A professional employer organization (PEO) is a global employment solution that enables a company to hire supported employees anywhere in the world. Three benefits of using a PEO are that their work is quick, legally compliant, and does not involve the burden of establishing a foreign legal entity. This process is typically used when a company has a small workforce located in individual countries. A company is able to stand up those employees quickly, bypassing the administrative burden of registering for statutory and tax registrations in every country.
This process is mostly used in a carveout (in which a parent company sells a minority interest of a subsidiary to outside investors) or in mergers and acquisitions activity, where the new company needs to be established in a new country. Due to the timing of a carveout, establishing a new registration cannot always be done in the same timeline, which can cause multiple issues in paying employees. PEOs also can assist with related banking issues that may arise when going into another country.
PEO Acts as Administrative Employer
A PEO is a third-party payroll and HR outsourcing firm that acts as a co-employer with your company. While you still manage your business’s day-to-day operations, your workers have two employers: you and the PEO. Through contractual sharing of employer responsibilities, the PEO acts as the administrative employer, and your organization acts as the worksite employer. This means the PEO provides and manages payroll and human resource (HR) services like your organization’s payroll processing, benefits, insurance, and workers’ compensation. The “company” will receive reports and analytics on their employees, but a deep dive into data may be limited. PEOs may provide a full spectrum of services—from hiring and onboarding to managing and paying the workforce.
Maintaining compliance with a country or region’s payroll regulations is an inherent part of a company’s global expansion. The argument for a PEO is that it is charged with both overseeing operations and maintaining legal compliance.
When companies are going global or expanding through a merger or an acquisition, they can sometimes inherit employees in countries, and the population of that employee base can be small—what we call outliers. Therefore, many small and mid-size businesses consider the help of a PEO.
Solutions That Help Manage Payroll, HR
When choosing a solution to help manage your payroll and HR processes, you have many moving parts to consider. It is important to understand the benefits you will receive with different solutions to make the right choice for your organization, depending on its size and goals.
However, as your organization grows, it may make more sense to transition your employee management in house by using human capital management (HCM) technology. If you are considering partnering with a PEO, weigh the pros and cons to determine what best fits your needs.
With a PEO, you are leasing your employees and will now co-employ these workers. This means your company’s employees are incorporated under the PEO’s tax ID. The PEO shares in risk and liability issues, as well as helps manage tasks like workers’ compensation reporting and state unemployment.
It might sound nice that a PEO partner shares risk and helps with important payroll and HR tasks. However, since your employees are co-employed by the PEO, you are relinquishing some control of your organization. This means you will have to contact the PEO if any issues arise, which can be inefficient.
Something else to consider is the impact a PEO relationship could have on your company culture. Think about how your employees might feel knowing they have been “leased” to a PEO. Employee morale and productivity could take a major hit.
Because PEO companies manage multiple small businesses, they have a larger pool of employees and benefit options than if an organization was shopping for health insurance on its own. Therefore, PEOs can negotiate lower group insurance costs and unemployment insurance rates.
While lower benefits rates for your company may seem enticing, you may be giving up the ability to customize a healthcare plan that meets your employees’ needs. Furthermore, PEOs can switch providers at any time, which can lead to fluctuating prices and dissatisfied employees.
Some PEOs offer payroll processing services, which can help eliminate manual administrative processes and allow payroll and HR professionals to be more productive. Just keep in mind that some PEOs only process the payroll. This means you still must prepare the hours and payroll to send to the PEO for processing.
Working with a PEO can potentially eliminate the need to hire more staff to handle tasks such as payroll processing. This can help lower overhead, but it is important to get a breakdown of all costs from the PEO to ensure that the option will truly save you money in the long term.
Minimal Employee Access, Communication Challenges
With PEO services, there is minimal employee access and visibility. CFOs, HR managers, and employees have little insight into company data. Likewise, communication between those managers and employees is nonexistent. Instead, all communication and transactions must go through the PEO, even a simple request that could easily be handled by your organization.
With this relationship, you must contact the third party, relay the message, and wait for it to fulfill the request. This “hands-off” approach makes things more complicated and time-consuming.
There is a lot to consider when determining if a PEO is right for your organization. The services you receive from a PEO are different from a payroll and HR provider, so you will want to weigh your options carefully against the needs of your company.
Do you like our content? Join the GPMI community to get free education and articles straight to your inbox!
Dee Byrd, CPP, PHR, SHRM-CP, is a Project Manager for PayTech, Inc. who has more than 30 years of global payroll management experience and has represented the payroll profession by speaking to the U.S. Congress in matters regarding multistate payroll taxation issues. She is an American Payroll Association (APA) Ambassador, a member and past chair of the APA’s Electronic Payments Committee, part of the APA’s Payroll Cards Subcommittee of the Government Relations Task Force (GRTF), a member of the APA’s Global Issues Subcommittee of the Strategic Payroll Leadership Task Force (SPLTF), and a member of the APA’s Board of Contributing Writers. She was also the APA’s 2011 Payroll Woman of the Year.