What is a Professional Employer Organization (PEO)?

Global expansion is at an all-time high in today’s work environment. The emergence of the “work from anywhere” concept continues to bolster employers’ initiatives toward expanding their business operations into new markets in new locations. With such a shift in global operations, many companies are wondering, what is a PEO?

If you’re considering expanding your business into new markets, you’ve likely explored the option of setting up a legal entity versus seeking out a Professional Employer Organization (PEO). A Professional Employer Organization (PEO), sometimes referred to as an employee leasing company, is an organization that provides human resource solutions to small and mid-sized businesses. The National Association of Professional Employer Organizations (NAPEO) explains that a PEO “enables clients to cost-effectively outsource the management of human resources, employee benefits, payroll, and workers’ compensation.”

In this article, we’ll answer the following questions:

• What is a PEO?
• What are the advantages a PEO?
• What are the challenges of a PEO?
• Is a PEO right for your business?
• How do you evaluate a PEO?
• What are some alternatives to engaging with a PEO?
• What is a global PEO Solution?

A PEO is a human resources company that’s contracted by small to mid-sized businesses to take over certain HR-related functions, such as payroll and compensation administration, employee benefits, employment taxes, recruitment, and more. Also referred to as a co-employment arrangement, the PEO leases employees to a business, allowing them to share and manage employee-related responsibilities. This arrangement also allows the PEO to combine employees from several companies, enabling them to provide those companies with better benefits packages, lower costs, and increased operational efficiencies. When a business engages with a PEO, it reports its employees’ wages under the PEO’s federal employer identification number (FEIN).

When choosing a PEO, you’ll want to have a solid grasp of the advantages it can provide to your overall business objectives. Often when people ask ‘what is a PEO’, they also want to know the benefits of using such an organization. One of the most significant advantages of using a PEO is the fact that the company will still have control over its employees’ daily activities without having to establish a legal entity or manage the administrative burdens related to the HR function. This frees up time and resources for the business to focus on other priorities. Some of the most significant administrative burdens a PEO can relieve from a business include:

• Payroll management
• Benefits administration
• Recruiting, hiring, and onboarding
• Compliance risk mitigation
• Workers’ compensation administration

According to the National Association of Professional Employer Organizations (NAPEO) businesses who use a PEO typically benefit from:

• Faster growth. Businesses that engage with a PEO typically grow 7-9% faster and are 50% less likely to go out of business.
• Positive Return on Investment. Employers using a PEO see an average annual ROI of 27.2%
• Less employee turnover. Businesses using a PEO have shown to have 10-14% less turnover.

Some of the challenges involved with choosing a PEO as a partner for your business include:

1. Permanent Establishment considerations

How long a business plans on being in a country could impact their hiring decisions. For instance, if a business is looking to hire employees quickly without the administrative burden of doing so, a PEO is the best solution. However, if a company has conducted research and knows they want to go into a specific country permanently, it may be worth considering setting up their own legal entity. At first this may be the more costly and time-consuming option, but after the entity is established it will allow a business to have total control over its operations.

2. Fragmented vendors

Rapid global growth can sometimes lead to hasty business decisions. As companies expand to other countries, they may not have the time or resources to vet every single PEO option. As a result, businesses may partner with a vendor that only offers limited services (i.e. they provide payroll but not HR). Or perhaps the vendor provides all the administrative support a business needs, but they don’t have entities established in other countries the company wants to expand to. In either case, the business is forced to hire and manage multiple vendors, which can quickly become cumbersome and difficult to oversee.

3. Lack of complete control

Although this is sometimes seen as an advantage, some businesses want complete control of their operations. Unfortunately, using a global PEO provider means that simply isn’t possible. The PEO uses its legal entities in various countries to operate compliantly with all the local laws and regulations in each jurisdiction. Therefore, because the PEO is assuming the risk and will be held liable for any mistakes, they maintain control of payroll, HR, and other administrative functions.

4. Cost

Working with a PEO provider is cheaper than setting up your own legal entity, but it’s more expensive than hiring an independent contractor. Most PEO providers charge a management fee for using their legal entity network, which is usually a percentage based on the employees’ salary. Although it may be cheaper to hire independent contractors, businesses will have to pay close attention to each country’s specific regulations around contractor classifications. Otherwise, they could end up paying significant fines and penalties.

What is a PEO good for? Many different factors can determine if working with a PEO is the right solution for your business. When choosing a PEO, here are a few indicators to help you determine whether it would be a good idea for your business:

• Your company is experiencing significant growth over a short period of time
• You would like your company to grow quickly
• You have plans to expand into new markets
• Your company plans to hire employees in multiple countries
• You have a shortage of time or capacity to setup legal entities
• You are facing challenges in procuring and managing employee benefits for international teams

How to evaluate a PEO?

Once you’ve decided that a PEO is right for your company, you’ll need to assess your business to determine your human resource and risk management needs. Next, you should conduct research on the various PEO’s on the market and make a PEO comparison so you can find a provider that meets your requirements and long-term goals.

When choosing a PEO, we recommend starting with the National Association of Professional Employer Organizations (NAPEO), as their website allows you to search accredited PEOs by state. But what is a PEO checklist you can use as a guide? As you narrow your search, here are a few questions to consider:

• Is the PEO accredited?
• Does the PEO have experience working in your industry?
• How many companies do they partner with?
• Does the PEO’s management and internal staff have professional training and expertise?
• How are the employee benefits funded? How are they tailored to your workforce?
• Does the PEO provide the services and resources necessary to grow with your business?
• What is the contract structure and cancellation policy of the PEO?
• What kind of technology or software does the PEO provide?
• What is the cost structure of the PEO? Does it charge per employee or by a percentage of your total payroll?
• What kind of customer service does the PEO provide?
• Does the PEO have positive reviews and referrals?
• Does the PEO meet all state and regional requirements?

Choosing a PEO – Accreditations

What is a PEO accreditation? When choosing a PEO, it’s important to consider the organization’s financial strength and risk management practices. There are two main types of accreditations that prove a PEO is financially stable: IRS certification and accreditation by the Employer Services Assurance Corporation (ESAC).

If a PEO is IRS certified, it confirms that the PEO can pay federal employment taxes under its Employment Identification Number (EIN). It also protects the PEO’s customers by requiring that the organization assume sole liability for wages paid to its employees. If a PEO is accredited by ESAC, the official accrediting agency of the PEO industry, this verifies a PEO’s ongoing financial stability and compliance with government regulations and industry standards.

Choosing a PEO – Employee Benefits Plans

One of the primary benefits of engaging with a PEO is the fact that it provides small to mid-sized businesses the opportunity to enroll in benefits programs that are usually only available to large corporations. While most PEOs offer some sort of employee benefits plan, but it’s important to remember that these offerings can vary drastically.

What is a PEO benefits plan? When choosing a PEO, ask about the types of health care coverage they offer and assess whether these benefits are relevant to your industry and  employee’s needs. You’ll also want to consider other benefits like vision, dental, life insurance and retirement programs to make your business more attractive to top talent.

Choosing a PEO – Technology Solutions

When choosing a PEO, you’ll want to be sure they provide you with access to a comprehensive and reliable HR platform. This platform should be simple to use and provide everything you need to manage your back-office HR functions in one place. All functionality and integrations should be designed to simplify the demands on your HR team, improve operational efficiency, and provide the optimal employee experience. A few of the technological functionalities to look out for when choosing a PEO include:

• Prebuilt employee and HR document checklists
• Accurate time sheets and simplified clock-in/clock-out capabilities
• Track and report time-off, leaves, balances, and accruals
• Accurate payroll management with hours worked, overtime, and holidays calculated automatically
• Comprehensive manager dashboards
• Centralized employee benefits administration and management
• Intelligent automation across the hire to retire process
• Automated non-compliance alerts
• GDPR and SOC compliant, ISO certified

Global PEO Solutions

With all this information in mind, what is a PEO going to do to help your business succeed? If your business plans to expand internationally, you’ll want to find a global PEO solution. Global PEO’s, commonly referred to Global Employment Outsourcing, eliminate the need to establish a legal entity in each country of operation. Instead, the global PEO will use their own legal entity to operate as the Employer of Record (EOR) for your organization. In this arrangement, the PEO assumes responsibility for all legal compliance, HR, payroll, and employee benefits for your workforce in that country.

Leveraging a global PEO will allow your business to expand into new markets quickly and hire the best talent in that location without the need to create a permanent establishment. Not only does this allow for quick access to new markets, but the global PEO will also onboard, manage and pay your international employees while maintaining compliance with local laws and regulations. This will allow you to free up time and resources so you can focus on growing your business.