The use of a PEO (Professional Employment Organization) is becoming a popular employment option for companies with operations in countries such as the US, where there is a wide difference between state laws on corporate registration, employment and payroll. The PEO is useful where a company (foreign or domestic) wants to assign or employ staff in multiple states, but wants to avoid the expense and administrative tasks of complying with diverse state laws and regulations.
This service can also be used in some foreign countries for basic employment and payroll support, and act as a ‘co-employer’ for the client company. Sometimes the term is used interchangeably with GEO (Global Employment Organization), but there are a few key distinctions between these two employment outsourcing services which are outlined in this guide. Basically, the GEO is a sole and legal employer of record, whereas the PEO simply shares some of the employment and payroll tasks with the client.
What is an International PEO?
Definition of PEO
A PEO is a HR outsourcing service, that can assist a company with the management of employment related tasks, including employee benefits, compliance with state and federal regulations, servicing payroll and risk management. It is essentially a ‘co-employment’ relationship between the PEO and the client-company, where the employees are employed by both, so that the PEO can assume some of the employer responsibilities for the client.
Why Use a PEO?
The question does come up of why a company would use this service for their employment needs and administration. The primary reason is that the PEO has a built-in HR support structure that includes:
- Risk Management and Worksite Safety
- Payroll Servicing
- Insurance and Workers Compensation Coverage
- Regulatory Compliance
- Withholding and Taxation
The PEO may take on any or all of these functions for the client, saving the HR department time and money as an efficient solution to complex payroll and employment regulations.
How Does a PEO Arrangement Work?
The PEO contracts in a business-to-business arrangement with the client to handle defined aspects of the employment duties to the employees. This can be a comprehensive service, or in some cases may be scaled down to suit the client’s specific needs.
The client-company still has the employment contract with the employee, and will both negotiate compensation and manage the work activity. The employee will probably not even notice the PEOs role, except if they have concerns about any administrative issues that come up.
Pros and Cons of Using a PEO
There are pros and cons to using a PEO as with any professional service, and each company will need to assess their own needs and weigh any disadvantages in their decision.
- A ‘ready-made’ HR support infrastructure, that a company can plug into at any time and with different degrees of service
- Frees up time for recruitment and management of key employees
- Reduces compliance risk across state and national borders when expanding
- Brings an efficient ‘co-employment’ partnership to set the company apart from others
- Additional expense of the service fee, which may be seen as a normal HR function not needing to be outsourced
- Limited insulation from liability or penalties for the client-company
- Perception by senior management of a ‘loss of control’ of some business or HR functions
- Registration is still required of the company in each business location
- The PEO does not take on any legal employer responsibility, which still rests with the client
Common Myths About PEOs
There are a few myths and misconceptions about PEOs, and if you are considering using this type of service you need to know the facts:
Myth: A PEO and GEO are the same, and both offer full legal employment
Fact: A PEO is not an ‘employer of record’, only a GEO has an EOR service
In truth, PEOs are not functioning as the sole, local legal employer, and there are limits to the reach of their authority. If a PEO service claims to offer an ‘employer of record’(EOR), then they are actually a GEO. The exception is the FESCO service used in China which is a blend of the two, designed to meet that country’s exacting employment laws.
Myth: If we use a PEO we will lose control over our employees
Fact: A PEO will not manage your employees or control your business
It has a purely administrative role and will not interfere with the daily work or management of employees. However, they may interact with employees to gather personal data or submit insurance claims.
Myth: A PEO can absorb all employment risks for a company
Fact: A PEO cannot insulate your company from non-compliance or liability
Unlike a GEO, the PEO will not assume any risks of legal liability or regulatory violations. Their role is purely advisory in this area, although they can guide you in minimizing compliance risk.
Myth: A PEO and GEO have the same structure and service
Fact: PEO vs. GEO: There are major differences
As mentioned, there is a difference between a PEO and GEO employment solution. The basic distinction is that the GEO offers the client a sole and legal employer of record in the location where business is being done. The employment contract is between the EOR and employee based on local laws.
The PEO service is a bit more arms-length as a ‘co-employer’ and is essentially in place to support the employment relationship with the end client through various HR related administrative tasks and services. The following points illustrate the differences between both approaches.
PEO: The PEO becomes a ‘co-employer’ along with the client, meaning liability and responsibilities still rest with the client, but the PEO can minimize compliance risk.
EOR: Employees become fully employed by the Employer of Record, and the EOR has all responsibilities for the administration of employment.
PEO: Some insurance is provided but may have to be opted into and paid for in addition to service costs. The client still needs to carry their own insurance for protection as a co-employer. It may also be difficult for PEOs to get Workers Comp insurance for non-clerical industries. This often becomes the client’s responsibility.
EOR: Agency and client become protected from risks such as litigation and compliance matters related to the employment of the employee. The Employer of Record’s insurance covers the employee fully, including General Liability, Professional Indemnity and Workers Compensation. The Employer of Record is compliant with healthcare reforms and offers medical plans to its employees on behalf of its client
PEO: The employment contract is with the client, not with the PEO.
EOR: The employment contract is between the employee and ‘Employer of Record’, with a service agreement between ‘Employer of Record’ and the agency/client
PEO: Client is still required to register their company in every location where they wish to have employees or conduct business, but the PEO may assist.
EOR: Using an Employer of Record means you don’t need to register in multiple locations as they are already set up as a legal employer.
PEO: Transfers all risk to the client, but can advise on statutory changes and regulatory compliance.
EOR: All the risks are carried by the EOR to meet statutory employment laws.
Who Uses a PEO?
The question of what types of companies will use a PEO depends on several factors such as:
- The HR department’s time is dominated by paperwork and administrative tasks
- The company wants to stay on top of changing employment regulations in multiple business locations
- HR needs to focus on the recruitment and retention of skilled employees, rather than employment administration
- Benefit and insurance compliance is a major problem and expense
If these points describe your HR department, then a PEO can offer one reasonable solution to your employment needs, but a GEO could also do the same thing with an EOR to act as a full legal employer.
PEO vs GEO Which is better?
While these two types of employment services seem interchangeable, you can now see that there are major differences that could affect your company. The key point to keep in mind is that the GEO offers a far higher level of protection and insulation from liability in a new or unknown business location. The PEO simply handles payroll or employment administration and does not have a legal employer of record in the locale.
If you require a more comprehensive employment solution, then a GEO service is probably more suitable. The PEO would be sufficient if you just want third-party support for a few HR functions. Please contact Shield GEO if you have questions about either of these unique HR outsourcing services.