PEO (Professional Employer Organisation) or EOR (Employer of Record) are well-known and commonly-used solutions for hiring and paying remote employees. Its speed of entry, especially in complex markets, as well as its almost switch-on switch-off ability, make it easy to grow a team without heavy up-front commitments and time delays. It’s no wonder that it is an increasingly popular choice for companies looking to scale overseas.
We believe that there is a place for PEO in any global expansion strategy. There are some obvious pros, but also certain challenges and considerations. Domestic HR teams will want to be conscious of these when using this payroll model for an international workforce. Here we will define just what PEO means, and then walk you through key considerations we regularly advise on. To date we’ve helped hundreds of companies on their expansion journeys.
Definition of the PEO model
PEO goes by many names and acronyms such as EOR and GEO that describe the same solution. Under this solution staff are employed through a legally registered, local PEO and are then effectively leased to you. This satisfies local employment laws, as employees are then under the tax ID of the PEO. The key point to this is that you are not their direct employer and they are not your direct employees.
The PEO provider would handle things like contracts, onboarding and salaries.
4 Key PEO Considerations
For the purpose of this article, we have collated the considerations into four key headings:
- Affordability
- Staff engagement
- Risks
- Retention
We’ll talk about each one in turn, and share our expertise in the context of long and short-term expansion plans. Once again, we’d reiterate that we believe there is a place for both in any organisation’s growth journey. There is no cookie-cutter approach to going global. Which factors weigh in more will vary from business to business.
Affordability
In low head-count and areas with complex local employment laws, PEO is an attractive solution, especially if there is a time pressure linked to the hire. This is because it’s possible to hire compliantly this way in a few days. In some places this can even be as little as 24 hours.
The PEO charges a fee for employment that is a percentage of the employee(s) salary. Although initially justifiable, this becomes less cost-effective as a business scales and becomes more established. This fee is on top of an employee’s salary, and often does not include benefits, which are then laid on top.
Where possible, it can be worth looking at the long view of your business – where you plan to be 6, 12 or 18 months down the line. There will be a tipping point as you take on more team members that may lean you in favour of direct employment. The initial delay in setting up legal entities or payroll registrations is worth planning for too (this depends wholly on the country of expansion).
On the other hand, PEOs can be an attractive option for small companies, giving them access (depending on the provider) to things such as HR services, onboarding and recruiting – bandwidth and skillsets that they may not otherwise have. These benefits can be invaluable to smaller companies looking to recruit top talent. PEOs may also have access to much more favourable and competitive benefits packages than would be available to an individual company. This is simply due to the overall numbers of people they employ in the country as a whole. This is useful if you just need a fast plug-and-play solution. It must be noted that little or no changes can be made to these group templates, policies and processes. We will expand on this a little later.
Staff Engagement
Staff engagement is usually a HR priority, feeding into costs, retention and the overall culture within a company.
Onboarding, Training and HR support via PEO
On the positives, using a PEO provider can open the door for smaller companies to offer onboarding, training and HR services. The onboarding process is generally speedy. This is ideal if you’ve already held the interview and need to follow up with the paperwork and hiring ASAP. This of course varies from country to country as well as from provider to provider. Packages vary, so some services will come at an additional cost. It’s important to have a good understanding of what is covered, offered and what the extras are before committing.
Broadly speaking, and something that can very much impact employee engagement is a lack of knowledge on the model and how it works in an international space. It’s not unheard of for some staff to complete the entire recruitment process, only to realise at contract stage that they’re not being directly hired by the company.
Compensation and Benefits with PEO
When using a PEO provider, there is less opportunity for negotiation with contracts and benefits. If you are recruiting international talent but promising your domestic benefits package, this isn’t always possible to deliver. All this can negatively impact morale and productivity, as a consequence and make recruits and employees feel undervalued. So, if you are hiring top talent at a global level, PEO may not be the best long or even short-term solution. This is more true, the higher the hire.
Returning to the subject of benefits, PEO providers can allow smaller companies to have access to group benefits packages. It’s worth noting that there can be limited options as far as tailoring packages goes. What is presented may not actually be the best fit your employees, and their families. PEOs can also change their policy providers at any time which may cause unexpected stresses for the staff on those plans and packages.
Advice when hiring a new recruit via PEO
It is worth noting that because of the limited ability to change or customise plans offered by a third party solution, it is important NOT to commit to any specifics when negotiating with a new candidate in a new country. When using a PEO you are bound by what the specific provider offers. This differs from country to country and from provider to provider.
Shared Risks
When you hire a new employee under a PEO arrangement, you are essentially co-employing them with the PEO. A benefit of this is that risk is shared. All employees they serve will be incorporated under the PEO’s own tax code. This can be very useful when managing tasks such as workers compensation reporting, management of the employee life cycle, onboarding and HR compliance. Done well it can actually mean a reduction in your own HR workload.
While all this can be appealing, it does mean relinquishing control. If and when any HR issues arise, you will need to contact them. Each situation is different but this can be inefficient, frustrating and means you lose a personal touch which can have knock-on effects on employee morale. Many companies understandably do not like giving up the control of their own internal processes in this way. This is, of course, not the case with direct employment. However, with PEO solutions, you will have to work with and through the PEO provider.
PEO may have legislative restrictions
Certain countries have legislation that guides how PEOs can operate. For example, Germany limits the time staff can be employed via PEO to 18 months. After this time the employee must either be terminated or transferred to direct employment.
Collective bargaining agreements
There are a number of countries where collective bargaining agreements are in place. Collective bargaining agreements govern almost every aspect of an employee’s working life, from pay expectations to time off and hours worked. It’s always best to check with your PEO provider to find out which agreement your organisation is bound by. This is key in case there is ever a dispute.
Retention
Although there are clear benefits (HR support and onboarding process as well as the smooth implementation of benefits), there can be resistance to a new recruit being employed through a third party. There can be discontent with the inflexibility of benefits packages or contract wording both from an employee and employer perspective. Company culture can be adversely impacted when staff feel undervalued and disengaged by not being directly employed. This is especially so if there are discussions between employees in different territories on different packages. If not handled well, this can lead to high turnover of staff.
Summary
In conclusion, it’s hard to find a better employment option than a PEO solution when entering a complex market with an immediate urgency or for a short timeframe. Small companies especially can benefit from the additional services and simple benefits implementation that a PEO can provide. However, because of the issues regarding inflexibility of contracts and employee engagement, as well as mounting costs as a business scales, it is not always a long-term solution. It is a good stopgap solution to enable you to hire and pay people quickly and compliantly. However, as we’ve mentioned, contracts and packages with PEO providers are set with little room for movement and amendment. This can make direct employment the better option if you want to have control over contracts and negotiation. PEO also presents challenges with staff engagement and retention that you will need to mitigate when attracting top talent.
If you’d like to know more about this subject, we held a webinar on a similar topic earlier in the year, which you can watch on demand here.
If you need advice on routes to international markets, our unbiased team of experts are here to help. Reach out to them here.