By Quin Roberts, Guest Writer
A small handful of growing companies are changing how businesses expand globally, making it dramatically easier for a company to test markets, manage an international workforce, and mitigate risk. These companies are known as international professional employer organizations (PEOs). They establish legal entities in foreign countries, becoming the legal employer, or “employer of record,” for their clients’ employees.
This concept of “co-employment” has existed in the United States since the 1960s, but only evolved to help domestic businesses expand internationally in the last half decade. This late adoption is surprising considering how effortlessly the co-employment model sidesteps common challenges associated with global expansion, namely costs associated with legal entities, and the risks that come with independent contractors.
When companies set up their own legal entity abroad, setup costs average around $15,000 to $20,000, plus $40,000 per year to maintain. Entities also take an average of three to four months to get set up, delaying the start of operations. Moreover, foreign entities often create a disproportionate time-suck for legal, HR, and finance teams; can be difficult and costly to dissolve; and produce additional political, legal, and compliance risks.
Independent contractors are a much cheaper option; however, treating them like an employee is illegal in nearly every country and comes with serious risks. Based on my research, “employee misclassification” can lead to costly legal battles, fines, adverse publicity, a disruption in operations, and court-ordered back payments of wages, taxes, and pension contributions, often with interest. These risks vary significantly from country to country, but surprisingly few employers understand what the risks are and where they are the highest.
The co-employment model eliminates independent contractor risk and is cheaper, more flexible, and easier to manage than a legal entity. Some international PEOs offer additional services like talent acquisition, immigration, and consulting to help clients start operating in places where they have no existing expertise. It’s not uncommon for companies to start foreign operations within 48 hours of signing a contract with their international PEO.
Despite the many benefits, international PEOs are not a silver bullet for all companies expanding outside their domicile. Its more cost-effective for companies to establish their own legal entity once around 15 or more employees operate in a single country, making co-employment fiscally imprudent for larger companies that plan to operate well into the future in foreign locales.
But international PEOs offer an ideal solution for small and medium-sized firms expanding abroad, companies in search for a bridge solution to a permanent establishment (often firms managing mergers and acquisitions), and those testing new markets.
At present, the average client tends to mirror that of the PEO industry: rapidly growing, successful startups. HR managers and executives stumble across this service during frantic google searches for expansion options, creating huge inbound leads for the nascent industry.
Total PEO industry numbers are difficult to find, but executives at one leading firm say there could be a dozen other players in the U.S. and they still wouldn’t get in each other’s way competing for clients. Another estimates the worldwide market potential at $130 billion.
Arguably the two firms with the largest market cap, Velocity Global and Globalization Partners, have each twice-made Inc. 5000’s list of America’s fastest growing private businesses. Velocity Global made it in both 2018 and 2019, initially ranking as America’s fourth fastest growing company, boasting 3,982 percent revenue growth between 2015 and 2018, followed by a 185th ranking from 2016 to 2019 with 2,112 percent topline growth. Globalization Partners made the list in 2016 and 2017, ranking as the sixth and 33rd fastest growing private company in the U.S. with 16,197 percent and 8,187 percent revenue increases over their three-year respective windows.
Eventually, the market will consolidate as clear leaders emerge and acquire competitors. As the industry matures, so will the type of clients that rely on it. Eventually, it will be commonplace for established firms to depend on co-employment during the new market testing phase that requires an on-the-ground presence, and as a bridge solution as they work toward a permanent presence abroad.
Until then, international PEOs like Velocity Global and Globalization Partners will continue to make global expansion a realistic option rather than a long-term goal for an increasing number of small and medium-sized companies.
Quin is a second-year student in the MGM program, and serves as the president of Campus Ambassadors. Quin works for Velocity Global as a graduate consulting intern.