What is a PEO, and when do you need one?

Your company’s human resources (HR) workload can be taxing — especially if you’re running a small or mid-sized business or launching a startup.

You might wish you could just find someone else to deal with the hard parts of HR.

There are various HR platforms and partners available to help you streamline HR processes. A professional employer organization (PEO) is an option that you can consider if your company owns a local legal entity. If you’re hiring internationally, an employer of record (EOR) is the ideal solution to simplify the challenges of global HR.

But before you hurry to Google to find the nearest PEO, take some time to learn more about what services a PEO does (and doesn’t) provide.

In this article, we'll explain the ins and outs of PEOs. And for businesses looking at expanding internationally, we’ll also cover whether you should consider working with an EOR instead.

So let’s unpack the details of PEOs and look at practical HR solutions that will give you peace of mind.

What is a PEO, and how does it work?

Think of a PEO as an outsourced HR department.

Complex administrative HR tasks can steal so much time from small- and medium-sized businesses. As a company expands, admin personnel may not have time to keep up with the increased workload themselves.

To remedy that, a business might outsource difficult HR and payroll work to a PEO.

As an example, there are between 700 and 1,000 PEO companies operating in the US. These companies handle things like payroll , employee benefits, taxes, and certain types of compliance documentation for businesses.

Not only do they ensure your employees get paid, but the best providers can manage time off requests and tax forms, among other things.

What’s the difference between a PEO and a payroll company?

It’s easy to confuse the two, but there’s a major difference between these two types of business services.

A payroll company (or payroll service provider) takes care of your company’s payroll administration and makes sure you’re compliant with local tax laws.

A PEO offers that same payroll and compliance assistance — in addition to taking care of other HR services. 

We’ll look at PEO services in more detail in a moment. But first, let’s answer the question of how a PEO works.

How a PEO works

PEOs operate under a co-employment model.

A co-employment arrangement is a contractual relationship in which your company and a PEO share certain employment responsibilities that would otherwise be handled in-house by your company's HR team.

When you partner with a PEO, both you and the PEO share responsibility for employing your workers. Your employees continue working for you as usual, while the PEO handles back-office employer tasks like payroll, benefits, and compliance.

However, it’s different if you use an EOR for HR outsourcing in a foreign country.

Even though some in the HR industry use the terms interchangeably, PEOs and EORs are not the same .

An EOR acts as the legal employer. This means that, technically, your employees work for the EOR (for compliance reasons). But in practice, they work for you, the same as any of your other employees.

This can be a preferable option for companies that have compliance obligations in multiple countries. As the legal employer, the EOR takes on the burden of staying up to date with all relevant local legal and taxation obligations, allowing your company to avoid the complexity and time involved with these HR challenges.

What do PEOs do for businesses?

As discussed, PEOs take on a number of key employer responsibilities. By working with a PEO, companies that struggle with the day-to-day work of employee administration can provide a better experience for their teams in a variety of ways, such as the following:

Payroll

Nothing can doom a promising company like unhappy employees who don’t get paid on time.

See also: What is the cost of payroll errors? 

PEOs provide reliable payroll services so that you don’t have to stress about the details of deposits, bank accounts, and paperwork.

Some PEO providers — like Remote — provide self-service options to employees, too, so workers can update their information and change their preferences on their own. This can greatly reduce friction and exposure to risk for your business.

Benefits

Different companies offer different employee benefits, but most fall into the same basic categories of insurance, time off, reimbursements, and other popular perks. PEOs can manage these for you, as well as more unusual benefits.

In addition, PEOs usually have access to broader benefits networks than employers can find on their own. This can help your company access health insurance with more coverage and better rates, plus retirement plans with lower fees and more investment options for employees.

Taxes

Ensuring that you're withholding and paying the right payroll taxes is a common stumbling point for many businesses, but PEOs ease this complex administrative burden.

For example, if you're based in the US, you no longer need to worry about proper withholding rates for federal and state taxes, or about making your payroll tax payments on time. The PEO handles that on your behalf.

Legal compliance

Tax compliance makes up a large part of a PEO’s responsibility, but taxes aren’t the only form of compliance businesses must follow. There are other reporting requirements, too.

Not only do you have to file the proper documentation to classify your workers correctly, but you must also make sure you comply with local regulations relating to workers’ compensation, social responsibility programs such as unemployment, and other labor laws.

If you don't comply with any of these rules, you can face serious consequences such as penalties, fines, and business restrictions.

PEOs don’t usually offer auditing services to double-check employee classification, but they do ensure you don’t get in trouble for filing the paperwork incorrectly.

What advantages do PEOs offer businesses?

Businesses of all sizes can save time and money by leaning on a PEO to do the heavy HR lifting, and take on a number of administrative functions.

Other advantages include:

Risk diversification

Because PEOs work with several businesses at once, they can spread risk across a larger pool of employees, making them more appealing to underwriters than small businesses with only a few dozen employees.

Ability to scale rapidly

Your company may find it easier to scale more quickly when working with a PEO as opposed to keeping all HR tasks in-house. The more people you hire, the more time you must take to onboard workers and the more internal resources you must dedicate to providing a positive experience for your teams.

Standardized, legally compliant processes

With a PEO, you can streamline your HR operations and improve consistency across payroll, benefits, and compliance.

By offloading many time-consuming administrative tasks, a PEO enables you and your team to focus more on driving business growth and less on day-to-day HR details.

When should you consider an EOR instead?

Now let’s talk about expanding internationally and hiring foreign employees, as this is where EORs come in.

If your business is looking to hire internationally, you typically have a choice. One option is to establish yourself physically in the country you want to hire in by setting up a legal entity there. However, this often requires considerable time and money, and is typically not suitable for companies looking to scale quickly or test new markets.

The alternative is to hire your foreign team members through an EOR.

Learn more: What is an employer of record?

Like a PEO, an EOR is a third-party organization that handles legal and administrative responsibilities on your behalf, such as payroll, benefits, and compliance.

The key difference is that EORs employ people through their own legal entities in the countries you're hiring in, and are therefore classed as the legal employer.

This option is usually often faster, safer, and more cost-effective than opening a legal entity in multiple countries.

It's important to be clear here. If you’re expanding abroad but you don’t have a legal entity in your new market, you can’t work with a PEO there. This is because the co-employment relationship of a PEO requires a local entity on your company's part. In situations such as this, an EOR is an ideal alternative.

To learn more about which model is the right one for your business, take a look at our in-depth guide: Does your business need an EOR or a PEO?

How Remote can help you with your international expansion

Teaming up with a PEO is definitely worth considering, especially if your HR resources are limited. But if you want to expand your business internationally, an EOR may give you more flexibility.

Whatever your needs and whatever stage of the journey your business is on, Remote can help. We provide a fully-fledged PEO service in the United States, and dedicated payroll and HR management services across the globe.

We also offer full EOR services, enabling you to focus on expansion without worrying about administration and compliance issues.

Simplify HR with Remote's PEO expertise 

Managing HR across borders is complex — but Remote makes it simple. Our PEO services take care of payroll, benefits, compliance, onboarding, and more, so you can focus on growing your business.

Why choose Remote:

• End-to-end HR support, from onboarding to offboarding
• Local compliance expertise to reduce legal risk
• Access to competitive, country-specific benefits
• Lower admin costs and faster scaling
  
  

Discover how Remote's PEO services can transform your global HR operations. Whatever your global HR needs, Remote has you covered, helping you to stay ahead of the competition and unlock new opportunities for growth.

If you’re unsure which approach is the right one for your business and you want to learn more — including how Remote can help — speak to one of our friendly experts today.