What is a PEO?
This guide explains what is a PEO (Professional Employer Organization) and which are the main factors, advantages and conditions to know before collaborating with one.
This is normally a third party contracted to administer all official employment undertakings. A Professional Employer Organization (PEO) comes in handy for business entities which opt not to directly recruit workers on assignment, in a different state or another country. Some of the common terms used to refer to a PEO include a local partner, local employer and back office staffing.
In China, a PEO can also be referred to as a Foreign Enterprise Service Company (FESCO), and its services focus on delivering labor dispatch agreements for foreign entities. Any labor dispatch agreement in China can be broken down into three main parts:
- Client – A foreign entity in need of running a business in China
- Professional – A representative of the client deployed to or recruited in China
- The PEO/Consulting Company – Happens to be the authorized representative of the delegate in the host country. The PEO operates as the client’s official administrative subsidiary in China.
While all administrative tasks regarding recruitment of employees are managed by the PEO, the client company only focuses on their work performance. The PEO sees to it that all labor market and legislative issues regarding the dispatched employees are properly handled.
The Essence of Using a Professional Employer Organization
The main reasons why companies use Professional Employer Organizations revolve around the need to beat regulatory, as well as cost obstacles when recruiting workers in a remote location. Every country (and, in the case of China, some provinces or autonomous regions) have their own unique employment, work permit and payroll conditions for non-resident business entities interested in doing business there. The challenge of complying with those requirements can be a major hurdle when it comes to smooth expansion of businesses across the international and interregional borders.
If an international company has a special commitment to a given country, province or region, the Do It Yourself (DIY) approach of incorporating, registering and operating a local payroll might be worth it. However, for some companies which are just trying to make an entry into a new market or smaller businesses which have limited HR resources, a Chinese PEO can be the most viable option.
The Professional Employer Organization is usually used as the nucleus of a complete Global Employment Organization (GEO) solution, which simplifies foreign employment for all sizes of companies. It becomes similarly helpful for both expats and local residents since it fully complies with the host country, state, province or region’s laws. There isn’t a viable reason as to why any company might opt to risk going against tax, labor and employment regulations when they can easily find a reliable PEO solution in almost every part of the world.
Professional Employer Organization Definition
The most basic definition of a PEO is a third party local entity, acting as a go-between in an already existing employer-employee relationship. The PEO is tasked with executing all the legal and regulatory prerequisites of employment, payroll in China, and immigration, but never gets involved in the day to day running of the client company activities.
Fundamentally, the PEO is normally the legally registered employer of the workers but doesn’t get involved in any management or supervisory roles regarding the employee’s position at work. The original employer retains all the rights for any substantive work relationship, regarding any decisions made on position duties, projects, compensation, as well as termination.
The Professional Employer Organization is particularly the legitimate entity which:
- Organizes all visa and work permit requirements for employees, hence eliminating any delays or denials.
- Offers a registered entity which operates a local and amenable payroll in a region, province, state, or country
- Complies with all host state, region or country’s laws, regarding the local contracts as well as worker protections
- Advises the client company accordingly in terms of the appropriate notice durations, rules of termination, as well as severance payments
- The host state, province, region or country’s buffer between the government authorities and the employee.
History of PEO in China
PEOs have over time developed as well as expanded as global mobility programs and currently happen to be more fluid. The customary multi-year foreign deployment has slowly morphed to shorter, more versatile assignments which incorporate one or more countries/states/provinces in one year.
This new trend made the Do It Yourself (DIY) system of entry into any market obsolete, and demand for local deployment alternatives grew. Most companies started considering options such as payroll outsourcing, the hiring of immigration experts as well as finding local business associates to mitigate part of the burdens occasioned by the regulations. However, a more comprehensive solution was still needed, to make it possible to build up a single source service that would take care of all the local employment tasks.
The Global Employment Organization (GEO) model takes care of a contemporary need, making it possible for companies to rapidly make an entry into a new market and recruit workers legitimately and effectively.
Advantages of Using a Professional Employer Organization in China (PEO)
There are several different advantages of any company making use of a PEO in China in tandem with the GEO services. In most cases, the PEO draws the greatest advantages when doing business in a region where the cost, intricacy and conformity risk of home employment might be too expensive.
No Need for Local Integration
When a company chooses the DIY approach, the very first requirement is to set up a local entity through legal incorporation and registration. This is normally not only expensive but time-consuming too since it needs competent legal and accounting expertise in order to guarantee conformity.
As much as some companies can have a good reason for the expenses and time consumed in setting up a local subsidiary, there are several instances where making use of the services of a GEO approved local PEO is a better option. The PEO will already be having in place a legitimately operational entity, which can take care of all employment, payroll and immigration issues in the host region. The PEO becomes the mediator between the assignee and the client company and comes with a ready network as well as the expertise to execute full conformity to all the local laws and regulations.
Compliance with Immigration Laws
Immigration laws and policies in various countries keep on changing, and the scrutiny by foreign governments or regions, when it comes to the issuance of work permits, visas as well as the kinds of business to be operated, is on the rise. This makes compliance the main challenge for international or interstate companies since any violation of immigration laws can have far-reaching implications for the company as well as its employees.
Instead of having to deal with non-compliance issues, many companies opt to utilize a GEO remedy offered by a local PEO. Using this approach, the Staff on assignment can be legitimately allowed to work in the host country or region, hence avoiding the challenges of remote payroll, overly using business visas as well as any multiple entries into a country. The PEO takes care of all the visa and work permit requirements, averting any problems as well as unnecessary scrutiny from the immigration department.
Operating a Local payroll in The Host Country or Region
A big number of countries, states or regions need a company with employees on assignment to operate their payroll in tandem with the local standards using a duly registered entity. The approach of “remote payroll” which involves remitting by the home region or country payroll is hardly permissible, especially when dealing with long-term deployments.
The main feature of operating a local payroll is the computation and retention of statutory subtractions from the pay, including remittances such as health insurance, pensions, and taxes. The PEO executes all such vital details, seeing to it that the payroll is up to date and remains compliant for each deployed employee.
PEO services in China are the ideal employment remedy, offering the needful entity to operate the local payroll with the right know-how while complying with all rules. This averts any problems with the local authorities and forms the most cost effective method of rapid deployment of employees in a foreign country or a different region.
Key Points To Consider When Choosing a PEO: What To Know About Your PEO
As you might surmise from the discussion to this point, a PEO is not just a staffing agency. They are your HR department in the same sense as the one that administers your company back in your home country. You, as their client, still maintain control over all personnel decisions. You’re just shifting the responsibility of managing the HR affairs of your employees to the PEO whom the host country will now hold accountable for meeting the intent of all labor laws and regulations at both the national and local levels. Your employees are employed under individual contracts with the PEO. You only pay the bill for their services, and those PEO employees are dispatched to you for tasking and work.
Do not take the impact of local interpretations of the labor laws of the host country lightly. Those local impacts can be substantial, and failure to comply with them will result in the same penalties and possible revocation of your business approval in that country. Thus, one of the first wise decisions you have to make is to search for a PEO in the local region you intend to locate in and where most of your potential employees will live.
Beyond using the PEO to hire and manage your staff, other benefits can be leveraged. The PEO does business with more than one client at a time. That being the case, the PEO can also obtain better deals on HR services (insurance, etc.) than you might be able to obtain on your own. They are a volume business, and volume is the basis for negotiating lower costs of doing business.
What Do You Need To Find Out About Your PEO Before Contracting With Them Independently?
This isn’t as simple as asking the PEO some general questions. The phrase “due diligence” has repeatedly been used to this point. What does that mean? The term originates from the legal maneuvering process when one company enters into a process of acquiring another company. In this case, you’re entering into a partnership which is on the leading edge of a corporate acquisition so, the principles apply. The Stern Business School of New York University is an authoritative source for a comprehensive checklist of what to look for and ask for. Particular sections to pay close attention to include:
- Organization of the PEO – read their by-laws. Is the company licensed to do business in the local region your facilities will be located (local rules can be a significant challenge)? Who are their other clients and do they have any subsidiaries or other legal entities?
- Who owns and controls the PEO – review the list of security holders in the PEO. How well is the PEO capitalized and by whom?
- Compliance with Host Country Laws – review their track record with the host country. Do they operate on the edge of legality or do they intelligently comply with the law using legal means to ensure compliance?
- Other Contracts and Commitments – does the PEO have the resources and staff you assume your HR function? Will they dedicate people to serve as your liaison to the PEO?
- Litigation status – do they have outstanding litigation in process and what does it involve.
The Future of International Employment Using PEOs
The advantages of using an employer of record in China for regional and international deployments become obvious when a company calculates the cost as well as the time consumed in a DIY approach. The PEO offers a layer of legal protection for any company, by taking responsibility for the many aspects needed to deploy workers abroad or in another region. There is no doubt that the future of the PEO solution is guaranteed, as more and more countries, states and regions keep revising their local rules on immigration as well as employment, to curb abuses and loss of revenue in terms of tax returns. The companies must get a way of going round this hurdle of conducting business abroad. Hence an EOR in China is becoming an important strategy for recruitment of both expats and local citizens.
Doing business in China with PEO Services: Your best choice
Strong economic growth in China attracts every year more foreign companies wishing to conquer the Chinese consumer market. However, they often discover too late that the administrative and legal processes inherent in setting up a business in China are often long and complex. Did you know that the average time to create even just a representative office in China is between 4 and 6 months? As for the creation of a WFOE (Wholly Foreign-Owned Enterprise), so do not expect to have completed in less than 8 months in the best case.
Many other complications can still occur, especially those related to obtaining working visas or residence permits for your representatives. Chinese migration policy get more difficult every year, and the current government has decided to reduce the number of entries in its territory, in order to encourage local youth on the labor market. Administrative procedures for obtaining visas for this purpose have been made much more complex, and Chinese immigration law is constantly changing, undergoing significant changes about every three months.
The INS Global Solution for your own PEO
INS Global is a leading PEO in Asia. With over 10 years of experience, INS Global has helped over 300 foreign enterprises to start, expand and develop their business activities in Asia with its Employment Services. Contact us today to discuss how a PEO can help your business with its expansion into Asia.