Is PEO the Right Solution for You?

While there is a lot to consider - and much about the PEO option that you may find beneficial - F&L will more often than not recommend the establishment of a formal entity within the territory of choice.

What is a PEO?

Put simply, a Professional Employer Organization” (“PEO”) is a vehicle which allows a company to pay an employee in certain countries overseas, without the need to create an entity (or “Permanent Establishment”) in that country.

Why Not Just Engage an Overseas Contractor?

When expanding into a new market, sometimes an independent Contractor will be the best option; however Companies need to bear in mind that:

  • a Contractor requires a formal contract;
  • there may be difficulty enforcing any contractual terms, as the company has no physical presence in the country concerned;
  • enforcing confidentiality and non-compete clauses can be challenging and in some countries, confidentiality and non-compete clauses are not recognised or enforceable at all;
  • Intellectual Property (IP) rights and ownership can become complicated;
  • there is often a fine line between what is locally considered to be an independent Contractor and what is deemed ‘employee’ status, giving rise to labor law or tax issues;
  • exit clauses can be difficult to manage and can include financial penalties; and
  • a lack of in-depth knowledge on the subject can lead to very costly mistakes.

For more detailed information on Independent Contractors, please request our Info Sheet on this topic.

How Does a PEO Work?

As a Company, you may need to employ people in an another country but want to avoid having a formal entity in that country because you’re just “testing the water” in this new market and want to avoid significant set-up and employment related costs at the outset.

Choosing the PEO route means that your new local hires become employees of the PEO. Therefore, PEO becomes the employer of record and is responsible for things like employment contracts, benefits and other HR considerations.

They will also act as a payroll function for the Company and handle salary, social security and statutory payments.

What are the Key Considerations?

  • With no local legal entity, you would be unable to acquire any physical assets within the country and your customers may perceive your Company as less committed to the market
  • You may miss out on the talent you want to source locally as many employees would want to feel like part of your company and enjoy the benefits of working directly for you as part of your global workforce
  • The PEO model is not available in every country worldwide – some countries don’t recognize the model as an option
  • IP protection can be difficult to enforce

While there is a lot to consider - and much about the PEO option that you may find beneficial - F&L will more often than not recommend the establishment of a formal entity within the territory of choice.

What Next?

We usually find that our clients have a clear vision of where they want to be and want high caliber employees. They also want to align their international workforce with their staff at headquarters and other teams around the world - offering similar incentives, reward programs and benefits. Your employees will be far more comfortable in knowing that they actually belong and as you’re the employer, you get to dictate the terms of employment and safeguard against potentially costly and lengthy legal issues.

Whatever the approach you choose, expense will need to be incurred. Although setting up a local legal entity initially seem more costly, it can be perceived as more credible to your local customers and employees – and provide you with a scalable opportunity to establish and grow your brand.

Updated June 2016. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For more information, contact:

Melissa Harkcom
Director, North America
San Francisco Office
+1 415 867 6245
mharkcom@fitzandlaw.com

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