What Is a PEO & How Does It Work?

If you are considering expanding your business into another country, you may have considered setting up a foreign company in your target location. However, for many companies, there is a faster and more cost-effective way of hiring employees in another country. That solution is using a Global Professional Employer Organization (Global PEO). In this complete guide to understanding ‘what is a PEO’, we explain the meaning of the term ‘PEO’, the meaning of ‘Global PEO’, and provide you with everything you need to know to rapidly deploy labor within a new country of operations.

 

Key Takeaways

1. A Professional Employer Organization (PEO) is an employment solution for companies that hire staff overseas or in other states. A Global PEO is focused entirely on international expansion. 

2. 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.  

3. Benefits of Global PEO solutions include fast-tracked entry to foreign markets, more cost-effective expansion and assurance of full legal compliance. 

4. Global PEO solutions suit a whole range of companies and individuals, including large enterprises, small to medium-sized enterprises, startups, NGOs and individual freelancers or contractors. 

What is a PEO?

A Professional Employer Organization – or PEO – provides employee management solutions and administrative assistance. In short, it acts as the legal employer of a workforce, on behalf of a client company. While services offered by PEOs can vary between providers, services often include payroll processing, onboarding, recruitment, benefits management, and HR solutions.

To read more about the meaning of the term ‘PEO’, check out What Does PEO Stand For? 

Many different organizations and individuals can benefit from engaging a PEO: This includes large enterprises, small to medium-sized enterprises (SMEs), start-ups, educational institutions and individual contractors and freelancers.  We discuss the benefits of engaging a PEO, and the different kinds of organization that can benefit from a PEO in considerable detail below. 

In the United States, where the model was first developed, PEO has been an effective employment solution for operating across state lines. However, with the importance of international expansion for ambitious enterprises, PEO has arisen as a global employment solution. Sometimes a PEO that only operates across state or territory lines is called a domestic, a local, or a national PEO

With the growth of foreign investment in places like China, or the need to manage overseas staff in Europe post-BrexitGlobal PEO has arisen as an innovative solution for businesses operating overseas.  

A Global PEO, as we discuss in detail below, provides a range of traditional PEO solutions for businesses interested in hiring internationally. As well as those standard PEO offerings, they often provide a range of other associated employment solutions as well, such as recruitment, strategy, visa and immigration support and legal entity set-up. 

What is a PEO
What is a PEO

How Does a Standard Professional Employer Organization work?

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, while taking on a range of administrative and compliance responsibilities. However, all employees 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.

Partnering with a PEO can significantly reduce employment costs for client companies. This is because a specialist PEO can often provide services more efficiently than the client company themselves.

The duties of a PEO will be determined by a written agreement between the PEO and the client company. This agreement will frequently cover:

  • Payroll administration.
  • Essential taxes (e.g. payroll taxes) and tax compliance.
  • Employee benefits administration (e.g. health insurance, workers compensation, retirement plans).
  • Human Resources (HR) administration.

It is also common for PEO agreements to cover a range of related services such as recruitment and onboarding.

What is a PEO – A Brief History

A PEO is not a new business or concept. It has been in existence for several decades now, although PEOs are becoming increasingly popular.

PEO, as it is known today, emerged in the 1980s. However, a related concept, known as ’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 same period. As a result, state governments enforced a number of HR and employment laws that were designed to better protect the interests of employees.

These changes have made HR and administrative matters increasingly time-consuming and complex. HR functions within an organization have needed to expand, meaning that the cost of providing such functions has also 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, the outsourcing of administrative and HR duties has become more prevalent.

PEOs emerged as a cost-effective solution

Statistics show that without a PEO, business owners spend approximately 25% of their time solely on employment paperwork. US companies are also known to spend significant time and expenses on employment compliance. The figures are US $6,795/employee/year and US $5,000/employee/year, respectively.

Companies that used PEOs for at least a year are 50% more likely to remain in business. PEOs also mitigate employee turnover, at 10% - 14% less per year.

Napeo - Industry Statistics

As a result of these advantages, engaging PEO services has become a cost-effective solution for ensuring compliance – when faced 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 800 PEOs exist in all 50 states.

There is every reason to think that, as employer compliance becomes increasingly 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 a PEO relate to Co-Employment?

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 refers to two distinct companies (one of which is often a PEO) taking on the rights and obligations of an employer. One company, the ‘operating employer’, takes on the day-to-day oversight of employees. 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’s worth setting up a ‘tri-partite’ agreement which sets out the rights and obligations that all three parties have towards each other.

What is the Difference between PEOs and Employee Leasing? 

PEOs supply employer administrative and compliance services to a client company and its 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 PEOs grew from the employee leasing model, there is sometimes confusion between the terms.

A similar arrangement is a temporary staffing agency that recruits its own employees to be assigned 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’ of 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. During this process, clients still maintain the ultimate responsibility and control of human resources.

Administrative Services Outsourcing (ASO) is broader. An ASO company may take over the tasks that a PEO performs (payroll and benefits administration and employment-related compliance). However, they will not be the ‘Employer of Record’ for the client company’s workforce and as such, they do not take on the same compliance obligations.

What is a PEO vs an Umbrella Company? Key Differences

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 Public Recruiters Ltd directly engaging the policy analysts, Public Recruiters Ltd could pay an umbrella company that directly employs the policy analysts.

The rationale 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 international expansion. Sometimes these Global PEOs are known as Global Employment Organizations. The specific services that a PEO provides are outlined in the service agreement with the client company.

Common Global 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, as well as market norms

  • Payroll services

    Global PEOs handle international payroll processing in compliance with the rules pertaining to their local jurisdiction. This involves using manual and automated processes to ensure that a workforce receives the right wages/salary, therefore allowing the right deductions to be made, checking/auditing delivery, and other payroll-related matters

  • Benefits administration

    Global PEOs administer all employee benefits. This includes annual leave, vacation leave, and sick leave, as well as health insurance, workers’ compensation, allowances, retirement contributions, and other required benefits. Due to economies of scale, global PEOs will often secure more cost-effective compulsory benefits than companies could achieve 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 are choices available for employer contributions

  • Tax

    PEOs calculate and pay the required payroll tax liability and any other tax liability in relation to the employees of a client company. They ensure that client companies best optimize their tax bills, ensuring that any relevant deductions that are allowed in the country of establishment are made (for example, deductions for health insurance and ‘fringe benefits’)

  • Risk and compliance services

    Global PEOs help to minimize the significant risks involved in international expansion. For example, start-ups and small/medium-sized companies are unlikely to have the resources or local knowledge to determine all the risks that are associated with expanding into a certain country. 

  • 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.

  • Significant compliance risks that global PEOs take into account and advise on include:

  • Employee Misclassification. This is the risk that workers have been classified as contractors when they should have been classified as employees. A Global PEO can ensure that you don’t pay back-taxes and/or penalties for misclassifying workers. Read more about employee misclassification at What is Employee Misclassification? 

  • Permanent Establishment. This is the risk that a foreign enterprise will carry on business in a country in a way that attracts corporate income tax in that country. Note, a global PEO solution might still count as a permanent establishment, depending on the circumstances of the case: Read more about permanent establishment at What is Permanent Establishment and Why Does it Matter?

Additional services from leading Global PEOs

Global PEO services do not fit neatly into a single box. Many have found that the broad range of Global PEO services are usefully supplemented by a range of other services that help facilitate international expansion. These services may vary between different countries and their applicable laws.

Such services may include the following:

  • Legal and compliance

    Sometimes specialist legal services are required to support international expansion, such as tri-partite agreements or contracts with local agents. 

  • Global entity setup

    In some cases, you may seek to establish a local legal entity (such as a subsidiary of your multi-national corporation). 

  • Annual & quarterly tax declarations

    You could be liable for a range of taxes that are unrelated to payroll in your country of expansion. This can include corporate income tax, turnover tax (e.g. GST, VAT, or sales taxes), or digital transaction taxes. Global PEOs can often support you by ensuring full reporting compliance for these tax liabilities.

  • Training, Onboarding, and Outplacement Services

    Global PEOs often provide training to support your workforce in your target country of expansion.

  • Recruitment and background screening

    Through global recruitment services, Global PEOs may use traditional advertising, as well as a global network of business contacts to identify a shortlist of potential employees for your final sign-off.

    General HR management services, including employee performance management.

  • Market Research and Market-Entry Advisory

    A Global PEO can ensure that your international expansion is informed by up-to-date, local market and compliance information.

What are the Benefits of Using a Global PEO?

Global PEOs are staffed by experienced specialists in human resources, tax, legal, and payroll functions. Having a business arrangement with a global PEO allows a company to expand faster, more affordably, and with less risk than other alternatives.

According to the National Association of Professional Employer Organizations, small businesses that work alongside PEOs have an employee turnover rate that is 10% to 14% lower than businesses that operate on their own. These businesses also grow at a rate that is between 7% and 9% faster than their counterparts. While the research relates to domestic PEOs, we are seeing similar results with international PEOs.

Some of the most important benefits of using a global PEO are set out below:

  • Reduced costs  

    Using a PEO allows you to skip expensive and time-consuming establishment processes. The biggest cost saver comes from not having to establish a separate legal entity. Other significant cost savings can be made through:

    • Streamlined payroll and compliance processes, which are already optimized for local conditions.
    • An efficient onboarding process for new staff.
    • Access to cost-effective deals for employee benefits (such as private providers of health insurance and workers’ compensation).
    • Avoiding compliance penalties and enforcement action, resulting from a poor understanding of the local environment.
  • Faster market entry 

    Because your company does not have to wait for the bureaucratic approval associated with establishing a separate entity, you can quickly enter the market and take advantage of opportunities faster. In many situations, you can deploy staff in a matter of days.

    Time is also saved through support with recruitment, onboarding of staff, and compliance with local human resources, as well as taxation laws and regulations.

  • Compliant payroll  

    One of the biggest challenges for foreign companies expanding into new markets is the implementation of a compliant international payroll system. Countries have different laws regarding payroll, which makes it difficult for foreign companies to understand the nuances of each.

  • General compliance  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 become involved with government agencies. An international PEO can help guide client companies through the process of hiring international employees in a compliant manner. They also support companies to compensate their employees in accordance with local laws and regulations; and sever the employment relationship if this becomes necessary. 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.
  • Simplified de-registration and wind-down procedures

    The laws relating to the winding down of a business are complex and can 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. Additionally, significant penalties may be applied to the business and any of its directors. This could lead to a situation where future engagement in that market becomes far more challenging.

    With a Global PEO, the key goals of international expansion can be achieved with less effort, time, and costs.

  • Testing a new market whilst limiting risks

    In order to grow internationally, many businesses will opt to test a new market. By engaging 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 to reduce risk and provides peace of mind. Laws related to employment, taxes, and employee benefits are constantly changing. A specialist PEO stays up-to-date with these changes, which means that you can rest assured your business operates in a compliant manner.

    Specialist PEOs have local in-house experts that carefully research and monitor any changes to the market. This ensures that their clients always remain compliant, even amidst legislative changes.

A global PEO will help a foreign company expand its business overseas quickly and effectively. When HR and administrative tasks are outsourced to a PEO, the company can concentrate on more important business goals. The funds saved through engaging a PEO can then be put towards further expanding a business.

Are there Limitations on Using a Global PEO?

While there are, strictly speaking, 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 a quick and cost-effective entry into a new market – while growing your international enterprise or testing the market.

As your business grows, it can make sense to transition from a global PEO to a local entity in your country of expansion. It may be better to transition to a local entity when:

  • You have enough employees in the target country to justify having your own payroll processing and HR functions. In these cases, you may still choose to outsource 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 company.
  • Read more about this topic at Should You Switch from a Global PEO to a Local Entity?

Which Type of Business Can Benefit from a Global PEO Solution? 

Global PEO is an effective expansion solution for any kind of business interested in global expansion. Some of the companies and organizations that can benefit from Global PEO include:
  • Large Enterprises
  • Large enterprises such as Fortune 500 companies can benefit significantly by using a Global PEO for international expansion, or in order to recruit and hire staff who live in another country in full legal compliance. This is particularly true where large enterprises are expanding across multiple countries.  Invariably, this is a much faster and more cost-effective solution for large enterprises than setting up a legal entity overseas.
  • Small and Medium-Sized Enterprises (SMEs)
  • Global PEO solutions can be an effective global expansion solution for ambitious and growing SMEs. Engaging a Global PEO to expand overseas can help you sell products and services in new markets and access a more cost-effective and qualified workforce.
  • Startups
  • Startups often need scaled solutions for their human resources. They need to be able to quickly ‘ramp up’ staffing capacity as their business grows. Global PEOs with their international reach and local recruitment networks are able to increase the size of their workforce rapidly and with an eye to cost-minimization. 
  • Freelancers and Contractors
  • If you are seeking out the best human resources for your business, they may happen to be based in another country. Alternatively, existing staff may move overseas. While it may be tempting to engage those staff as freelancers or contractors, often this is not compliant with tax and employment laws. A Global PEO is able to hire those workers, wherever they are based, ensuring that the business does not attract negative attention from tax or employment authorities.
  • Where a company nevertheless wishes to use freelancers or contractors globally, it is worth considering a contractor management services solution. This can operate alongside a Global PEO solution for employees. 
  • Non-Governmental Organizations (NGOs) or Non-Profits
  • NGOs or non-profits often need to hire staff based in multiple overseas locations. In many cases, it is not feasible for NGOs to understand all the payroll, tax and compliance requirements that apply in all those locations. A Global PEO can hire these staff in place of the NGO.  

Costs involved in Global PEO services

Global PEO costs vary depending on the type of services required. The location of the business will also be a determining factor. Most Global PEOs charge a client company an annual or monthly flat-rate fee for each employee. Some also charge a percentage of the employee’s salary. This rate may be higher depending on the terms of the agreement. For example, the client may want to provide an added contribution to existing employee benefits and salaries. The more tasks required, the higher the rate will be. Some Global PEOs also base their rates on factors like the risk level of the company, credit rating, and benefits history. Because of these factors, rates can be higher. Companies should do their research and select a Global PEO that provides the best value for money. A PEO should offer high-quality, cost-effective services that are relevant to the needs of a business.

Learn more about Global PEO?

Given the number of PEOs today, choosing the right PEO for your business can prove overwhelming. When you partner with New Horizons’ Global PEO, your business can tap into emerging international markets; without needing to establish a local entity or subsidiary, and in full compliance with local and international laws. And by fast-tracking your access to new markets in days – not months – your business can save thousands in expansion costs. Contact New Horizons Global Partners and discover how our Global PEO can fast-track your compliant international expansion.

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