Key Points to Consider When Choosing a PEO

Due Diligence in Human Resources Outsourcing

It is critical that you keep in mind the outsourcing your human resource department to a third party company is a purely contractual and partnering event. It is common to do this when you’re trying to penetrate international markets like China. Professional Employer Organizations (PEO) indigenous to the market are valuable in ensuring you are playing by the labor rules of the host country. These labor regulations vary widely between countries, and the relative maturity of the labor markets in these international settings can drive some dynamic environments. Keeping up with the changes as well as interpretations of these laws and regulations is a full-time job in its own right. However, not all PEO organizations are run efficiently, and they may not be honest and perform their functions in a transparent manner. That’s why a due diligence approach to establishing the partnership is necessary. You need to satisfy yourself that the PEO meets your requirements for trust, loyalty, and empathy in understanding your business and the people required to make it work.

There are a few prerequisites for you, as a company, to have firmly in mind when you start this partnership search. First, what is your corporate strategy? Is this partnership a permanent one or a limited time arrangement? You are essentially creating a startup enterprise in the host country. Do you intend the leverage this PEO as a learning resource until you have a working model and then assume those responsibilities in-house? Second, is it in your plan to create a shadow HR department in your international affiliate that will manage the HR PEO contract or will you treat the PEO as a fully functioning department within your company? In any case, you get the point, have a plan.

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? Publicly filed reports – of course, you’re looking for recent negative reports that might influence your decision to hire this PEO. You should go back at least three years in your search. 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. In Conclusion?

There are many other things you’ll want to know about the PEO before you sign a partnership agreement with them. Build a checklist to make sure nothing slips through the cracks. You will want to make an informed decision and not one that involves significant risk.

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