What is a Professional Employer Organization (PEO)?

When looking for ways to hire international employees, businesses often stumble across various acronyms that describe different global employment solutions, one of them being PEO. PEO stands for Professional Employer Organization.

But what kind of service can businesses expect if they contract a PEO? What does a Professional Employer Organization do? And is there a difference between a normal PEO and a global PEO?

However, it should be noted that the definition of a PEO and the range of services it offers can vary depending on the context.

The PEO model has its origins in the US, where Professional Employer Organizations act as co-employers to small and medium-sized businesses that either cannot afford to hire a full-time employee to handle their HR and payroll or wish to employ someone in another state where they lack the necessary knowledge regarding employment and payroll rules. In this sense, the PEO can be seen as an extension of the HR department.

In recent years, the concept has made its way into the global employment solution space, with service providers using it to describe employment outsourcing services aimed at expanding businesses that hire employees in new markets where they have a legal presence, but not the necessary HR and compliance knowledge to handle things like payroll, onboarding, and more. 

In the context of global expansion, the acronym PEO is also frequently used in combination with the adjectives “international” or “global”. Global PEOs (or international PEOs, whichever term one prefers) take the idea of a PEO one step further and not only provide employment management services, but take over full legal liability for the employment.

An international PEO hence provides a full employment outsourcing solution for businesses hiring overseas. Another term that is often used interchangeably is Global Employment Organization (GEO).

Within the US, PEOs follow the co-employment model. This means that the business that contracts the PEO service has a fully operational legal entity through which the employees are employed, but outsources its HR and payroll responsibilities to the PEO—which also has a registered legal entity. The employer responsibilities are hence shared between the PEO and the client.

Now, let’s take a look at so-called global PEOs. Co-employment is common in the US, but not really in other countries. In fact, co-employment arrangements are even a legal gray area in some jurisdictions. Sharing employment liabilities with a third party that provides compliance support and handles payroll and employment matters therefore often does not work in cross-border employment.

What international PEOs offer instead is to hire employees in a foreign country on behalf of their clients who are hence relieved of the need to establish a local legal entity. The employees are hired under the legal entity of the PEO, the latter becoming the official employer in the eyes of the law. Therefore, the purpose and service of a global PEO rather follows the idea of an Employer of Record (EOR).

What’s important to remember is that the employee’s day-to-day activities are still managed by the organization that contracts the PEO service. The employee exclusively reports to and receives instructions from the client business.

Also read in the Lano Employment Academy: PEO vs EOR - What is the difference?

Under the co-employment model, a Professional Employer Organization may offer the following services: 

• Payroll processing

• Benefits management

• Compliance support

• Payroll tax administration

• Recruiting, hiring and onboarding

• Employee registration

• Employment contracts

• Other HR-related tasks (e. g. complaint management or dismissals)

International PEOs usually have a similar service offering, but may extend it by additional services that facilitate global expansion, such as:

• Arranging work visas and permits

• Acting as an intermediary between the foreign organization and local authorities

• Supporting legal entity creation

PEO services can be useful to businesses of any size. Their use is typically linked to one or several of the following factors: 

• Lack of resources and/or knowledge to handle employment and compliance

• Need to enter new markets fast

• Reluctance to establish a local legal entity in a new geography

• Higher flexibility and lower risks in global expansion

• Cost savings compared to incorporation

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