One of the biggest challenges of operating a remote workforce is managing HR tasks, especially when workers are located in different countries or regions with various laws and regulatory requirements.
Because of the complex nature of these tasks, many businesses turn to a professional employer organization (PEO) to help them navigate these challenges.
This article will help you understand what a PEO does, its benefits and limitations, and whether or not your business would benefit from using one.
What Is a PEO?
A PEO is a firm that provides comprehensive HR solutions for small to mid-sized businesses. The services offered by a PEO include:
- Payroll administration
- Employee benefits
- Tax filing
- Regulatory compliance assistance
PEOs enter into a co-employment arrangement with their client companies. Under this arrangement, the PEO is responsible for filing payroll taxes under its own tax ID. However, the client company continues to direct the employees’ day-to-day tasks and operations.
Benefits administration, compliance safety training, and other HR services are also typically handled by a PEO. This helps reduce the client company’s potential risk and liability, as the PEO now shares legal responsibility for employees.
PEO vs EoR
While a PEO is a co-employer that helps with many HR responsibilities, an employer of record (EoR) is a company that employs staff on behalf of another company. Companies often use EoRs when they want to hire workers in a country where they don’t have a legal entity.
In contrast to a PEO, which has limited liability as a co-employer, an EoR takes over all the legal liabilities of employing workers, including tax filing, employee benefits, and compliance with local labor laws. In this case, the client company is not responsible for managing these aspects, and its role is purely operational.
Both PEOs and EoRs can provide significant benefits, depending on the client business’ specific needs and circumstances. Understanding their differences and similarities can help you choose the right solution for your organization.
Why Use a PEO?
There are several reasons why you might choose to use a PEO. Here are the two most common:
Help reduce your company’s liability
Businesses lower their liability risks by entering into a co-employment relationship with a PEO. This is because the PEO takes on certain responsibilities and obligations associated with the country of operation.
For example, a US-based tech start-up may want to employ remote software engineers based in Mexico. However, there are several complex issues that come with this, including complying with Mexico’s labor and outsourcing laws and meeting employee benefit requirements.
Failure to comply with these local laws and regulations could result in significant legal and financial implications, such as fines or lawsuits.
With its local expertise, the PEO assumes these responsibilities and ensures compliance. It will structure legally compliant employment contracts, handle payroll processing per Mexican laws, and manage any mandatory benefits.
By partnering with the PEO, the start-up would significantly reduce its liability while still being able to employ the remote talent it needs.
Go beyond HR administration
While HR administration is a primary service of a PEO, these organizations often offer employer services that improve a company’s business operations and help it grow. Services may include programs for:
- Employee training and development
- Recruitment assistance
- Risk management
- Safety compliance
- Guidance on how to improve workplace productivity and culture
By using a PEO, businesses access a wide range of professional services that might otherwise be too burdensome or expensive to manage in-house.
Benefits of Using a PEO
Here are a few of the many benefits of using a PEO:
Improves employee benefits
A Gallup poll found that competitive benefits are among the most important factors in attracting and retaining top talent. However, as a small or mid-sized business, you may not be able to negotiate the same rates with insurance providers as larger corporations due to a lack of buying power.
PEOs, however, handle benefits for multiple companies, thereby providing economies of scale that can lead to better benefits plans at lower costs.
Saves time and resources
PEOs alleviate the burden of administrative tasks, allowing your team to refocus their energy and time on business growth and development. The time and resources that would otherwise be spent dealing with payroll functions and compliance issues can be redirected to more strategic activities.
PEOs often use modern technology to streamline HR tasks like payroll, benefits administration, and compliance reporting. This increases efficiency and reduces errors and discrepancies that can occur with manual processes.
The PEO provides a single point of contact for all these tasks, streamlining the whole HR process for your business. Employers and employees can easily access HR information and self-serve, enabling them to perform tasks like requesting leave or viewing pay stubs.
Drawbacks of Using a PEO
While there are many benefits to using a PEO, it’s important to also consider the potential disadvantages. These may include:
Not every organization is a good fit for a PEO structure. When it comes to company size, PEOs often work best for small to medium-sized businesses that do not have the resources or experience to manage HR, payroll, and benefits.
Large organizations with extensive HR departments may find the costs of a PEO to outweigh the benefits. Additionally, some businesses may require unique HR practices or policies that are not well suited to the generally standardized services offered by a PEO.
Loss of control for employers
While using a PEO simplifies many aspects of HR, it also means giving up a certain amount of control. Decisions about employee benefits, HR policies, and payroll are partly or fully handed over to the PEO, which may not sit well with all businesses.
Working with a PEO means adding another layer of communication between your company and your employees. There may be times when questions or issues arise that the PEO can’t answer without consulting you first, which can slow down the resolution process.
Additionally, relying on a third party could potentially affect your ability to relay important company information or changes to your employees.
Top PEO Companies
Each PEO offers slightly different services depending on its focus and areas of expertise. Below are three of the leading options, listed in no particular order:
TriNet provides full-service HR solutions tailored to industries from technology to construction and nonprofits. It offers tailored packages for small businesses or start-ups and is particularly strong in providing industry-specific solutions, emphasizing benefits packages, risk mitigation, payroll, and compliance.
ADP is a reliable and well-known global provider of PEO services. It provides HR solutions such as payroll, benefits, HR management and compliance, risk management, and more. It also offers various scalable solutions ideal for growing businesses. ADP is especially popular for its robust digital tools and technology.
Paychex offers a combination of PEO and traditional HR outsourcing, making its service highly scalable.
Businesses can choose from an array of services, from full HR outsourcing (including employee benefits, risk management, and payroll) to more specific areas as needed. Paychex also provides excellent software for managing your HR services across the board.
How To Choose the Right PEO for Your Business
Choosing the correct PEO for your company involves diligent research and careful evaluation. Here are a few actions you should take to ensure you make the best choice:
Identify company needs
Start by outlining what your organization needs. Ask yourself questions like:
- Are there specific HR tasks we want to outsource?
- Are we interested in improving benefits packages to attract and retain talent?
- Do we need general HR support, or are we seeking more specific expertise in compliance or risk management?
Without first outlining your needs, matching the right PEO to your business is challenging. Remember that not all PEO services are the same—some may offer a broader range of services, while others might specialize in certain areas.
Research reputation and industry experience
Ensure that you choose a PEO with a strong track record and extensive experience in your industry. Check its customer reviews and ratings online, and see how long it has been working in your sector.
You can also look at its case studies or examples of its work to see if it has successfully managed companies similar to yours. Examine whether it has experience working in the countries where your business operates or plans to expand, as international experience can be crucial for managing compliance and HR.
Understand the pricing and fees
Some PEOs will charge a flat fee per employee per month, whereas others may charge a percentage of your total payroll. Ensure you understand the pricing structure and what the costs cover, and inquire about any other potential fees that may arise.
For instance, are there setup fees, year-end processing fees, or fees for additional services? Clarify these details up front to avoid unexpected costs down the line. Fully understanding the fee structure will allow you to compare different PEOs accurately and assess which offers the best value for your business.
Ensure the PEO is on top of trends
Choose a PEO that stays ahead of the curve regarding industry trends and changes in laws and regulations. HR intricacies often change, and you want a proactive PEO to ensure your business stays compliant.
Additionally, your PEO should be well versed in the latest HR tech trends, providing you with the most advanced and efficient solutions on the market. This includes user-friendly software systems, online portals, mobile apps, and more. Invest in a PEO that invests in its own growth and expertise.
Carefully review the service agreement
As with any contractual agreement, it’s critical to thoroughly review and understand the PEO service agreement. This will help you understand what to expect from each other.
Look out for terms related to the termination of the contract, renewal processes, responsibilities and duties of each party, and how disputes or disagreements are resolved.
Don’t hesitate to ask for clarification if you have questions or are uncertain about anything. Having a lawyer review the contract before signing the agreement might also be helpful. After all, this is a major commitment and partnership for your business.
Pick a PEO that offers flexibility
As your business grows, your needs will change, and the PEO should be able to adjust to these shifts. Whether it’s expanding the range of services, scaling the team, or extending to new areas, ensure your PEO can support these changes.
Ask it about its capabilities to adapt to changes and its track record in managing the growth of similar businesses. Flexibility is paramount in selecting a PEO that can be a long-term partner.
Using a PEO can have numerous benefits for your business, particularly if you’re looking to expand internationally or need extra support managing your HR functions efficiently and compliantly.
However, there is another option if you’re growing your remote team. When you partner with Near, there’s no need to worry about the complexities of international payroll and benefits. We handle all the administrative burdens of hiring, onboarding, and paying remote workers.
If you’re considering expanding your team and would like to learn more about how Near can help you simplify your global staffing solutions, book a free recruiting consultation today.