A professional employer organization (PEO) - more commonly refered to as an Employer of Record (OR) in Europe - is an is an outsourcing firm which provides services to small and medium sized businesses and enters into a contractual co-employment agreement with its clientele. The PEO becomes the employer of record for tax purposes through filing payroll taxes under its own tax identification numbers.
The PEO industry began in the late 1960’s in the United States, where each state has differing regulations for workers' compensation insurance and state unemployment insurance. The USA is the only country to formally recognize the PEO industry in statute.
Fast forward half a century and a new disruptive variant of PEO was born. Global PEO makes it much easier and quicker for companies to expand internationally since it eliminates the need to them to establish a legal entity in the country is which they would like to hire talent.
I know from my own experience how slow and painful this process can be. Last year, I was asked by a US Movie Financing Company to establish a UK Company and Bank Account in the UK where I am located. The Company was itself was established within an hour, but it took many months to open the Bank account.
By engaging in the services of a Global PEO, companies are able to legally employ international workers in days, not months. The Global PEO assumes responsibility for payroll, tax, immigration, and employment compliance in the host country, greatly reducing the risk, cost and workload for their clients.
Furthermore, the General Data Protection Regulation (GDPR), which came into effect this May, carries steep penalties for companies not in compliance. An effective way a company can take proactive measures to minimize the risks associated with GDPR when hiring global workforces in EU is by engaging in the services of a Global PEO - As the Employer of Record, the PEO are authorized to collect remote employees’ personal information and assume responsibility for GDPR compliance in this critical area.
Since Global PEO helps companies expand internationally without establishing subsidiaries overseas, their services are particularly useful for Private Equity firms who help them grow their portfolio globally, helping them find a home for newly acquired employees in countries where the buyer does not have a legal entity. The time and effort in setting up entities for countries with only a handful of employees, can be disproportionate to the size of the deal.
The remit of finance professionals involved in international expansion is to make sure they keep the costs associated with positioning personnel around the globe at a minimum. The hourly costs of local lawyers and other in-country partners can escalate quickly. Global PEO helps keep costs manageable and predictable.
Over and above helping companies capture market share relatively quickly in new overseas markets, Global PEO allows them to test before they invest. If the market is no good, they can fail fast and fail relatively cheaply: the cost of closing overseas operations can often exceed the expense incurred of creating them in the first place.
In his bestselling book ‘The World is flat’, Thomas Friedman describes the interconnected world in which we now live as a level playing field in terms of commerce, where all competitors have an equal opportunity. His book refers to the perceptual shift required for countries, companies, and individuals to remain competitive in a global market where historical and geographical divisions are becoming increasingly irrelevant.
This metaphor is particularly apt in the relatively new world of Global PEO.