Among the many challenges for new ventures in the United States, human resources is probably one of the biggest. After all, payroll is complicated, with withholding requirements for thousands of different jurisdictions, from the federal level all the way down to counties and even towns or townships. Add to that the difficulty in providing even basic benefits, such as health insurance and some type of 401k, and the net result can be a real time suck. Even worse, the burden of handling all of that administration is almost the same with one or two employees as it would be for ten or twenty, leaving a small one or two person operation overwhelmed.
Fortunately, there are a lot of services which can help with that burden, albeit at a bit of a premium. First of all, a warning – if you’re starting up a new business with just a few employees, don’t do your own payroll. No matter what the purveyors of QuickBooks or other software say, properly withholding taxes and remitting them to the correct jurisdiction is a lot of work, and easy to get wrong. That, and payroll services just aren’t that expensive, so you’re much better off just working with a third-party provider like ADP or Paychex. Just make sure they are reputable, since you’ll be given them the keys to your bank account and responsibility for a lot of critical tax submissions.
The next step up from regular payroll processing is a professional employer organization, or PEO. PEOs allow you to outsource your entire human resources department, but you retain the employment relationships with your employees. PEOs typically offer a broad range of services, which means you can start out outsourcing almost everything, but as you grow you can bring pieces in-house (or work with cheaper providers) where it makes sense to do so. That means it starts out somewhat more expensive than a payroll provider, at least on a per employee basis, but you can reduce those costs as the company’s capacity to manage those functions in-house increases. Typically, you also have more say over the employment relationship itself, since you are actually the employer of record, but that means you also share the liability if something goes wrong. That also typically means that you retain some of the more annoying parts of being an employer, such as registering the company in each jurisdiction where you have employees, remains your responsibility. That can be particularly challenging for companies which want to allow remote work, since even a company with relatively few employees may end up registering in a number of different jurisdictions, each with ongoing reporting and compliance obligations.
PEOs may require a minimum number of employees before they’ll work with you, since the revenue from working with a smaller employer may not offset the expense.
If you want to offload all of your HR functions, especially if you’ll require employment services in multiple locations across the country, you might want to consider an EOR. EOR stands for “employer of record,” and is used to describe vendors which assume complete responsibility for your employees. That means your employees are actually employees of the EOR, not your company, so the EOR is responsible for every aspect of the employment relationship. That also means that the EOR is almost entirely liable for any HR-related issues, including tax compliance, although most EORs transfer some of that liability to you by contract.
An EOR also doesn’t give you as much control over your employees, since the employees aren’t really working for you, so if you want to offer benefits or enact policies which aren’t consistent with the EOR’s you are probably out of luck. That being said, most EORs offer a range of different benefits and, being larger employers, can probably offer a better set of benefits than a small company would be able to. In the short and medium term, especially as a small subsidiary of a foreign company, that can be useful since it means you don’t have to worry about anything relating to the employment/HR function. Over the longer term, an EOR can get expensive, so most companies will eventually switch to a PEO or bring the function in-house. An EOR can make sense longer-term for companies which are completely remote, since a large EOR handles local requirements without you getting involved.
With respect to subsidiaries of foreign companies, generally speaking, a PEO is a good choice if there is sufficient administrative support in the US or elsewhere to manage any issues which come up, or for companies with an ambitious hiring plan with very specific ideas requirements in terms of benefits. Otherwise, many subsidiaries will benefits from working with an EOR, since they can set things up once and let the EOR take care of the details.
image courtesy of Wikimedia Commons, public domain