In looking to hire an overseas employee or expand into a new country, there are two principle routes to market:
- direct employment and registration (aka international payroll) or
- using a PEO model
In this article we will define them both and then weigh up each option, giving an unbiased view of what works for who and when, as well as clearing up some common misconceptions.
What is international payroll?
In short, pay-rolling an international employee creates a direct hiring relationship between your company and the employee.
In this case, it is the business that owns the relationship with the employee, with complete control over the onboarding process of the new member of staff including sharing of company values and culture. This solution not only fully satisfies employment laws in the chosen country but also allows you to tailor a benefits package, including offering of stocks and shares in the business, which is unavailable when using a third party employer.
It is a common misconception that you always need to set up a legal entity in order to employ someone directly overseas. There are locations and occasions where a lighter touch payroll registration can satisfy local law and this can be done speedily. This does however depend on the nature of the activity and job role as well.
What is PEO?
PEO (short for Professional Employer Organisation) refers to an outsourced hiring arrangement through a third party employer.
It is sometimes called EOR (short for Employer of Record) or even GEO (Global Employee Organisation) but all these are talking about a third party service provider that acts as a middle man in an employment triangle. It is the PEO / EOR / GEO (we’ll simply call it PEO from here on in) that has the direct and contractual relationship with the employee. You then effectively ‘lease’ the employee from that third party provider.
Using this model enables businesses to employ staff in foreign countries without the need for any footprint or tax profile in that country. The PEO manages all the paperwork and contractual side with the employee, allowing for a fully compliant hire (in terms of local HR and employment law). They are useful in terms of speed, with hires in some countries being processed usually with a few days, some as little as 24 hours. Use of a PEO can be incredibly useful in complex markets, where it can essentially sidestep the infrastructure and lengthy process of setting up a legal entity, which would be required for direct employment or payroll.
There are 4 key scenarios where PEO often comes into its own:
- low headcount
- low salary (say under £40,000 or USD per annum)
- trialling a new market
- hugely complex markets
What is the fastest way to employ an overseas worker?
Although PEO is known for its speed, it is also possible for rapid direct hire in a number of countries. Depending on location it is perfectly possible to compliantly hire and payroll employees without a legal entity, including in the whole of Europe, Canada and Australia.
PEO is certainly the fastest option, but the time to hire by direct employment varies greatly. In Europe, it is often quicker than you think – within a few weeks with setting up legal entity. In countries such as Japan and China, however, where legislation and processing is more complex it can take many months.
What is the difference in cost between direct payroll and PEO?
PEO charges are mostly based on a percentage of salary cost per employee. Location may also affect the cost.
This means that as a business scales and grows, PEO as an option to hire will become more and more expensive and difficult to sustain from a cost perspective.
This could also be driven by a number of reasons other than growing the headcount, such as when you look to employ more senior personnel, or you wish to have a more permanent set up.
In any of these scenarios, there will be a tipping point where the cost of using a PEO will eventually overtake the cost of direct payroll, making it a less effective option and one worth reevaluating.
Retaining control of the employee experience and culture
The onboarding experience is the first experience an employee has of working with you and your business. It is key that this experience is a positive one. Research has found that a strong and positive employee onboarding process can help you increase employee retention by 82%, whereas a negative employee onboarding process can make your new hires 2x more likely to start looking for other opportunities.
Domestically, for example, in the US, PEO is a common model for employing individuals from state to state. It’s worth clarifying that our expertise lies in global payroll so we won’t comment on how PEO works domestically, we will only comment from an international perspective.
By handing over the contractual relationship between employer and employee to a PEO provider you lose control over elements of the process. Benefits packages, for example, vary from provider to provider and country to country. This can limit what you can offer to your overseas team depending on where they are located and the PEO provider you are using. It means that if you are choosing PEO as a route to market, it is worth comparing more than one to see which benefits package most suits you and your business. You may have to accept that when using PEO solutions what you offer your domestic team will not necessarily be reflected in what you can offer a remote worker in another country, which will also vary from another overseas hire elsewhere in the world.
The same limiting effect is true when it comes to contract wording. PEO providers have standard contracts and wording that they expect to be accepted as is. You will have no input into wording of contract and expectations of hires, which has greater implications when hoping to ‘manage’ the hire down the line.
This is the opposite with direct employment, where although there will be certain clauses and wording to keep you compliant with local employment law, you will have flexibility in tailoring what is included. You can also dictate what company benefits and perks you wish to extend to employees, enabling you to create a similar onboarding and employee experience wherever your employee may be in the world – at HQ or anywhere else. This also translates into employee satisfaction, engagement and longevity.
In addition and tied in with both cost and employee relationship is the issue of stock options, which are not allowed in a PEO situation but can be through direct employment.
What are the risks and considerations to weigh up when choosing between PEO and direct global payroll?
- Permanent establishment
- PEO legislation
- Tax compliance
- Employee resistance
Requirements and law vary greatly from country to country. This includes the local authorities’ definitions as well as your own organisation’s approach to risk.
Some countries, such as Germany, limit the period of time that you can hire someone using a PEO, namely 18 months. Where PEO is still somewhat in its infancy, it’s not unreasonable to expect other countries will introduce similar legislative standpoints.
Sponsorships and visa applications are easier when a company is already registered with a legal presence.
How to decide the best route to market
There are a number of factors to take into consideration for a business choosing between PEO and direct international payroll on how best to approach an overseas hire. While this article discusses some specific factors, risks and scenarios, it is by no means exhaustive.
For a more detailed discussion of the topic, we held a live webinar on the subject which you can watch on demand below or here.
If you have an international hiring need and would benefit from a helping hand to guide you through the process and considerations specific to your business, our team of international expansion experts are here and happy to help. We offer unbiased advice on best routes to hire and to market based on our vast experience. Get in touch and speak to someone today.