Should you hire US employees through a PEO?

UK companies entering the US market sometimes decide to use a PEO (or “professional employer organization”) to hire their US employees. A PEO acts, along with the UK company, as the co-employer of these employees. Although the employees are under the day-to-day management of the UK company, the PEO administers all payroll and employee benefits.

A PEO does offer a new market entrant easy access to employee benefit plans (including health insurance and pension) and simplifies payroll administration. But a PEO does not solve many of the most important compliance problems UK companies face when entering the US market. A PEO’s services are also expensive compared to available alternatives.

Before signing up with a PEO, it is important to appreciate the limitations of using a PEO in your US operations.

• A PEO does not insulate the UK company from US federal taxation. Under the US-UK Tax Treaty, a UK company doing business in the US is not subject to US federal taxation unless it has a “permanent establishment” in the US. Even though payroll is administered by the PEO, employees hired via a PEO are still employees of the UK company, thus giving rise to a permanent establishment. The only way to avoid this result is to form a US subsidiary, which would in turn contract with the PEO for purposes of hiring the employee. (In fact, some PEOs will only work with foreign companies through their US subsidiaries.) But creating a US subsidiary results in many of the administrative costs that the UK company sought to avoid in the first instance.
• A PEO’s services are limited. The tasks of administering payroll and employee benefits satisfy only a small fraction of the needs of UK businesses operating in the US. A PEO will not offer general legal services. In addition, although a PEO will file payroll tax returns, you will need to look elsewhere for help with federal or state corporation tax returns, sales tax returns, and annual company reports. A PEO will not establish and manage a bank account for you, offer bookkeeping services, or assist with other important functions of operating a US enterprise.
• A PEO’s services are readily available elsewhere. For UK companies that do not choose Bouwen’s full-service solution, inexpensive payroll software is available to perform all the payroll administration tasks offered by PEOs. Similarly, pensions (typically, a “401(k)”) can be easily established using third-party service providers, at very modest fees. For companies with more than one US employee, a group health insurance plan can be secured at rates competitive to what a PEO can offer. (A group health insurance plan is not available for companies with only one employee. In that case, a tax-favored health reimbursement arrangement can be created to reimburse the employee for his or her individual plan. In any event, PEOs often will not work with companies that have only one employee, eliminating any advantage a PEO would have for such early market entrants.)
• A PEO rarely delivers cost savings. For small companies, it is common for a PEO to charge fees ranging from 7% to 9% of gross wages, with a minimum monthly charge of $700 or more. In most cases, Bouwen’s fixed monthly fee is substantially lower than the monthly charges imposed by a PEO. For that fee, clients receive far more than they would receive from a PEO. In addition to administering payroll and coordinating employee benefits, Bouwen’s monthly fee includes: (1) account management, including management of payables and receivables; (2) bookkeeping services; (3) tax compliance services (including federal and state corporation tax and sales tax); and (4) non-contentious legal work. In short, Bouwen offers a full-service solution for the legal, tax, and bookkeeping needs of UK companies entering the US market, often at costs lower than charged by a PEO for substantially more limited services.