editione1.0.3Updated March 23, 2023
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When it comes to keeping up with all the laws and regulations for remote U.S. workers, you have roughly three options:
Track everything yourself. This means that for every location that you have a remote employee, you manage payroll, benefits, and so on with your own internal HR employees or via external accountants, benefits administrators, lawyers, et cetera. This was what many businesses had to do before more recent SaaS-based HR-service providers came on the market.
Mix advisors with services. This typically is a mix of contract legal and financial help paired with some form of service provider that handles most of the payroll, benefits, and related overhead (like Gusto, Zenefits, Bamboo, et cetera—see our list of tools and services for a list of all these providers).
Outsource everything. Give all the tracking, implementation, and ongoing management to a Professional Employer Organization (PEO).
A Professional Employer Organization (or PEO) is an outsourced solution for HR, including payroll, benefits, workers’ comp, and compliance. A PEO is a co-employment model,* in which the PEO takes on the responsibility for a company’s HR, including any liability; and payroll is processed through the PEO’s tax ID, not the company’s.
importantIn general, what we’ve seen mostly for remote companies—especially startups or small organizations—is the second option above. With the advent of modern SaaS-based HR tools, the vast majority of payroll and benefits oversight is easily managed via these services. But they don’t necessarily handle everything (for example, registering new employees in their state), so you will want to be sure to ask what is and isn’t handled. (You can use the checklists below to help with this.)
When it comes to outsourcing via PEOs, there are multiple pros and cons.
The primary benefit of going with a PEO is that it dramatically reduces a company’s payroll and HR overhead. They handle all your HR needs while you focus on the business. A few other benefits include:
Monitoring laws and regulations. PEOs stay up to date on all the state and municipal rules and regulations, many of which can change often and quickly.
Liability assurance. The PEO takes responsibility for any issues related to staying compliant. Should an employee or local jurisdiction take issue with certain administrative issues, the PEO may be ultimately responsible for resolving the situation.
Compliance. PEOs handle all payroll and tax-related compliance needs, including:
W-2 and 1099 filings
Employment Practices Liability Insurance (EPLI)
Employee benefits. PEOs are also responsible for your employees’ benefits, like health insurance. Because PEOs serve a large client base, they have greater purchasing power and can negotiate better coverage.
Many of the potential downsides of PEOs are the flip side of the benefits coin:
Lack of control. Due to the co-employment model—which is a contractual agreement between the PEO and your company—and a PEO’s assumption of liability, companies give up a certain amount of control. This can amount to a company having to adopt the PEO’s policies and procedures, and potentially even their employee handbook terms. The PEO can also be involved in performance-related and firing decisions.
Cost. Someone else is doing all that work, and you have to pay them for it. PEO pricing typically falls into one of two categories:
Percentage of payroll is a PEO pricing model that charges a percentage—typically about 2–12%—of a company’s total payroll amount per pay period for its services. Many PEOs also include an administrative fee on top of this per pay period as well.
Per-employee (or PEPM or PEPY) is a PEO pricing model that charges a fixed dollar amount per employee either monthly or annually for their services. This is similar to many SaaS-based “per-seat” pricing models. Per-employee pricing varies quite a bit across PEOs.
Limited healthcare choices. While the rates PEOs negotiate may be better than what your company can, you have little say about which providers they choose. When it comes to remote employees, this can be a significant issue, as some companies may not have good options for out-of-state employees.
Outdated tooling and customer service. Startups and tech-savvy companies that are used to modern, SaaS-based tools may be frustrated with most PEOs. Internationally, this can be even more exaggerated, with some still operating largely via phone calls, and in some cases even via fax. (See Working with a GEO.)
contributeWe’re not aware of any startups or smaller companies that work with a PEO for U.S.-based remote workers. If you have experience with this we’d love to hear from you.
“Third Party Payer Arrangements—Professional Employer Organizations“ (IRS)
“Voluntary Certification Program for Professional Employer Organizations (CPEOs)” (IRS)
“The Use of Third-Party Employees and Joint Employer Status Under Fair Labor Standards and Family Medical Leave Acts” (Lindabury, McCormick, Estabrook & Cooper)
List of Certified PEOS (IRS)
“The Best PEO Service Providers of 2022” (Business.com)
In the next section, we lay out the various aspects of employing remote U.S. team members you’ll either have to track, or ensure is handled by whichever third party or service you use. We include checklists of what to look out for for each section, and where possible, matrices of jurisdiction (federal, state, municipal) related to each of the areas.
In order to protect candidates from discrimination, U.S. federal law, as well as many state and local laws, prohibits companies from recruiting new employees in a discriminatory way,* making hiring decisions on a discriminatory basis or using hiring practices that have an especially negative effect on relevant groups,* and asking certain questions during interviews.*
Federal law prohibits or strongly discourages asking certain questions because of their connection to discriminatory hiring practices: