What is a PEO, and does your business need to hire one?
If you’re an owner of a small- to medium-sized business, you may have heard of the term “PEO” used as you plan your journey to expansion. PEO companies are great partners to utilise when you’re planning on growing your business. But what are they? And what do they do for you?
In this article, we’ll take you through everything that you’ll need to know about PEO companies, from PEO meaning to the advantages and disadvantages of engaging with them and if they’re really the right fit for your company’s needs.
What does PEO stand for?
PEO stands for “Professional Employer Organisation”, and you may have heard them also referred to as “co-employment” or “HR outsourcing” companies. In order for companies to save money and time, PEOs let their customers outsource human resource (HR) tasks by managing perks, payroll, and compensation for their workforce. Many PEOs offer these services on a global scale, helping companies enjoy a much smoother global expansions.
If you’re based in the UK, you might have heard of the term “umbrella company”. These are specific types of PEO services that will provide you with the same service, albeit through utilising contractors rather than actual employees.
PEOs will go into a co-employment relationship with the company that engages with them, meaning that both the company and the PEO will technically be legally liable for the employees that they hire. Although in some cases, PEOs may take on the legal liability of their employees, in others, they may not, despite being a co-employer.
Co-employment, also known as joint employment, refers to the legal relationship between the two employers and the workers. This greatly simplifies the administration of payroll, taxes, benefits, and insurance. As to the legal responsibility of the employees, this aspect of the co-employment relationship between a PEO and your company comes down to the fine print.
Some or all human resources tasks may be delegated to a PEO, depending on the nature of the agreement. For businesses that would rather avoid co-employment but still reap the outsourcing benefits, an administrative services outsourcing (ASO) agreement with the PEO they wish to partner with can be a good middle ground.
To clarify, PEOs should not be used to replace your company’s HR team entirely. It should be noted that while PEOs can take quite a few HR tasks off of your plate, they will not do any of the hiring or firing for you – that decision, ultimately, still is up to your discretion.
What PEOs can do for your company
If you’re slightly confused as to what PEOs can offer your company, not to worry! PEOs help your company streamline a lot of the repetitive, time-consuming tasks that would normally be taken up by a full-fledged HR team. For small- to medium-sized businesses, these redundant tasks can be quite resource-intensive, especially when looking to expand internationally, which takes the company’s focus away from the main business focus.
Here’s a quick summary of the various tasks that a PEO company can do for your business:
- Take care of a wide range of human resources tasks for businesses, such as payroll, compliance, risk management, employee benefits, employment tax, plus time and attendance tracking.
- Assist in lowering wage, payroll, and state unemployment tax obligations
- Increase the appeal of your company to both present and potential employees, which will help with recruitment and retention.
- Free up your resources so you can concentrate on running and expanding your company.
Advantages of using a PEO
So, now you hopefully know and understand what a PEO company is as well as what services they can offer your company. For a small- to medium-sized business looking to expand their workforce as they grow their company, engaging with a PEO can carry quite a few advantages:
1. Faster growth rate
As we’ve mentioned earlier, using a PEO can free up valuable resources that can be better spent on the company’s core business. According to NAPEO, companies who engage with a PEO to outsource their HR tasks have found an impressive 7-9% increase in growth rate.
2. Improved compliance
One of the most frustrating aspects of human resource management is to ensure that all your contracts, payroll and tax payments are compliant with local labour laws. In the United States, labour laws can differ from state to state, which can make hiring across state borders complicated. Surprisingly, this is a similar situation in the UK, where there are distinctions between the labour laws of all four nations.
3. Increased employee retention
As a small- or medium-sized company, it can be difficult to offer attractive benefits or salaries in order to draw the best talent to your company. According to the Society for Human Resource Management (SHRM), in today’s employment market, an increasing number of companies are improving their benefit offers to increase their chances of attracting the cream of the crop. By engaging with a professional employer organisation, you’ll be able to offer potential employees many more benefits that you wouldn’t have been able to before.
4. Lower overheads
One of the most positive features of the PEO model is financial savings on human resources functions. When you free up your HR department from tedious tasks, they can put their attention where it will yield the greatest return: on developing company culture and helping with improving the company’s bottom line. With a PEO, you get a full suite of HR services to ensure a smooth workplace experience for you and your employees. This has the potential to greatly reduce the cost of expanding both domestically and internationally.
Disadvantages of using a PEO
Unfortunately, as with most things in life, there are also some disadvantages your company will face if you decide to partner with a PEO for your company’s growth exercise. Here are the biggest limitations of engaging with a professional employer organisation:
1. Third-party influence on company culture
A professional employer organisation will remain a third-party company throughout the duration of your engagement. This could greatly impact company culture as there will still be outside forces who engages with your workforce on a regular basis. Plus, since the PEO would take charge of onboarding tasks to ensure that contracts are compliant, they could very well be the first point of contact before entering your company, and a bad first impression may leave a bad taste in your employee’s mouth.
2. Lack of control
Relying too much on an outside company to take up HR duties might diminish the control and respect had by your company’s own HR department. This is especially the case since your company has no say in the PEO’s handling of personnel records and paperwork. Employing a third-party agency to handle HR could also prevent your company’s in-house HR team from gaining valuable insight into the field for use in growing your own business.
3. Legal liability
Since PEOs and their clients enter into a co-employment relationship, the legal responsibility of an employee ultimately still falls upon your company. Although their main selling point is to maintain compliance when it comes to onboarding, payroll and taxes, you still need to keep an eye on things. This is because if the PEO makes a mistake, it also becomes your mistake. Your company will be liable for any legal issues and lawsuits that could arise from dissatisfied employees, as your company is their employer in the eyes of the law.
4. Global expansion is more difficult
Although we had mentioned earlier that you could engage with a PEO if you’re looking to expand your business onto the global market, there are still significant steps you need to take before that’s achievable. In general, when a business wants to venture into a new market – whether to grow the business or even simply to gain access to a larger talent pool – they need to establish a local entity before doing so. Especially if the plan is to penetrate multiple new markets, this not only gets complicated but expensive too.
Difference between a PEO and an EOR
In the pursuit of international growth for your company, you might have come across the acronym “EOR”. Similar to PEOs, EORs (short for “Employer of Record”) take on HR responsibilities on behalf of their client companies – from onboarding to payroll and tax payments and making sure that everything is compliant. So, are EORs and PEOs the same thing? Absolutely not!
EORs and PEOs are fundamentally different in one essential way. In contrast to PEOs, with whom firms enter into a co-employment relationship, EORs are viewed as the sole legal employer of an organization’s global workforce and assume all associated legal responsibilities. This is due to the fact that, unlike PEOs, EORs have established entities in key countries all over the world.
Benefits of using an EOR
With that said, what are the advantages of engaging with an employer of record? Here are the biggest benefits your company can enjoy:
1. Conserve resources
Similar to working with PEOs, the delegation of most redundant and repetitive HR duties to an EOR is a great way to conserve time and money. But, there is an added cost-saving benefit that EORs can offer to which PEOs cannot – removing the need to spend money on establishing local entities wherever you wish to expand your company.
2. Easily expand to international markets
As we briefly discussed before, an employer of record has legal entities established across various countries around the world. This allows you to gain access to new markets much more easily than if your company had to establish entities for itself. And even if you only want to connect to a global talent pool rather than do business, it is entirely possible to do so if you partner with an EOR.
3. Risk mitigation
Possibly the biggest advantage for a small- to medium-sized business to engage with an EOR is the alleviation of legal employment liability. If you decide to partner with a reputable EOR, the EOR will be the sole legal employer of your workforce, taking the pressures of possible employment legal issues off of your company.
4. Guaranteed compliance on a global scale
EORs and PEOs have to keep their eye on the changing states of labour legislation wherever their client company wishes to operate. Since EORs will be the legal employer of your workforce and have settled entities around the world, you can rest assured that your workforce is taken care of with minimal need for monitoring their work. Your partner EOR will ensure compliance is maintained through all aspects of employment, from contracts to payroll – making sure that all aspects of your business are happy campers.
5. Focus on the business
With all the above benefits combined, a small- to medium-sized company that partners with an EOR in their global expansion efforts will be able to grow at an exponential rate. Without the need to monitor too closely the work of your partner EOR and with more resources freed up, you and the employees that you hire through the EOR will be able to put more focus on the core aspect of your business.
Disadvantages of using an EOR
In the grand scheme of things, a lot of these disadvantages can be mitigated by ensuring that you’re engaging with the right employer of record for you and your company. However, if you don’t manage to find the right one, there are three disadvantages to working with an EOR:
1. Limits on administrative control
Although you are ultimately in charge of the day-to-day tasks of your workforce, there is a question of control on the administrative level when working with an EOR. If you outsource the onboarding process to a third party like an EOR, you may feel less involved with the new employees. Some business owners prefer to personally greet every potential employee, despite the fact that employer of record firms have their own HR specialists who are educated to onboard your employee to your business.
However, this can easily become a non-issue when you discuss with your partner EOR upfront with regards to handling employee onboarding. There is still an opportunity for you to be personally involved in the process – you just need to make sure that you mention this upfront!
2. Misaligned goals and culture
In a similar light to working with PEOs, there is a risk that working with an EOR can cause a misalignment in goals and company culture. When it comes to anything related to HR, the Employer of Record company that you engage with could be the first point of contact rather than your in-house team. Any interactions with your partner EOR will still be reflected upon your company, even if your workforce is aware of the distinction between the companies.
When to use a PEO?
When should your company use a PEO? If you’re simply looking to outsource HR tasks and not expand into international markets, then a Professional Employer Organisation might be right for you. However, keep in mind that with a PEO, you won’t be able to gain access to a global talent pool very easily!
When to use an EOR?
If you’re ready to take your company to the next level and enjoy the benefits of globalisation, then you should consider engaging with an EOR instead. It can’t be understated how much of a relief it is on the resources of your company when you don’t have to worry about establishing legal entities in whichever market you wish to explore. Partnering with a first-class Employer of Record company will ensure that your global expansion efforts run as smoothly as can be, with the added benefit of gaining access to a global talent pool as soon as you need it.
