What is a PEO? A Guide to Co-employment

Whether you’re looking for a little extra help in the recruitment process, increased employee benefits or looking to expand overseas, a PEO can be an extremely helpful tool in doing so.

But what exactly is a PEO service? And how can it benefit, or hinder, a business looking to expand abroad? Read on to find out.

What is a PEO?

What does PEO stand for?

PEO stands for a professional employer organization. Also referred to as co-employment, PEO is a human resource outsourcing service that leases employees to an employer and conducts employee management tasks often associated with an HR and payroll department.

What does a PEO do?

A PEO effectively leases employees to their client, the employer, and manage HR and payroll responsibilities on behalf of the employer. Legally, a PEO will hire employees directly in what is known as joint employment or co-employment with the primary employer.

Particularly beneficial to small and medium sized businesses between 50-100 employees, a PEO can help a company to grow steadily informed by the experience and stability of the PEO. However, this is less beneficial as your company grows beyond the 100-employee point.

A PEO doesn’t always replace an internal HR department, but instead will help one with the tasks that come along with running human resources, and act as an extension of the existing team.
From payroll to daily administrative tasks, a PEO will aid:

• Recruitment processes,
• Benefits administration,
• Payroll administration,
• Compliance and regulations…

and any other task involved with an HR department.

Whilst PEOs may be considered when businesses are looking to expand abroad to assist in administrative tasks associated with HR and payroll, professional employer organizations are particularly advantageous on home soil. With certain challenges to face that are better suited to EORs (Employer of Record) or other international expansion services, PEOs face restrictions by their status when expanding globally…

What is an international PEO?

Expanding your business internationally is extremely challenging, something international expansion services can help guide a business through. An international PEO can help with the regulations of different countries to ensure compliance and can also assist in setting up a legal entity.

When hiring employees abroad, you are required to register your business entity in the country in which you are expanding, something a PEO can help navigate through.

However, while an international PEO can offer these services, this is an extremely time consuming and costly process due to a PEO’s inability to provide an Employer of Record status. When expanding globally with a PEO, the main employer will still have to register as an entity in the new country and show they can employ people.

What is the difference between PEO and an Employer of Record?

Whilst a PEO and Employer of record (EOR) may seem, on the face of it, very similar in the services they provide, there is a key distinction to make.

Employers of record do provide similar services to PEOs, such as employee benefits and payroll administration for example, but the biggest difference between the two services is that an EOR is the sole employer. EORs do not enter co-employments, but instead become the sole employer of any staff members hired under their service, regardless of the country the employee is in.

A benefit to using an EOR over a PEO is that you are not required to register an entity abroad before expanding internationally, something a PEO requires. This is a significant downside to PEO, as this increases both admin time and resources that an EOR simple doesn’t require. However, in some cases, a PEO may offer an EOR service if this is mutually beneficial.

What is the difference between a PEO and an employee leasing company?

Whilst there may seem to be many similarities between PEOs and an employee leasing company, and are often used interchangeably, there is a difference.

An employee leasing company supplies new workers, either on a temporary basis or for specific project work onsite. When a job has been completed, an employee on lease will return to its leasing company ready for the next job.

A PEO, on the other hand, provides its services to an existing workforce with the ability to employee new hires. Employees hired under a professional employment organization are considered employees of the client, so if the contract with PEO was to terminate, those workers remain under the client’s employment.

PEOs and international expansion: Is it worth it?

When expanding globally, one choice can be a PEO. However, this isn’t always the right option for many businesses, especially those who need to scale over 100 employees quickly.

Benefits of a PEO abroad

There are many benefits to using a PEO and can be a great way to add increased value to a company that chooses co-employment.

Compliance expertise

A huge benefit to outsourcing human resource and payroll to a professional employment organization is the compliance expertise they can offer.

Whether choosing to expand internationally and navigating unknown regulations, or simply wanting to ensure best practice, a PEO’s knowledge of compliance and regulations can ensure that a company adheres to each and every regulation in place in regard to HR and payroll.

Improved efficiency

Another advantage of using a PEO is the efficiency that it affords. Whether this is simply by freeing up time or streamlining HR and payroll tasks, allowing an external partner to take the stress and strain of an entire department allows for the client to get back to the business at hand.

Greater access to benefits

Access to benefits that are not often afforded by small companies is a key advantage to entering a co-employment with a PEO. Whether this is health care or life insurance, a PEO often has access to improved benefits not previously available to the client.

These benefits can also be continually monitored and handled by the PEO, ensuring that all employees are receiving the care they need and when they need it, helping to improve employee satisfaction.

Retain brand culture

Although many may be concerned that introducing a PEO to a business may mean less control over the employees recruited, ultimately affecting the brand culture, a PEO can in fact aid this instead.

Informed by experience and expertise, a PEO can spend the time to carefully choose new recruits. Through strategizing with the client, a PEO is able to select employees that will suit the brand culture, something that many organizations simply do not have the time or resource to do.

Disadvantages of using an international PEO

Whilst there are many benefits to using a PEO as detailed above, this outsourced service does come with many limitations.

May upset internal HR department

A great concern displayed by many employers when considering using a PEO is the affect this will have on their internal HR department.

While a PEO doesn’t necessarily equate to the redundancy of an internal human resource department, and in many cases can in fact increase the abilities of internal HR, this can create problems. Many HR workers may resist a PEO, raising concern about their job stability and may even choose to leave, increasing staff turnover.

Loss of control

A disadvantage of using a PEO for many employers is the loss of control. Whilst a PEO can improve company culture if they work with their client, ultimately, they do have control over one of the central processes of an organization, HR and payroll.

This can mean that even if a trusted PEO works closely with their client, the client may feel a reduced control over their people, potentially resulting in tension between employer and employee.

Costly

While a PEO may reduce recruitment overheads and cut the administration fees often associated with HR tasks, outsourcing your entire employee management system is costly.

While different PEOs will vary in price depending on the level of service they are providing and the number of employees at an organization, this will incur monthly outgoings that a business will need to account for.

Security concerns

Whether it’s supply chain security or sensitive information being shared across organizations, working with third parties to outsource any part of a business brings increased security concerns.

Employee records hold extremely sensitive information, something a PEO requires access to. This results in the need for additional cyber security defense measures in order to protect employee information from being subject to a data breach or misuse, something that also comes at a cost.

Increased admin

Lastly, and possibly the biggest disadvantage to PEOs, is that they require a huge amount of admin to expand into a new country. When compared to an EOR, or other international expansion services, PEOs have certain restrictions when it comes to global expansion. Having to register an entity abroad is hugely time consuming and costly, taking far longer to expand globally.

Compliance risk

In some countries, such as France and South Africa, co-employment through a PEO can even be considered illegal in certain situations. Because of the shared legal requirements, you as the primary employer would be held liable if your PEO fails to meet HR, payroll and employee compliance laws in your chosen country.

Using a PEO can prevent compliance problems in many countries, but it’s worth checking where you wish to expand as to the most compliant option for international expansion.

Expand with IRIS FMP’s international HR and payroll service

Looking for international HR and payroll services to help your grow your business overseas without the restrictions? IRIS FMP can help. As a trusted provider of global payroll, benefits and HR solutions, we can help you with employee management services. Get in touch.