China is amongst the world’s fastest growing economies, as acknowledged by the World Bank which described it as the “fastest sustained expansion by a major economy in history”. It has astonished the world by swiftly shooting to the second spot while many predict that it will not be not long before it succeeds in claiming the crown for itself. It is, therefore, unsurprising that many astute entrepreneurs have their eyes on China as the next potential target for business expansion.
However, whilst the Chinese market is undoubtedly attractive, offering a range of potential rewards for businesses, it is important not to rush into any temptations without forming a sound strategy for market entry. The lengthy procedures and costs associated with establishing an entity in China in combination with the lack of local market knowledge and experience is often seen as a major hurdle to the pot of gold waiting at the other end. However, what many do not realise is that there is one route that allows foreign enterprises to test the waters safely to help them reach a more informed decision as to whether to proceed with business conduct in China: Professional Employment Solutions.
This guide will cover the following aspects:
- What is PEO?
- How can PEO help?
- Why use PEO?
What is PEO?
In simple terms, Professional Employment Organisations (PEO) can be said to be “HR departments for rent”, which a foreign business may use to expand into an overseas market without establishing its own legal entity. PEOs legally employ workers on behalf of the foreign company and manage the administrative and HR functions while having no interference between the company and employee relationship. The employee will be answerable to the company, while the HR and administrative functions will be outsourced to the PEO.
PEO offers foreign investors who are interested in the Chinese market to legally test out their presence and ease the burden of dealing with the monotonous administrative and HR functions, allowing themselves to instead direct their focus on to market expansion strategy and business performance. Consequently, this facilitates a more effective operation of business whereby responsibilities are intelligently divided in order to best ensure business success.
How can PEO help?
A PEO can be of help in many ways, including:
- Recruitment: PEOs are highly familiar with the local labour market along with salary expectations for a given role. PEOs can help the foreign business hire the best local talent to drive the business in right direction and avoid unnecessary confusion due to the lack of awareness of local employment practices.
- Visa processing: all foreign employees in China must have the relevant immigration documents, and PEO could be of great help in this regard, particularly given the complicated nature of visa procedures in China.
- Payroll: this includes salary payment, overtime payment, tax deductions, and social benefit payment. PEOs can deal with this in a legally compliant manner.
- Employment contract: PEOs can assist the company in drafting a bilingual version of the contract, ensuring it is in accordance with the local labour laws and, consequently, avoid any contractual issues in the future.
- Other HR functions: PEOs specialise in undertaking all HR functions and do so in a manner that abides by local laws and regulations.
Why use PEO?
One of the key advantages of the PEO model is that it is the most cost-effective way of market entry. Establishing a separate entity in the local jurisdiction can be painfully draining on the company’s financial resources without any guarantee that the business will be met with success in the new market. Using PEO saves the company from substantial financial risks, since the company can procure staff to conduct early activities of business such as market research, without directly establishing a legal entity in the local market.
In addition, PEO model is also much speedier than other models of market entry. By outsourcing recruitment and administrative functions to a local firm which is knowledgeable and experienced in the overseas region, the unpleasant obstacles you may face when entering a new market, such as the language barrier, regulatory compliance and administrative procedures, are smoothly bypassed due to the partnership with the PEO. Consequently, this allows business operations to resume much quicker than it would if a decision was made to engage in direct employment or establish a separate legal entity. Companies who partner with PEOs are usually able to begin their operations within one month.
Moreover, the legal landscape in China is rapidly shifting, with laws and regulations constantly undergoing amendments. It can be a challenge to remain updated with the latest laws in your home country, let alone a country which you are unfamiliar with. One of the main functions of a PEO is to continuously be aware of all the happenings in the legal environment. As a result, using PEOs will safeguard the company from any negative consequences arising out of non-compliance. A further related benefit is that the PEO accepts responsibility for all employment liabilities as it is the one which does the hiring in the first place.
Using the services of PEO provides a unique benefit of hiring employees before establishing a legal entity in the desired area. As the employees would be local to the target location and under the payroll of the PEO, they can take the preliminary steps in researching the local market and test the waters in order to best prepare the business for a more long-term market entry in the future.
Furthermore, PEO can rely on their experience and knowledge of the local norms and standards in determining the employees’ wages, and this is an area in which foreign enterprises may struggle due to their unfamiliarity with the business expectations in an unfamiliar environment.
The above advantages have concrete results on business development. NAPEO reports that “Small businesses that work with a PEO grow 7 to 9 percent faster, have employee turnover that is 10 to 14 percent lower, and are 50 percent less likely to go out of business”. This is sensical as PEOs generally have more HR capabilities than the company’s own HR department, and by outsourcing administrative functions to an experienced organisation, the company’s employees’ are consequently able to direct their focus onto business growth.
A PEO is the ideal solution for trying out a new, unfamiliar market while taking minimum risks. It has been proven to be highly effective and is the perfect answer to those who wish to dive into the lucrative Chinese market but feel anxious about any uncertainties they may face. PEO easily addresses this concern, enabling anyone to test their luck in the second largest economy in the world – a market too big to ignore.