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What is a PEO and Why Global HR Leaders Should Care

Professional employer organizations, or PEOs, are one of the best kept secrets for small and mid-sized businesses looking to scale quickly. Many talent leaders are familiar with common support channels for HR such as staffing, consulting, and benefits brokers. But PEOs provide a different kind of service that enables businesses to more effectively manage risk and compliance, while becoming more agile and competitive on a global scale.

More than seven in ten employers with global operations are at risk of not understanding local employment requirements, based on preliminary findings in Papaya Global’s 2017 Global HR Practices Survey.

This competency gap clearly needs to be filled, and one of the fastest ways is through a PEO service. At the same time, professional employer organizations have their own limitations, which opens the door for blended solutions that harness software and service to help employers meet their business objectives.

What does a PEO stand for?

What if your business was able to offload the payroll, compliance, and other complex processes while still maintaining a base of motivated, highly competitive talent? That’s the value of the PEO model. So what is a PEO and how does it work?

In essence a PEO, which stands for ‘professional employer organization‘ is a service firm that allows employers to outsource specific tasks and processes related to employee management. This is accomplished by the PEO hiring the client company’s employees, becoming the employer of record for compliance purposes. This process is referred to as “co-employment.” While the PEO manages and maintains a global payroll service and record keeping for the client employees, the client is able to direct the daily tasks of the employees, focusing on the key priorities that impact the business.

Four Key Benefits of a PEO

This arrangement clearly has benefits for the client, as it allows the firm to keep its customers and business needs at the top of the agenda. In addition to that focus, there are four areas clients benefit from leveraging a global PEO: flexibility, in-country awareness, cost, and time.

Flexibility:
PEOs allow clients to hire full-time employees, not contractors, quickly. Instead of trying to manage the complexities of each country’s limitations on contractors, professional employer organizations allow firms to hire employees that can get the job done, creating a stronger employment relationship and more stability than a flood of temporary workers could provide.

In-country Awareness:
One of the biggest challenges for employers is being locally compliant and understanding that country’s employment and labour law requirements. Using a PEO allows employers to sidestep these tricky issues, placing the compliance requirements and international payroll solutions in the capable hands of the local organization.

Cost:
Attempting to set up an entity in a foreign country can be expensive and riddled with challenges. With global employee leasing, PEOs allow employers to hire local workers without going through the expense and hassle of setting up a local, permanent establishment.

Time:
The preliminary findings from Papaya Global’s 2017 Global HR Practices Survey point to one clear fact: the number one reason employers hire global talent is to create a global footprint close to their target market. And in instances where firms are seeking global talent to meet the needs of their customers, time is of the essence. A PEO gives employers an opportunity to leapfrog the competition, putting workers in place in a fraction of the time it takes to hire through more traditional means.

What is the difference between PEO to EOR to GEO?

Essentially they are the same service with different names. GEO stands for ‘Global Employment Organisation’ and EOR for ‘Employment of Record’, they all refer to the same services

I’m using a Co-PEO service in the US, what’s the difference?

Co-Peo in the US is different to a global PEO service. Co-Peo means that the company must have a registered local entity in the US and the co-PEO will process all payments taxes and liabilities under this entity. All labor and compliance liabilities will be enforced on the company’s local entity

Why should I use a global PEO service instead of setting up a legal entity?

Setting up a legal entity in the country in which you want to expand is complex and comes with many tax obligations and legal liabilities including: end of year financial reporting, nominating local directors and ensuring that the entity meets all local legal requirements.

Whilst there are many cases in which a company must have a local entity in order to set up business activity in a specific country, generally it is advisable not to set up a local company just for purpose of employment or hiring. This is especially the case when the company is taking its first steps in this country and hire a few workers. Understanding local labour laws and discharging employer obligations is complex and time consuming. Payroll mistakes cause local employee dissatisfaction and at worse fines and bad publicity. This is why a global PEO service is the perfect solution to set up a new operation in a new country.

Who will manage the employees?

PEO is a transparent layer between the company and the employee. A good PEO company will ensure that the employee is in a good hands, on the one hand effecting local employment law, liabilities and payments and on the other, providing direct access to the company he works for and dealing with any personal related issues.

Why shouldn’t a company hire remote workers as contractors?

This was a very common practice in the past, but like the option that lies at the other end of the hiring spectrum – setting up a local entity – is now generally considered inadvisable. If a workers works exclusively for a company, his legal status would be considered a mis-classification. The worker will be able to claim full payment for social benefits, PTO’s, severance payments, in addition to the monthly compensation he received from the company, negating the very purpose of hiring as a contractor to start with

Another thing to take into consideration with contractors, is the fact that it’s hard to enforce non competitor, NDA and IP protection clauses on contractor agreements.


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Limitations of a PEO

Despite these benefits, even this employment approach has a downside. Many PEOs are entirely service-based, which means that there is no technology in place to keep resources aligned. In addition, there is often broken communication between suppliers, PEOs, and employers.
This entire process is challenging to oversee from a business perspective, offering little transparency into operations. In fact, more than half of respondents to the Global HR Practices Survey said that a lack of transparency is one of the most challenging aspects of managing a global workforce.

That’s where solutions like Papaya Global come into the picture. The firm’s technology platform helps to standardize and bring transparency to this network of global suppliers, creating lasting value for organizations and disrupting the marketplace. The system acts as a nerve center for managing the disparate activities that go along with global employment relationships. Eynat Guez, Co-founder of Papaya Global, explained,

What really separates us is being transparent and cost effective. We offer a platform to manage the employment process in an efficient way, creating clear communications among our clients and their PEOs and other suppliers.”

While PEOs can provide value for employers, they can be augmented with technology solutions to help employers get the best of both worlds: the flexibility and cost-savings that a PEO can bring to the table and the transparency and standardization of a technology platform underpinning the variety of relationships necessary to operate a global business. At the end of the day, hiring and managing a global workforce is a challenging prospect, and it’s best to find good partners to bring the expertise and scalability where they are needed most.

Written by: Ben Eubanks, Principal Analyst