When businesses grow, their needs change—and so do their markets. Some firms explore domestic expansion while others look internationally to expand their business.
Both types of expansion come with challenges, but firms have options to manage this growth successfully.
To create a business expansion strategy, firms often explore two solutions: A professional employer organization (PEO) and an international professional employer organization (international PEO).
Understanding critical differences between each solution helps businesses avoid confusion when exploring their expansion options. Read on to learn what PEO and international PEO are, and the benefits and challenges of each.
What Is PEO and How Does It Work?
A domestic professional employer organization (PEO) is a business-to-business (B2B) services company that allows businesses based in the U.S. to outsource specific HR tasks and other essential administrative responsibilities. PEOs take on many functions but commonly manage:
- Payroll
- Benefits
- Taxes
- Worker’s compensation
- Safety training
- Risk management
A PEO solution allows companies to execute the day-to-day functions of their business, manage employees, and assign essential job tasks and responsibilities. The PEO provider handles all tax and regulatory responsibilities associated with the company’s employees.
The price for these services ranges widely depending on the number of employees and services selected. However, domestic PEO providers typically charge one flat rate per employee or charge based on the percentage of the total employee payroll (between 2-8%).
Other types of PEO include:
- Umbrella companies: For UK-based businesses, umbrella companies handle clients’ independent contractor risks, including tax withholdings.
- Co-employment: A common form of PEO that divides employment responsibilities between the provider and the client. These HR, payroll, and compliance responsibilities fall under the PEO’s tax ID.
- Administrative services organization (ASO): Under an ASO, companies choose which responsibilities the ASO must take over rather than handling overall administrative duties.
- Pass-through agencies: These organizations act as independent contractors’ employers of record and manage their tax, insurance, and pay.
PEO Benefits
PEO is a sound solution to ease firms’ growing pains, especially as headcount increases. If a firm uses a PEO solution, its employees are pooled together with employees of other clients into one large group. This tactic allows all clients to benefit from lower insurance, payroll, training, and worker’s compensation rates. PEOs include all clients’ employees as part of their organization, enabling them to offer cheaper plans than companies pay on their own.
Partnering with a PEO also enables scalability at a manageable pace without worrying about managing HR or other functions. Overall, PEOs save companies an average of $450 per employee annually on administrative costs when compared to businesses that do not partner with a PEO.
PEO Challenges
While a PEO solution offers many benefits, it is not without its shortcomings. Domestic PEO limits employers’ flexibility on specific issues, such as:
- Fewer healthcare plan offerings
- Impersonal customer service or support due to higher client counts
- Outdated technology
- Inability to move business overseas with a domestic PEO solution
What Is International PEO and How Does It Work?
International PEO enables businesses to hire and manage employees in virtually any market and becomes a company’s global employer of record (EOR). International PEO partners hire a company’s employees without having to set up an entity in that international market, making it a quick solution to get up and running overseas.
Companies utilize international PEO when they need to expand into one or more foreign markets and do not have the internal resources, bandwidth, or time to manage all necessary business functions. Growing businesses rely on international PEO to execute the following responsibilities:
- HR tasks
- Compliant onboarding
- Payroll and benefits
- Medical and life insurance
- Compliance
- Health and social security contributions
- Tax withholdings
- Tax payments to revenue authorities
- Government-required reporting
- Compliant off-boarding
Companies utilizing international PEO retain complete oversight of their employees and management duties. International PEO offers employers the freedom to remain focused on their daily responsibilities and broader business objectives.
International PEO Benefits
If a company looks internationally for qualified employees or to find the right product-market fit, global expansion comes with a degree of uncertainty. However, international PEO mitigates much of that uncertainty by enabling firms to explore and pursue growth options overseas confidently.
When firms choose international PEO, they benefit from:
- Accelerated market entry: International PEO enables companies to begin operating much faster than with entity establishment.
- Cost savings: When compared to entity establishment, international PEO saves companies in overseas setup and maintenance costs.
- Risk mitigation: Companies must consider market-specific risks during global expansion. Through in-country expertise, international PEO mitigates liability, employment, and intellectual property risks.
- Simplified process: Expanding into a foreign market is a complex process, and ensuring compliance in one or more foreign markets becomes stressful. International PEO alleviates much of this stress by streamlining all payments into one monthly invoice, covering all services and employees.
- Multi-country operations: International PEO gives firms the freedom to grow into more than 185 markets under the same service provider.
International PEO Challenges
International PEO is an excellent choice for firms expanding into new markets with limited budgets, tight bandwidths, and lower headcounts. However, it is not right for all companies. Before firms choose international PEO, they must consider if the following conditions apply:
- Acquiring physical assets: When using International PEO, firms cannot acquire physical assets in foreign markets. Firms must establish an entity to hold physical assets.
- Permanent establishment: Because permanent establishment tax laws and obligations vary between countries and sectors, firms must explore country-specific tax requirements to determine if they must establish an entity to remain compliant with these tax laws.
Grow Your Company With an International PEO Partner
While international PEO and domestic PEO provide similar services, international PEO’s ability to simplify global expansion is a viable option for firms taking on overseas markets.
Learn how a trusted international PEO partner like Velocity Global gets you there quickly and supports you during each step of the expansion process.
If your company is considering taking its operations global, reach out to Velocity Global today.
