What's the benefit?
PEOs, EORs and employee benefit uplifts
You cost more than you think. Not because you are difficult to work with, or anything like that (well, you might be). Each employee has an associated “uplift” their employer needs to factor in when pulling together the annual budget.
Depending on where you live, and the method by which you are employed, the “uplift” can vary pretty significantly.
I’ve built a bunch of annual operating plans for companies with international footprints, and relied heavily on PEOs (Professional Employer Organization) and EORs (Employer of Record) to get around the complexities of hiring workers abroad. Today we’ll take a look at different employment structures, and the estimated benefit uplifts by country.
TL;DR:
PEOs (Professional Employer Organization) and EORs (Employer of Record) help companies employ people around the globe while only having a limited legal presence in the region
EORs are like PEOs on steroids
Tapping into PEOs and EORs has become increasingly strategic as companies go fully remote and try to hire the best people possible, agnostic of location
The USA has a +20% benefits uplift (e.g., a person paid $100K actually costs the company +$120K), while places in Europe, like the Nordics, can have up to a ~40%(!) uplift
Common costs baked into this “uplift” include Vacation, Healthcare, Local Taxes, Federal Taxes, Payroll Fees, Pensions, and 401K matches
Disclaimer: Opinions are my own. Not financial advice. Do your own homework. I know next to nothing about tax or legal stuff.
Quick tangent…
When I was jointly filing me and my wife’s taxes this year, I noticed a strange company name at the top of her W9. I knew she worked for “Company XYZ” but the form said something funky, like “512 Corporation.”
My stomach dropped. This was the end, I thought. She must have gotten entangled in some Rue La La - Esque Pyramid Scheme. And we were obviously all now going to jail.
Alas, my fears abated once I realized she did indeed “work” for Company XYZ, but was “employed” by a PEO - a type of co-employment relationship.
What’s a PEO?
A PEO (professional employer organization) is an outsourced way to handle common human resources tasks
A PEO typically processes payroll, withholds and pays payroll taxes, maintains workers’ compensation coverage, and administers employee benefits like health care and dental
PEOs typically charge the company’s they serve a percentage of total payroll cost. Some base their fee on the number of employees you have. Some charge a combination of variable and fixed (all in, it usually costs between $750 and $1,500 per employee per year)
This allows the company to avoid bringing payroll, benefits, and taxes in house, which would require hiring more people
This makes a lot of sense when you are a smaller company and you’d rather invest your money in people that build and sell your product, rather than back office
It’s also easier to onboard employees in different states with different tax withholdings and labor requirements - if you’re in MA and trying to hire your first employee in CA, your PEO has the playbook
Furthermore, your PEO can probably get better rates on healthcare and the like compared to if you were to strike out on your own and negotiate with Aetna or Blue Cross
It’s typical for many small and medium sized businesses to use PEOs until they reach a scale where it makes sense to bring payroll, tax, and benefits in-house (generally once you exceed ~100 employees or ~$50M in annual revenue)
Note that the company still has some HR responsibilities - like recruiting (which I guess can be outsourced as well) - and headcount planning
Still, PEOs are shown to save companies ~35% on average per year compared to bringing the costs in house (with diminishing returns past ~100 employees, as mentioned above)
What’s an EOR?
An EOR (employer of record) is like a PEO on steroids
They do all the tasks a PEO does, and more
The biggest difference is that PEOs require you to own a local entity and enter into a co-employment arrangement
On the other hand, an EOR allows you to hire in other countries without an entity and without a co-employment status.
Opening a legal entity in another country can be really expensive (usually ~$10K to $30K all in) and a total pain in the ass - you have to appoint local directors and fill out a ton of paper work (I was once quite literally buried in paperwork trying to open an entity in Singapore)
As a rule of thumb, you start to think about establishing a legal entity after a dozen or more people are on the ground there. After that you are more or less indifferent on the cost front
Until then, you pay a similar arrangement as a PEO, just higher
What’s included in benefits?
Core benefits might include:
Vacation / Paid Time Off
Pension
Medical Insurance
Life Insurance
Workers Compensation Insurance
Fringe benefits might include:
Auto Allowance
Education Allowance
Gym Allowance
Cell Phone Allowance
Pet insurance (!?!)
Expenses to deliver these benefits might include:
Payroll Service Fees (for a PEO or EOR)
State Employment Taxes / Fees
Federal Employment Taxes / Fees
The most costly item in the list above is Vacation. If your company has unlimited time off, this line item is zero. However, if you receive a set number of days per year (say, 15 days annually) your company accrues that as a liability on the balance sheet until you take those days off. If you’ve ever left a company with a vacation policy you know what I’m talking about - you received a fat check on the way out the door. If you work for a company with unlimited vacation - no dice.
Benefit uplifts by country:
At startups it’s usually easier to budget for benefits using a round percentage uplift off on target earnings. This is because some of the benefit lines are really hard to estimate (bi-monthly local canton taxes in Switzerland, anyone?) and would require a false level of precision.
Now, these are rules of thumb, NOT scientific. The rates are fully baked estimates - so it’s a wash if you are or are not going through a PEO / EOR or doing it all in-house. And if you are doing something fancy pants like 401K match, then you’ll want to add a little bit more wiggle room.
Smart Stuff I Read at 2AM:
What’s a PEO - ADP
What’s the difference between a PEO and EOR - Remote
How much do PEOs cost - Landrum HR
What I’ve Been Listening to:
I guess I’m on the podcast circuit now!
If you’ve been reading Mostly metrics for a while and you want to hear what my voice sounds like, I went on Paul Barnhurt’s podcast to chop it up all things SaaS metrics.
Links: Apple | Spotify | Blog post and transcript
Paul (AKA the FP&A Guy) is a corporate finance guru. We talked about my favorite metrics ( and career trajectory from financial analyst to CFO.
Quote I’ve Been Pondering:
“Are you the business end of rebel, or the rebel end of corporate?”
Choose Yourself by James Altucher
Completely new topic for me, amazing explanation. Thanks for sharing!