ensuring compliance with the intricate employment and labor laws that confront small businesses.
Currently, over 150,000 start-ups and small businesses utilize PEOs. In the United States alone, over about 800 PEOs exist in all 50 states.
There is every reason to think that, as employer compliance becomes ever more complicated, and international expansion continues to accelerate, PEOs will be a crucial part of the business model for many enterprises.
In the next few sections, we consider a range of similar business models that are often confused with PEO.
How does PEO Relate to Co-Employment?
The term ‘co-employment’ is often used interchangeably with the term ‘PEO’. However, it would be more accurate to recognize co-employment as a specific form of PEO that is offered in some countries. So, what does co-employment involve?
Co-employment means two distinct companies (one of which is often a PEO) taking on both the rights and obligations of the employer. One company, the ‘operating employer’ takes on the day-to-day oversight of employees, while the other company, the ‘administrative’ employer, takes responsibility for payroll processes, benefits administration, and related functions.
In the case of co-employment, as two companies have rights and responsibilities with respect to the employee it may be worth setting up a ‘tri-partite’ agreement which sets out the rights and obligations all three parties have towards each other.
What Is the Difference Between PEOs and Employee Leasing Companies?
PEOs supply employer administrative and compliance services to a client company and their workforce. By contrast, an employee leasing company supplies their own workers, often on a temporary basis, to a client company. Once the assigned work is completed, they will often return to the leasing company, available to be leased to another client company.
As the PEO model grew out of the employee leasing model, there is sometimes some confusion between the terms.
A similar arrangement is a temporary staffing agency which recruits its own employees to be assigned as needed to client companies, usually on a temporary basis. This is common for administrative and manual labor jobs where there might be a need for short-term ‘cover’ for a job.
What Is the Difference Between a PEO and Human Resources Outsourcing (HRO) or Administrative Services Outsourcing (ASO)?
Using Human Resources Outsourcing (HRO) means engaging another company to organize your HR strategy, or supplement your existing HR workforce, while you still maintain ultimate responsibility and control for human resources.
Administrative Services Outsourcing (ASO) is broader still. An ASO company may take over all the tasks that a PEO performs (payroll and benefits administration and employment-related compliance), but they will not be the ’employer of record’ for the client company’s workforce, and therefore don’t take on the same extensive list of compliance obligations.
What Is the Difference Between a PEO and an Umbrella Company?
An umbrella company employs professionals who work on temporary agency contracts, often through the intermediary of a recruitment agency. This rather complicated structure can be explained through the following example: Imagine that the Ministry of Silly Walks wishes to engage policy analysts for a temporary project (e.g., Brexit implications for silly walks). They might engage a recruitment agency, Public Recruiters Ltd, to seek out and engage the right talent for them. Once the policy analysts are found, instead of the Public Recruiters Ltd directly engaging the policy analysts, Public Recruiters Ltd could pay an umbrella company, that then directly employs the policy analysts.
The rational for umbrella companies is that recruitment agencies typically prefer to issue contracts to limited companies, in order to reduce their liability.
In general, an umbrella company service (this form is particularly popular in the United Kingdom) does not provide a full suite of administrative employment responsibilities, as a PEO does. Their primary purpose is payroll and payroll tax processing.
How Do Global/International PEOs Work?
Not all global/international PEOs (we use the terms ‘global’ and ‘international’ interchangeably) offer the same set of services. Relative to a domestic PEO, they often provide a wider range of services to client companies in order to support an international expansion. The specific services that a PEO provides are outlined in the service agreement with the client company.
Common PEO Services:
- Human Resources (HR) – Global PEOs are experts in local laws and regulations. They assist foreign companies with compliance adherence, severance pay, and other HR services. They can also provide labor contracts that adhere to local and national regulations and market norms;
- Payroll Services – Global PEOs handle payroll processing in full compliance with the rules in the local jurisdiction. This involves using manual and automated processes to ensure that the workforce receive the right wages/salary, ensuring that the right deductions have been made, checking/auditing delivery, and other payroll-related matters;
- Benefits Administration – Global PEOs administer all employee benefits. This includes annual leave, vacation leave, sick leave as well as health insurance, workers’ compensation, allowances, retirement contributions and other required benefits. Due to economies of scale, global PEOs are often able to secure less costly compulsory benefits than companies could in their own right. The global PEO ensures that the right deductions and contributions are made in line with payroll processing. It also regularly reviews compliance and market offerings to ensure that client companies are getting the best deal where there is choice available for employer contributions;
- Tax – PEOs calculate and pay the required payroll tax liability, and any other tax liability in relation to employees of the client company. They ensure that client companies best optimize their tax bills, including ensuring that any relevant deductions are made where allowed in the country of set up (for example deductions for health insurance and ‘fringe benefits’);
- Risk and Compliance Services – Global PEOs can help minimize some of the significant risks involved in international expansion. Start-ups and small/medium-sized companies likely do not have the resources or local knowledge to determine all the material risks involved in expanding into a particular country. In particular, global PEOs can advise on the risk of different business models for expansion (e.g., setting up a local company versus engaging a global PEO). Global PEOs are particularly familiar with the risks associated with managing employees in another jurisdiction such as employee complaints/lawsuits, workplace safety requirements and managing workers’ compensation.
Additional Services from Leading Global PEOs
Global PEO services do not fit neatly into a box. We have found that the broad range of Global PEO services are usefully supplemented by a range of other services that help facilitate international expansions. At New Horizons Global Partners, we go beyond the basic services and provide a range of associated services for overseas expansion. These services may vary from country to country and the applicable laws.
Such services include the following:
- Global Mobility. This means supporting businesses in the transfer or secondment of staff (e.g., staff from head office) in applying for visas, and other immigration matters;
- Legal and compliance. Sometimes specialist legal services are required in order to support an international expansion, such as tri-partite agreements or contracts with local agents. We can support you with this;
- Global entity solutions for the workforce. In some cases, you may seek to set up a local legal entity (such as subsidiary of your multi-national corporation). We can help you do this;
- Annual/quarterly tax declarations. You could be liable for a range of taxes that are unrelated to payroll in your company of expansion. This could include corporate income tax, turnover tax (e.g., GST, VAT, or sales taxes), or digital transactions taxes. We can support you with ensuring full reporting compliance for these tax liabilities;
- Training, onboarding, and outplacement services. We can provide training to support your workforce in the target country;
- Recruitment and background screening. Through our recruitment services we use traditional advertising, as well as our networks and contacts in target countries to come up with a shortlist of potential employees for your final sign-off;
- General HR management services, including employee performance management;
- Market research and Market-entry advisory. We can ensure that your international expansion is informed by the best up-to-date local market and compliance information
Many of these solutions often involve utilizing the latest technological innovations, as may be appropriate for the particular client company and their country of expansion. At New Horizons Global Partners, we can customize our offers in accordance with your needs.
What Are the Benefits of Using a Global PEO?
Global PEOs are staffed by experienced experts in human resources, tax, legal, and payroll functions. Having a business arrangement with a global PEO usually allows a company to expand faster, more affordably, and with less risk than other alternatives.
Some of the most important benefits of using a global PEO are set out below.
Using a PEO allows you to skip expensive and time-consuming establishment processes. The biggest cost saver is in not having to establish a separate legal entity. Other significant cost savings can result from:
- Streamlined payroll and compliance processes which are already optimized for local conditions;
- An efficient onboarding process for new staff;
- Access to cheaper deals for employee benefits (such as private providers of health insurance and workers’ compensation);
- A reduced likelihood of compliance penalties and enforcement action resulting from a poor understanding of the local environment.
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. While the research relates to domestic PEOs, we are seeing similar results as an international PEO.
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.
In addition, time is saved due to the support with recruitment, onboarding staff, and complying with local human resources and taxation laws and regulations;
One of the biggest challenges for foreign companies expanding to new markets is implementing a compliant payroll system. Countries have different laws regarding payroll, and it is difficult for foreign companies to understand the nuances of each.
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 government agencies. An international 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, international 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 De-Registration and Wind-Down Procedures
The laws relating to the winding down of a business can prove highly complex, and result in a lengthy and expensive exit from a foreign market. Failure to properly wind down a foreign business may result in the ongoing accumulation of tax liability, even for a non-operating business. In addition, significant penalties could be applied to the business itself and any of its directors, that could make continued or future engagement in that market significantly more difficult.
With a Global PEO, the key goals of international expansion 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, foreign businesses can mitigate the cost of building a new branch or subsidiary.
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.
A global PEO will help a foreign company expand its business overseas quickly and efficiently.
When these HR and administrative tasks are outsourced to a PEO, the company can concentrate on more important business goals.
The funds saved on hiring a PEO can instead be used to further expand the business.
Are There Limitations on Using a Global PEO?
While there are no disadvantages to using a global PEO, there are some circumstances where it may not be the best choice. Engaging a global PEO is preferable when you need quick and cost-effective entry into a new market while growing your international enterprise, or testing the waters.
As your business grows it may make sense to transition from a global PEO to setting up a local legal entity in the country in question.
It may be better to transition to a local legal entity where:
- You have enough employees in the target country to justify having your own payroll processing and human resources function in that country. In these cases, you could still consider outsourcing some administrative functions in order to make crucial cost savings;
- The size of your presence in the target country would mean that there are marketing benefits from having a branded presence in that country;
- You would benefit from being able to enter into transactions with other local companies, fully governed by local law;
- This provides access to subsidies and rebates that require a locally incorporated country.
For more information see Should You Switch from a Global PEO to a Local Entity?
Who Should Use a Global PEO?
Companies wanting to expand abroad should consider a global PEO. They will get access to assistance with their HR, compliance, payroll, and tax functions. 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.
Global PEOs not only offer cost-effective, efficient, and less time-consuming HR functions. They also provide legal and statutory expertise ideal for compliance requirements.
New and small businesses normally do not possess such capabilities on their 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 well-funded an organization is, the costs of establishing compliant payroll and HR infrastructure abroad may be too high. Global PEOs mitigate the need for such spending.
As well as the cost savings, international expansion can be done faster and more efficiently.
Companies use a PEO regardless of their sector or industry. These industries may include the following:
- Real Estate
- Health Services
- Computer services
- Technology, etc.
Costs Involved in Global PEO Services
PEO costs 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. Some also charge a percentage of the employee’s salary.
This rate may go higher depending on the terms of the agreement. For example, the client may want to give an added contribution to existing employee benefits/salary.
The more tasks required, the higher the rate becomes.
Some PEOs also base their rates on factors like the risk level of the company, credit rating, benefits history, etc. As such, the rate could be higher.
It is best to closely consider the PEO that will give you the best value for your money. At the same time ensure high-quality, efficient, and accurate services according to your actual needs.
Learn More About Global PEO?
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.
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.