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Why PEO Doesn't Work for UK Companies Hiring in India Without an Entity
- Saransh Garg
- 21 hours ago
- 8 min read
There is no legal concept of a Professional Employer Organisation in India the way UK HR teams understand it from the US or parts of Europe. PEO doesn't work for UK companies hiring in India without an entity, because Indian labour law requires every worker to be employed by one clearly identifiable, registered employer. The EPF & Miscellaneous Provisions Act 1952, the ESI Act 1948, and the state level Shops and Establishments Act all assume a single employer, not a shared or co-employer setup.
We've worked with UK HR and operations leads who assumed India would work the same way their US PEO does, only to discover weeks into onboarding that their vendor had no Provident Fund establishment code and no ESI registration in its own name. That gap doesn't just delay hiring, it creates a compliance exposure the UK company often doesn't know it has until an inspection or an employee claim surfaces it.
Why Do UK Companies Assume PEO Will Work in India?
Most UK HR teams have used a PEO in the US, where state co-employment law makes it legal. India has no such law. UK fintech and insurtech firms building delivery teams in Bengaluru and Pune through an offshore recruitment partner are competing for the same engineers that large Global Capability Centres hire, and salaries in these hubs have climbed as demand for cloud, platform engineering, and AI focused roles has spread into sectors that never used to compete for this talent, from retail banking to logistics.
The instinct makes sense until you check the statute books. India's Ministry of Labour and Employment recognises exactly one employer per worker for Provident Fund, ESI, and gratuity purposes. There's no dual employer status, and no vendor can legally register a UK company and itself as joint employers of the same person. When a vendor markets itself as a PEO for India, it's either an unregistered payroll processor or an Employer of Record using different language.
The pattern we see most often: onboarding starts, and only later does someone ask the vendor for its own PF establishment code. If they can't produce one instantly, that's the clearest sign the arrangement isn't compliant.
Contract Hiring, Full-Time Hiring, and Where PEO Actually Fits
Before choosing a hiring model, separate two questions: how you want to employ someone, and who legally employs them. Contract hiring means engaging someone for a defined project or period, often through an agency, without long-term employment obligations. Full-time hiring means a permanent employment relationship with statutory benefits like Provident Fund, gratuity, and paid leave built in from day one.
PEO doesn't work for UK companies hiring in India without an entity for either model, since both still need a legally registered Employer of Record behind them. What changes between the two is risk and cost. Contract hiring through a compliant agency suits short, defined work or roles that might shrink within a year. Full-time hiring through an Employer of Record suits roles you expect to keep for two years or more, since it gives the employee full statutory protection and gives you continuity if the engineer becomes core to delivery.
We generally advise UK clients testing the Indian market for the first time to start with a small full-time team under an EOR rather than pure contract hiring, since contract-only engagement makes it harder to retain strong engineers once GCCs start recruiting them with permanent offers.
The Legal Reality: Why PEO Doesn't Work for UK Companies Hiring in India Without an Entity
Here's the compliance chain a genuine PEO model would need to satisfy, and where it fails. The EPF Act requires employers with 20 or more staff to remit Provident Fund contributions under their own establishment code, not a pooled code shared across client companies. The ESI Act works the same way, tying registration to one specific employer. The Shops and Establishments Act adds another layer, since each state administers it separately, with Karnataka, Maharashtra, and Telangana setting slightly different renewal cycles and working hour rules.
The Payment of Gratuity Act 1972 obligates one identifiable employer to pay gratuity after five years of continuous service. The Contract Labour (Regulation and Abolition) Act 1970 does allow a principal employer and contractor relationship, but it was built for blue collar labour, not software engineers, and stretching it to cover knowledge workers invites scrutiny rather than solving the problem.
The mistake we see repeated: a UK company assumes its vendor's compliance is handled, then a routine PF inspection questions why employees sit under an entity with no direct contract with the UK parent. Fixing this after the fact means re-registering staff under a properly licensed Employer of Record (EOR), with back dated corrections that cost more than doing it right from the start.
PEO vs Entity vs EOR: A Quick Comparison UK Companies Can Use
Structure | Legally valid in India | Who employs the worker | Typical setup time | Best fit |
US style PEO | No | Disputed, high risk | Not applicable | Not usable in India |
Own Indian subsidiary | Yes | Your own registered entity | 8 to 12 weeks | 15+ headcount, long term plans |
Employer of Record | Yes | The EOR's registered entity | 2 to 3 weeks | 1 to 15 headcount, market testing |
Contractor or consultant | Yes, with limits | Self employed individual | 1 to 2 weeks | Short term, project based work |
Most UK companies we've guided start with fewer than 8 people and do better on an EOR first, then move to their own entity once headcount passes roughly 15 to 20, when the cost of running payroll internally starts to beat the EOR's per head fee.
How the Process Works, and What Almost Went Wrong for One Client
Our usual timeline for a UK company moving off a misclassified PEO onto a compliant structure, handled through proper HR outsourcing, runs about 15 working days. The first three cover role scoping and choosing between contract and full-time hiring based on how long the role is expected to run. The next seven cover sourcing and technical vetting, including a scenario based round testing how candidates handle UK specific compliance context, not just technical skill. The final five cover offer, verification, and onboarding into the EOR's payroll or, for contract roles, a properly structured agency agreement.
One case worth sharing: a UK insurance technology company with about 200 UK staff came to us after their existing vendor, marketed as a PEO, had run four Indian engineers for over a year with no ESI registration. The gap surfaced when one engineer filed an ESI claim and found no contributions had ever been made. Their finance team initially wanted to quietly switch vendors, which would have left those engineers with no paper trail for owed contributions. At AnjuSmriti Global, we pushed for a voluntary disclosure and back payment process instead, coordinated with a compliance lawyer in Bengaluru.
The outcome: all four engineers were re-registered under a licensed EOR within three weeks, back contributions cost around four thousand pounds across the group, and the client avoided a penalty estimated at over fifteen thousand pounds had an inspection triggered first. That client has since scaled to eleven engineers and is weighing its own entity next.
What Hiring in India Actually Costs Without a PEO
Real numbers help more than percentages. A mid level backend engineer in Bengaluru or Pune typically costs one point four to one point eight lakh rupees a month fully loaded, roughly thirteen hundred to seventeen hundred pounds. A senior engineer with six to eight years runs about two point two to two point eight lakh rupees, or two thousand to twenty six hundred pounds. A lead engineer or engineering manager with ten or more years typically costs three point five to four point five lakh rupees, close to thirty three hundred to forty two hundred pounds.
Statutory contributions, including Provident Fund at 12 percent of basic pay plus gratuity accrual, usually add 13 to 15 percent on top of base salary. An EOR's management fee typically runs one hundred fifty to three hundred pounds per employee monthly, compared with eight to fifteen thousand pounds in one time incorporation costs plus another one and a half to three thousand pounds a year in ongoing compliance if you choose to expand your business in India with your own entity. Agency fees for sourcing usually run 12 to 18 percent of first year cost, dropping for bulk hiring of five or more roles together.
Most clients reinvest the gap, typically 55 to 65 percent lower fully loaded cost per engineer than UK hires at the same seniority, into one extra senior engineer or a dedicated QA resource for every two to three roles they'd have filled in the UK.
Conclusion
Hiring patterns are shifting fast. AI adoption inside engineering teams means more roles now expect familiarity with AI assisted development tools, not just traditional coding skill. Cloud spend governance, often called FinOps, has become its own specialism as GCCs push cost accountability into engineering teams. Platform engineering roles, sitting between DevOps and product engineering, are in high demand as companies consolidate infrastructure tooling.
UK companies are increasingly blending contract and full-time hiring within the same team, using contract hiring for short term spikes while keeping core roles full time under an EOR or their own entity. This hybrid approach gives flexibility without the compliance risk a misclassified PEO carries. It's a strong reminder of why PEO doesn't work for UK companies hiring in India without an entity, and why the blended contract plus full-time model is becoming the default for UK teams scaling here.
If your team is deciding between an EOR and setting up your own entity, we can walk through the numbers for your headcount plan here.
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FAQs
1.Does India legally recognise co-employment the way US PEOs operate?
No. Indian law requires one identifiable registered employer per worker under the EPF Act, ESI Act, and Shops and Establishments Act. There's no framework for shared employer liability. Any vendor calling itself a PEO in India is either an unregistered intermediary or an Employer of Record using different terminology, so always ask for their PF establishment code before signing anything.
2.What should we do if we've already used an unregistered PEO vendor for over a year?
Don't switch vendors quietly. Disclose the gap, then re-register affected employees under a licensed Employer of Record with back dated Provident Fund and ESI contributions settled properly. This usually costs a few thousand pounds across a small team, far less than the penalty risk if an inspection or employee claim surfaces the gap first.
3.How is an Employer of Record (EOR) different from setting up our own Indian entity?
An EOR employs your staff under its own already registered Indian entity, handling PF, ESI, and gratuity compliance, while you keep full operational control. Setting up your own entity means incorporating under the Companies Act 2013, taking 8 to 12 weeks with ongoing compliance costs. EORs suit smaller teams; your own entity suits larger, longer term headcount.
4.Can we hire Indian engineers as contractors instead of using an EOR?
Yes, but only for genuinely project based, time limited work. Long term, full time, single client contractor arrangements risk being reclassified as disguised employment under Indian labour law, which triggers retroactive PF and ESI obligations. For ongoing core roles, full-time hiring through an EOR is the safer structure.
5.Which Indian cities suit a UK fintech or insurtech company hiring its first engineers?
Bengaluru and Pune have the deepest bench of engineers with prior GCC or UK client exposure, which shortens onboarding. Hyderabad suits cloud infrastructure and data engineering roles given its concentration of major cloud providers. Mumbai and Pune both have strong BFSI experienced talent if your company works in insurance or asset management.
6.Does UK GDPR create extra obligations when Indian engineers handle UK customer data under an EOR?
Yes. The UK company remains the data controller regardless of employment structure, so a data processing agreement with the EOR is essential, alongside technical access controls for engineers handling UK customer data. This should be built into onboarding, separate from the employee's contract with the EOR.
7.How long does hiring in India actually take without setting up an entity?
Under an EOR structure, our typical timeline is about 15 working days from role scoping to onboarding. Setting up your own entity first adds 8 to 12 weeks before you can make a single hire, which is why most UK companies start with an EOR for their first few roles before considering their own entity.
8.At what headcount should we move from an EOR to our own entity?
The economics usually tip in favour of your own entity somewhere between 15 and 20 employees, depending on seniority and total compensation levels. Below that, an EOR's per head fee typically beats the cost of running your own payroll and statutory filings. Above it, owning the entity usually saves more over time.
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