Pros and cons of PEOs for ANZ startups

Published on
November 9, 2023
5
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When you’re hiring employees in the US, you have roughly 3 options to keep across all the rules and regulations:

  • DIY: Your internal HR team manages the payroll, benefits and compliance (which differs from State to State). 
  • Use a mix of external advisors and services: You contract legal and financial support alongside a service provider that handles payroll, benefits and related overhead. 
  • Outsource: Everything is handled externally by a Professional Employer Organisation (PEO). 

Many Aussie and Kiwi startups choose to outsource and use a PEO when establishing their presence in the United States, so they can focus on growing their business rather than navigating the complex landscape on their own without adequate knowledge or resources.

What is a Professional Employer Organisation (PEO)?

A professional employer organisation (PEO) is an outsourced solution for HR, including payroll, benefits and compliance. 

Often called a co-employer, a PEO becomes the employer of record to your company’s employees. The PEO is legally able to perform tasks associated with employment, and handle sensitive payroll and benefits information.

Your company's vs. PEO's responsibilities

Benefits of using a PEO in the US

PEOs are a natural fit for startups as they can offer enterprise-grade HR services to teams whose time, money and expertise are scarce and high-value. 

Compliance with US Employment Laws

US employment laws are considered complex compared to Australia and New Zealand’s for a number of reasons:

  • Employment law in the US is governed by both federal and state laws, creating confusion and overlap. This is different from Australia, where the federal Fair Work Act 2009 is the principal piece of legislation governing employment relationships. 
  • US employment laws are known for having stringent requirements, such as health insurance and retirement benefits.
  • State laws vary widely making it a challenge for employers with a nationwide presence. 

PEOs help startups remain compliant with US employment laws by staying up to date with all state and municipal rules and regulations which can change often and quickly. PEOs handle all you compliance needs, including:

  • New-hire reporting (Federal law mandates that new hires be reported within 20 days of the hire)
  • W-2 and 1099 filings (Independent contractors use a 1099 and regular employees use a W-2 to report income earned from sources throughout the tax year)
  • Employment Practices Liability Insurance (EPLI)
  • Unemployment-insurance filings

Competitive benefits

PEOs serve a large client base. By pooling employees across many companies, they have greater purchasing power and can negotiate more competitive health care benefits and less expensive insurance plans. 

The mandatory federal benefits include:

  • Social security and medicare
  • Unemployment insurance
  • Workers compensation insurance
  • Family and Medical Leave Act (FMLA) protections 

Attract and recruit to talent

By partnering with a PEO in the US, startups can tap into the PEO’s existing talent pool of candidates and network of HR professionals and recruiters. They also will have a deep understanding of the local job market and can share insights into attracting and retaining local US talent.

The employee benefits you offer, which your PEO manages, can also make your business more attractive to potential candidates. 

Drawbacks of using a PEO in the US

Cost

When someone else is doing all the work, you have to pay them for it. PEO pricing models generally fall into one of two categories:

  • Per employee: you pay a fixed dollar amount per employee either monthly or annually, similar to many SaaS-based “per-seat” pricing models.
  • % of payroll: you pay a percentage of your company’s total payroll amount per pay period. Most PEOs will charge an admin fee on top of this as well. 

Less flexibility

The co-employment model and contractual agreement between the PEO and your company may mean you need to relinquish a certain amount of control and flexibility. They may require you to use their benefits providers, adopt their policies and procedures, and may be involved in performance-related firing decisions. 

Compliance isn’t a guarantee

Your employees are considered co-employees of both the PEO and your business, meaning the IRS still considers you liable if there are any errors in your filings. 

Key questions to ask a potential PEO

  • What is the minimum number of employees in your team the PEO will service?
  • What is their experience working with companies like yours?
  • How do their fees scale as your team in the US grows?
  • What other fees may you incur besides a percentage of payroll? (e.g. changing employee details or re-running payroll)
  • Can employees update their details electronically?
  • How do they ensure compliance with US employment laws and regulations?
  • Where does the liability lie for non-compliance?
  • What happens if you a) want to change vendors, or b) want to change vendors for a subset of the service offered?

PEO providers

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Disclaimer
AirTree Ventures Pty Ltd holds AFSL No. 456766 and AirTree Ventures Custody Pty Ltd holds AFSL No. 544106.