What is a PEO? Explained. [Definite Guide, eBook, and FAQs]
What is a PEO?
PEO stands for “professional employer organization.” A PEO, specifically as it pertains to the U.S. market, is what is known as a co-employer. For example, PEOs are companies that manage payroll, benefits, and other HR outsourcing for the employees of a client company. PEOs are helpful in that they mitigate health insurance and other benefits costs for companies. Working with a PEO is a great way for small- and medium-sized businesses to offer employees great benefits without having to burden their own HR administration and in-house HR resources.
Typically, senior-level leadership of a PEO includes executives with extensive HR, legal, tax, client services, and accounting experience. In addition, a PEO often has classical business functions like marketing, sales, IT, and business development.
What is a Global PEO?
A Global PEO is a legal “employer of record” for international employees. Meaning, the client company’s employee is on the Global PEO’s payroll, but the work the employee executes is assigned back to the client company, which in turn provides funds to the Global PEO. By using the Global PEO’s legally established entities in countries around the world, a company can effectively outsource its HR, legal, and tax infrastructure to the Global PEO. Global PEOs are responsible for being compliant down to the local level on the client’s behalf.
A Global PEO can be extremely helpful for businesses for the following reasons:
- Payroll and commission rules are different country-to-country and are significantly different from rules and regulations in the U.S.
- U.S. HR teams can be overwhelmed in trying to decipher benefits laws in different countries. (In some areas, benefits are entirely state-funded, in others, companies are responsible for some—but not all—employee benefits.)
- International terminations can be particularly challenging for U.S.-based in-house legal and HR teams. Only in the U.S. is “at-will employment” a concept.
How Does a PEO Work?
At its most basic level, a PEO puts a company’s employees on the PEO’s payroll. In addition, a PEO typically is equipped to handle the following for any given company:
Tax contributions, direct deposits, on-time payments, and other issues related to payroll.
Medical, dental, vision, and location-specific benefits. Additionally, PEOs can offer commuter benefits, 401k, flex spending, PTO, sick time, and other benefits typically included in an employment package.
PEOs investigate and decipher labor laws ensuring companies stay within compliance of local, state, and national regulations.
PEOs often can handle short- and long-term disability, workers’ compensation, performance management, FMLA, termination pay, and other employee requests.
What Are the Benefits of a PEO?
PEOs handle most (if not all) of the HR functions so that the client doesn’t have to. Essentially, the client company outsources its entire HR, legal, and, at times, accounting structure over to the PEO.
In addition, the PEO:
- Takes on some (if not all) of the compliance risk on behalf of the employer
- Can help get employees onboarded quickly, as in days, not months;
- Provides employees with locally appropriate benefits packages;
- Acts as the client’s day-to-day business partner with particular expertise in HR, legal, finance, and accounting.
Who Should Use a PEO?
Any company can use a PEO to help outsource HR, finance and legal, administrative tasks. But small- and medium-sized businesses have the most to gain through working with a PEO. This is because small- and medium-sized businesses can focus on managing core business functions while outsourcing the HR administrative burden to a PEO. In addition, not all businesses have direct expertise when it comes to HR, legal, or tax requirements. These areas of business are easily outsourced to PEOs, which specialize in these functions directly.
That said, very large and Fortune 500 companies often use a Global PEO as well. In any one country, the infrastructure and cost of hiring employees directly may outweigh the advantage of having companies in each country. Large companies, mid-size companies, and even small companies are likely to engage PEO’s across borders to facilitate international expansion.
Frequently Asked Questions About PEOs
1. Will a PEO recruit/hire candidates for me?
No. PEOs do not handle recruiting or hiring activities on behalf of the company of origin. PEOs handle onboarding of employees once hired.
2. Can I just hire in-country contractors instead?
Technically, you could. But you’d be opening yourself up to major compliance risks. If the government of the country in which you want to hire catches on that you have hired contractors without a recognized, legal business entity in the country, you could subject your company to heavy financial penalties. In some cases, the company’s directors could be charged criminally.
3. What if an employee quits?
If an employee quits, it all depends on what the employment contract says. But typically, there is an agreed-upon notice period.
4. What if I need to fire an employee?
International termination of an employee can be extremely difficult. Regulations vary greatly country-to-country. Again, it depends on what the employment contract says. This is a good primer on what to do if you need to terminate an employee working outside of the U.S.