As business go increasingly global, companies of all sizes are opening branches abroad and exploring new markets. Traditionally, hiring in a foreign country meant opening a legal entity and planning for a long-term engagement in that country. Opening an entity requires time and money, and closing it can be complex as well. Only the biggest companies were apt to take the risk.
That’s why an increasing number of companies are taking advantage of a low cost alternative that allows them to start hiring overseas in full legal compliance without an entity. It’s called a global PEO (professional employment organization). The global PEO, or one of its local partners, serves as the official, legal employer for the team abroad, providing payslips and withholding taxes. The original company, however, directs the employees in their day-to-day tasks.
As an example, a company based in the UK will makes use of a PEO service in Canada for its expansion there. The Canadian PEO is the official employer of record for tax and compliance purposes, but the UK
company gives the employees their day-to-day tasks.
The definition of PEO is the same across the globe – with one notable exception. In the US, a PEO is different. It is a co-employer arrangement that requires a legal entity within the US. That entity serves as the employer of record while the PEO handles the payroll, employee management, and compliance. Hiring in the US with a PEO, therefore, does not bypass the need to open an entity.
Advantages of a Global PEO
The global PEO assumes all legal liability for the new hires. It is easy to open and close. Usually, there is a fee for each employee, so it tends to be a short-term solution. But if the project shows potential for growth, there is no barrier to opening an entity and taking full responsibility for the employees.
The flexibility makes the global PEO an excellent option for testing a new market, exploring a short-term engagement in a particular country, or as an interim solution while processing an entity. It is a low risk/high reward option for overseas expansion.
Choosing a Global PEO
Before making a decision on which global PEO to choose for your global employees, take time to get answers to a number of key questions:
1. Does the PEO have a local presence in the country where you want to hire?
Every country has its own tax and labor laws, as well as mandatory benefits and salary standards. You want to be sure that the PEO is not only knowledgeable about the country but truly and expert, and for that, only a company operating on the ground can be fully trusted to understand the nuance and keep up with legislative change.
2. Does the country you choose have a limit on how long a company can work with a PEO?
Some countries have restrictions on how long a company can hire through a PEO. Germany, for example, limits PEO activity to 18 months. After that, the company must open an entity to continue. It is crucial to know in advance if there are similar restrictions in the countries you plan to enter. Sometime, the only way to know is to ask.
3. How much flexibility does the PEO show in employment contracts?
Some PEOs have a standard work contract that cannot be changed. Other PEOs offer levels of flexibility. You want your oversees expansion to reflect the values of your company, so you may need flexibility in the types of offerings the PEO can handle. If your company is known for its generous benefit package, or even for a particular benefit, then you want to know in advance if a PEO is going to be able to deliver it to your overseas employees as well.
Disadvantages of a Global PEO
The biggest disadvantage of a global PEO is the higher costs per employee compared to having an entity. A company will pay the same taxes, but there is an additional fee for the service and for assuming liability for the workers.
Another disadvantage is that since the company is not the official employer, there is a natural limit on the level of business engagement the company can have. For example, it will not be able to build partnerships because it has no actual presence in the country. In addition, some companies may be
reluctant to work with a company that does not have a full legal presence because it may be deemed unstable.
For these reasons, a global PEO is a great way to enter a market, but it should be viewed as a relatively short-term option of a few years to see if a long-term commitment is warranted. If the plan calls for a expansion to more than 15 or so employees and a presence for more than a few years, it may be wise to move to opening an entity.