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.
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 Professional Employer Organization (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.
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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-Brexit, Global 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.
How Does a PEO 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.
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 itself.
The duties of a PEO will be determined by a written agreement between the PEO and the client company. This agreement will frequently cover:
It is also common for PEO agreements to cover a range of related services such as recruitment and onboarding.
History and Origins of PEO Solutions
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.
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?
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
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:
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:
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:
Which Type of Business Can Benefit from a Global PEO Solution?
Video: NAPEO on 'What Is a PEO?'
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.
Hire Anywhere in the World with a Global PEO
Given the number of PEOs today, choosing the right PEO for your business can prove overwhelming. When you partner with Horizons, 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.
Let us know if you’d like us to fast-track your international employee hiring, saving you time and money.
Frequently Asked Questions (FAQ)
A PEO is a Professional Employer Organization: That is, a company that takes over the payroll, compliance, tax and HR responsibilities of a client company.
A PEO takes over as the legal employer of a company’s workforce. As well as managing payroll, tax withholding, HR and compliance, the PEO becomes legally responsible for those matters.
By contrast, a payroll company is an outsourced payroll processing provider. They process the payroll as a service provider for a client company, but do not take on any legal responsibilities or liabilities.