- International PEOs can assist with legal compliance, business registration and statutory changes as you expand into new territories.
- Although an international PEO can help you expand into foreign countries, it is not a global employer organization.
- PEOs bundle many comprehensive international HR needs into one service, but they don't eliminate international registration needs and risks.
- This article is for small business owners looking to use a PEO as they expand into international markets.
Expanding your business internationally might be on your bucket list, but doing so without due diligence can ruin your dream – and that's where international PEOs come in. These third-party HR firms are known to make reliable partners for expanding into new territories, though some people mix them up with another type of helpful international entity. Learn all about PEOs and the confusion surrounding them below.
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What is a PEO?
A professional employer organization (PEO) is a type of HR outsourcing firm that sponsors your health insurance, workers' comp and other types of business insurance. It does so through a co-employment arrangement in which it assumes the full burden of whichever HR tasks you assign to it. Small businesses like yours typically hire PEOs to handle benefits, payroll, legal compliance and taxation. [Related content: Learn the differences between a PEO and traditional HR outsourcing.]
Taxation is an especially notable PEO service, as your PEO will handle taxes under its employer identification number (EIN) instead of yours. If your PEO's state unemployment tax rate is lower than yours, you'll pay less taxes.
Your PEO co-employer agreement is more of a formality than anything else, as you'll experience no changes in how you manage your employees day to day. Your workplace won't change significantly, but if you remain worried about changes, you can choose a PEO certified by the IRS or Employer Services Assurance Corporation. These PEOs adhere to rigid standards that all but guarantee no serious modifications to your operations.
What is an international PEO?
An international PEO is a PEO that specializes in offering HR services to domestic clients expanding internationally. International PEOs can assist with payroll, and all the regulations involved in tax, insurance and risk management needs that come with expanding into a foreign market. As a result, you'll save time and money trying to navigate the complexities of expanding beyond your borders.
Note that international PEOs, contrary to somewhat popular belief, are not global employment organizations (GEOs). We'll explain this distinction later. [Read related article: PEO vs. Insurance Broker]
Key takeaway: An international PEO is a company that can help you establish legal operations in foreign countries, but it is not a global employer organization.
How do PEOs help you expand internationally?
International PEOs can help you lower your compliance risks as you venture into new territories where you're likely not familiar with the laws and regulations. Similarly, your PEO can keep you informed of statutory changes that come with expanding into new markets. Your international PEO can also help you register your company in each of its new foreign locations.
To offer these functions, PEOs will, as mentioned earlier, sign a co-employer agreement with your company. Through this contract, you can designate which international employment duties you delegate to the PEO and which you prefer to handle yourself. No matter which tasks you contractually assign to your PEO, you'll remain responsible for day-to-day employee management and all salary negotiations.
What is an employer of record?
Earlier, we mentioned that international PEOs are not global employment organizations. That's because whereas PEOs are co-employers, GEOs are employers of record.
An employer of record (EOR) is a third-party company that takes on all your employment administrative work. Your international employees thus sign employment contracts with your GEO instead of you. Although you retain day-to-day operational control and can set employees' schedules and salaries, your GEO is recorded as their employer.
The EOR arrangement of GEOs means that you won't have to register your company in every new location into which you expand, which isn't true with international PEOs. Additionally, your GEO will obtain work visas for your team, advise you on international labor laws, protect you via international business insurance and run international payroll for your team.
FYI: An international EOR offers foreign employment administration and signs employment contracts directly with your employees.
Pros and cons of international PEOs
Although PEOs and GEOs may seem necessary for launching operations in another country, they aren't exactly mandatory. That said, they offer many advantages that streamline international growth and minimize liability, though these benefits don't come without drawbacks. That's why we've listed the pros and cons of international PEOs below.
Pros of international PEOs
Here are some of the reasons you might want to hire an international PEO.
- Built-in international HR: Like domestic PEOs, international PEOs give you access to HR services. This access is perhaps even more important internationally, as tapping into experts based in the areas where you need assistance minimizes your chances of misunderstanding (and thus failing to comply with) regional law.
- Time savings: Even if you're enthusiastic about expanding beyond your borders, you're probably not thrilled at the prospect of the paperwork. And all that hassle will come after hours spent trying to master the ins and outs of international labor and tax laws. Hiring a PEO to handle these tasks on your behalf may be well worth your while – what you spend in money, you earn back in time.
- Easier legal compliance: With an international PEO, you don't just get back all that time you might have planned to spend on mastering international labor laws. You also get an HR partner that specializes in keeping your company compliant with those laws. As a result, you can enter international markets with less risk of government fines, employee lawsuits and financial loss.
- Bang for your buck: PEOs do more than ensure your international compliance. They also set up your international payroll, obtain the appropriate insurance for your company and help to manage your risk. For the amount you'll pay for your PEO services, what you get is often quite a good deal.
- Co-employment structure: As compared to choosing a GEO when you expand internationally, PEOs take on fewer of your employment administration tasks. Perhaps this could translate into more work for you, but it will mean that you retain more control over your HR operations.
Cons of international PEOs
Some aspects of international PEOs might give you pause.
- Less comprehensive business registration: If you choose a GEO over a PEO, then you won't need to register your company in every new location into which you expand. The same isn't true for PEOs, but they may somewhat make up for this gap by assisting you with registration.
- No EOR arrangement: Unless you fear a loss of control over your employment practices, the lack of EOR arrangements that accompany international PEO contracts may be a point of concern. Without an EOR arrangement, you still retain most legal employer responsibilities. If your employment terms violate international labor laws – and again, slip-ups are easy in places where you're unfamiliar with the laws – you'll be primarily liable.
- Higher financial risk: The absence of an EOR setup with international PEOs sets your company up for troubles beyond compliance violations. If an international government levies fines on you for your violations, your PEO shoulders only part of this burden as your co-employer. A GEO, on the other hand, accepts the entire responsibility.
- Potential loss of control: Although international PEOs will never involve themselves in your day-to-day affairs, some small business owners still may feel reluctant to make any third party a co-employer. The only solution to this concern is to go entirely DIY when expanding internationally, as GEOs take even more control of your affairs.
- Fees and other costs: Sure, the amount and quality of services you get from international PEOs for what you spend is a great deal, but you're still spending considerable money to hire a PEO. If you're hesitant to pay too much money on your expansion, PEOs might not be a viable option. In this case, only the DIY route would work.
- Legal questions: Co-employment is a common arrangement in the United States, but in some other countries, it's illegal. Since a PEO acts as your co-employer, your PEO arrangement might not be valid in the territory into which you're seeking to expand. Additionally, both you and your PEO must register yourselves as businesses in the territory in question. If not, there could be compliance consequences.
Key takeaway: PEOs efficiently package many important international HR services into one bundle, but they don't eliminate risk or international registration needs.
How to learn more about PEOs
If you're interested in learning more about PEOs, the best way to get started is to read about how they work on a domestic level. To that end, Business News Daily has created a guide to choosing PEOs and reviewed the best PEO services. Trying the PEO model domestically may prove helpful for setting up an international system – and a thriving global business.