A PEO (Professional Employer Organization) can be a great solution for foreign companies expanding to the United States. A PEO can solve many of the administrative headaches and help with local compliance. When making the decision of choosing a PEO it is important to understand why PEO is the right solution for you and which of the available service providers is the one suitable for you.
In this article we will explore the pros and cons of PEOs for companies expanding to the USA.
What is a PEO?
PEO is a firm that provides outsourced employee management tasks. A PEO works through a co-employment arrangement, which means the PEO contractually shares certain employer responsibilities with the company. When using a PEO, the PEO will essentially be the one hiring your employees, thus becoming an employer of record for tax and insurance purposes.
Your company will be sharing legal liability towards the employees with the PEO.
PEOs are recognized by the federal government. The Small Business Efficiency Act (SBEA) of 2014 has solidified the relationship between a certified professional employer organization and its customers for the purpose of federal payroll taxes.
The services may vary between firms, but key services provided by PEOs are:
- HR administration
- Employer tax
- Employer insurance
- Employee benefits
- Retirement plans
- Compliance and partial liability
The diagram below illustrates the comparison between direct employment and employment via PEO:
Why are PEOs so common in the USA?
PEOs started in the USA in the late 1960s as a way to utilize various tax loopholes (the most common one being State Unemployment Tax).
After the introduction of the Affordable Care Act (Obamacare), the number of companies using Professional Employer Organization services has rapidly grown since PEOs are able to leverage their scale and usually provide better deals on employee private medical care, insurances and others.
Should you use a PEO?
When choosing to use a PEO, companies need to consider multiple factors, including size, state where taxes are collected and average age of their employees. Below is a simple diagram that could help you decide if using the PEO might be the right decision for your company.
Drawbacks to using PEOs
Despite the significant advantages of using PEOs, before engaging one, it is wise to familiarize yourself with some of the drawbacks of working with one, primarily:
- Loss of direct control of the employee – as the PEOs officially employ your employees, some companies prefer not to lose the day to day control that come with direct employment
- Changes in insurance terms – PEOs might change terms of insurance and benefits from time to time. This can cause employees to switch doctors, treatments and even spend out of pocket for treatments are not used to paying for. Companies and their employees need to understand beforehand that this could happen and be ready to embrace such changes.
Most PEOs will price their services in one of two ways:
- Share (%) of employee payroll – 2-12% (Most common: 5-6%); This model works well if you are planning to hire a large number of lower-wage employees.
- Flat fee per employee – $40-160/month; This models works well if you are planning to hire a small but senior team.
Choosing the right PEO for You
Assuming that you have decided a PEO is right for you, it is best to invest the time and effort into proper vetting before you start working together. Below are a few of the top things to check picked by Emeraldo’s partners and clients:
- Tax: Make sure the PEO is certified by the IRS here
- Customer support: If you will have an employee related issue, you might find yourself needing guidance on the correct legal process to follow. Therefore check the following:
- How does the PEO structure their private medical plan offering? Do they use national providers or statewide providers (which can result in 2 employees in different states on a different package)?
- How will your employees have access to their benefits? Does the PEO have an online portal?
- How does the PEO help you ensure full legal and regulatory compliance? For example, will the PEO help you write the mandatory Employee Handbook?
Deciding whether and which PEO to work with are not usually the first thing on management’s mind as you enter the US. However, a careful selection of the right PEO is crucial for your success in the US, as it means happier employees, fewer HR issues and a management team that can focus on growth – not administration.
If you are looking into choosing the right PEO for you who will be handling your entire employees in the United States, be sure to get the free help from our expert partners on our global expansion platform.