The global payroll ecosystem is made up of a number of important players - not every company will have the capacity for a global payroll department or the ability to employ experienced global payroll professionals.
In some companies, payroll processing happens within the human resources department while in other companies it falls under the responsibility of the finance department. Many of the larger companies or business owners who have a globally dispersed workforce require a centralized or dispersed global payroll processing team to manage payroll delivery across all of their countries.
And then there is the entity referred to as the professional employer organization or PEO. This is a relatively new entrant into the global payroll space, but many organizations choose to engage with a PEO as part of a process that outsources what they consider to be time consuming service deliveries like specific HR processes or payroll.
In this article, we will take a closer look at this professional employer organization, attempt to define what exactly they do and what role they play in the global payroll and service delivery ecosystem at multinational companies around the world.
A response to complexity
Growing or rapidly expanding organizations need to get a handle on complexity in order to relieve the burden of administrative tasks and help some of their overloaded departments by outsourcing some of the more nuanced work such as compliance or complex global payroll to a third-party provider who has demonstrated significant expertise in these areas.
A PEO can provide useful assistance here -particularly if they have a strong background in payroll service delivery, tax filings and meeting compliance requirements. They usually tend to have strong human resources administration knowledge and highlight their ability to help out with things like recruitment, new employee onboarding, background checks, compliance confirmation, workers’ compensation and employee benefits.
Their unique selling point is that they take on all of this administrative burden, allowing the multinational company to focus on other priority tasks and allocate their employee resources in areas of the business that can help drive business strategy. The PEO would handle salary and tax admin along with employee benefits while the employee is largely unaffected, they would likely see the PEO name on their payslips or human resources documents but may have little or no direct contact with the PEO if they don’t have a specific query.
Essentially, these companies wish to avoid getting bogged down in heavy staffing administration, instead choosing to outsource hr functions and benefits administration to a specialist provider designed to address these specific needs. A PEO is the outsourcing of HR tasks to an external provider.
Co-employment
When a multinational organization chooses to work with or partner with a PEO services firm, they are entering into a business-to-business relationship called co-employment. The PEO becomes the professional employer of the company’s existing workforce and they deliver HR services and payroll services while the company continues to focus on business tasks and revenue generation. The PEO has the resources, technology infrastructure and organizational experience to handle essential and business critical service delivery while the employer focuses on priority business initiatives.
PEOs can provide wide-ranging employee benefits such as medical, dental, workers’ compensation insurance, health insurance and retirement plans. They can also reduce the administrative tasks burden on human resources departments by handling payroll taxes and becoming the single point of contact for information and questions for company employees.
A PEO, especially one with specialist local country knowledge can be a valuable asset when it comes to meeting international compliance and regulation requirements. This is a consistent pain point for money global employers who do not wish to go out and create relationships with local country employer services experts to take care of any compliance issues.
Handing this off to a PEO is therefore an attractive risk management proposition- the responsibility for monitoring and adhering to employee and local country laws and regulations is taken out of their hands
Local knowledge
Partnering with somebody who has local knowledge and expertise on the ground in a new region or territory can be a significant reason to enter into a business relationship with a PEO. Many companies, especially digital native organizations are expanding rapidly into new regions in a bid to seek out and exploit revenue generation opportunities.
They often wish to hit the ground running but find that they do not have a legal right to do business in this new country, hindering the recruitment of local workers and making it difficult to adhere to local labor laws and international compliance requirements. It is challenging for them to mobilize and relocate sections of their workforce into this new region. They may not wish to do this anyway and also, there is a considerable cost factor involved with such an approach.
This is particularly relevant at the present moment, as many countries are still under strict lockdowns due to the coronavirus pandemic- therefore global mobility and workforce movement is severely restricted. Companies who wish to expand rapidly into new territories and regions find that their hands are tied temporarily.
PEOs often have access to a network of professionals operating in various different countries-they can be of assistance when an organization enters a new region and is looking for specialist employees to be set up quickly. without the legal right to operate in that country as an employer, this is very difficult to do. But a PEO does have the legal right to operate in that country and they can pay the new employees as part of an agreement with the multinational.
As you can imagine, this would put a PEO in a strong bargaining position- they would in essence, be entering into a collaboration or business partnership with the multinational, setting them up with new employees, being part of the recruitment process and becoming the legal entity that is permitted to pay them. The global employer is likely to look favorably on a PEO who can help them out in such a situation, as it is often the case that the mandate to grow into new regions is so strong that they will be very keen to begin operations quickly and efficiently -if a PEO can help them do this, they will very likely enter into a business relationship with them.
No disruption
The whole point around entering into a contractual agreement with the PEO is to avoid service interruption or encounter administrative hassles. An experienced PEO with solid market experience will operate quietly and efficiently in the background, allowing the employer company to focus on priority tasks and grow the business in line with strategic objectives.
They are not disruptive, they do not get involved in company strategy or provide advice on company products, services are revenue generating opportunities. HR management and payroll services are what they specialize in. The only strategic area of the business they are likely to be involved in is in the construction and development of compensation packages that align with business objectives and allow the employer to be competitive when recruiting new talent.
It is crucial that the individual employees in the organization experience no disruption so an employer will likely seek reassurances from the PEO about this. If an organization has undergone rapid growth or is struggling to fill key human resources positions, then a PEO organization can add value. They can immediately apply their expertise to all HR administrative tasks, offering best practice advice and services. A range of important yet time consuming human resources services can be condensed into a single vendor relationship- and this is appealing to many companies.
Alternatively, the PEO solution may not be required. or an organization may desire to maintain full control over their administrative functions - if they have the resources and capacity to do this, they may view a PEO solution as an unnecessary business expense. Or perhaps they have a digital mindset and wish to manage their HR payroll services via a digital technology solution instead of an outsourced people solution offering. It depends a lot on company culture, finances an attitude towards outsourcing.
Many businesses right now are fighting fires and facing difficult economic challenges brought about by the coronavirus pandemic. Company survival, strategy and future growth is uppermost in their minds and some welcome the opportunity to outsource HR or administrative tasks to an experienced vendor. Uniquely, they also represent a creative way for some companies to expand into new regions in the face of employee mobility restrictions due to cover 19- a PEO can be of significant assistance with the recruitment and onboarding of local country employees, overcoming the hurdle of local country knowledge and bureaucracy.