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EOR vs PEO - Common Misconceptions
David Hughson
August 8, 2022

EOR vs PEO - Common Misconceptions

If you're growing your team and/or expanding to multiple locations, you've probably heard the terms EOR and PEO. Maybe someone in your company has told you that your company needs to sign a new EOR or PEO agreement, or you're a consultant with clients that want to know about these plans so they can decide which is better for them.

The difference between an Employer of Record (EOR) and a Professional Employer Organization (PEO) might seem confusing when you're just starting to search for options on managing payroll services, HR solutions, and benefits administration. The terms are often thrown around in the same sentence, but they have many differences that might make you choose one over the other.

Choosing the right service will depend a lot on your business, but we’ve written this post to help you identify some of the key variables between the two, as well as some scenarios where you might want to pick an EOR over a PEO, or vice versa. Continue reading to have a better understanding of what these services are and whether or not they are right for you.

What is an EOR?

An Employer of Record (EOR) is an organization that helps companies expand internationally by hiring and paying employees on behalf of another company. EORs assume the responsibility for all formal employment tasks, including onboarding processes and compliance documentation.

Using an Employer of Record (EOR) allows companies to legally and efficiently engage with workers in other countries without having to set up a local entity or risk violating local employment laws. EORs can help you customize the employment contract to reflect important considerations for you and your business — for example, you can ensure your intellectual property is fully protected through robust IP protections in your employment contract.

What is a PEO?

A Professional Employer Organization (PEO) is a type of company that can be used to outsource HR services. A PEO will enter a co-employment agreement with a company where their responsibilities are defined. Typically, a PEO will handle all human resource responsibilities including payroll and benefits.

Many employers, especially small and mid-size businesses, struggle to find enough time and resources to focus on all the functions related to employee management. This is also the case with companies that operate remote teams, where HR functions can become increasingly complex if hiring abroad. In these cases, a business can opt to outsource its HR functions to a professional employer organization to streamline its operations in states/countries where they have a legal entity.

Key differences between EOR and PEO services

While both PEO and EOR services offer a similar level of service and cost-efficiency for businesses outsourcing their HR needs, their subtle differences lie in these key areas:

1. Legal requirements: An EOR allows you to manage employees across many countries while keeping your business registration limited to your home country. Meanwhile, a PEO requires you to register your business in every country where you plan to hire.

2. Employee status: An EOR provides you with all the services and solutions that an employer would need, including payroll processing and tax compliance, benefits administration, HR support, and more.

3. Size requirement: Because a PEO serves as a co-employer, they might require a minimum amount of employees, while an EOR can be contracted for as little as one or two employees. This is because they are usually used for remote candidates.

4. Benefits: EORs and PEOs both provide benefits packages. However, the key difference is that the employer chooses whether to offer a benefits package via an EOR, whereas a PEO typically requires it.

Picking the right service for your business

Choosing an Employer of Record (EOR) or a Professional Employer Organization (PEO) as a solution to outsource your HR functions will depend on what kind of business you have.

Here are scenarios that may help you decide:

• You have employees in multiple states or countries. If your company operates in multiple locations with different tax laws, it can be difficult to stay up to date on filing requirements. EORs are especially helpful if you need to employ workers in places where your company is not yet established. They can also provide the infrastructure needed to start hiring people in another country, acting as the employer until you are ready to establish a legal entity there.

• You're a small, but growing company and want a cost-effective way to offer employee benefits. A PEO helps small and medium-sized businesses provide the same attractive employee benefits packages offered by larger companies.

• If you are a start-up or a gig economy company with freelance workers and/or international contractors, you might want to consider an EOR solution. This way, you can quickly add or remove employees from the payroll without having to go through the long term contract process of a PEO. EORs are extremely useful for companies that want to hire people for a limited period of time or only for certain projects.

• Working with a PEO is a common choice for SMB’s in the United States, however most US PEO’s do not offer services beyond US borders. For many companies it may make sense to leverage both a PEO for your US team AND an EOR for your global team. This way you’re leveraging the best partner for each scenario.

Frequently Asked Questions (FAQs)

Q: What is a PEO provider?

A: A PEO provider refers to a Professional Employer Organization that offers full-service HR outsourcing to businesses. This arrangement is typically known as a joint-employment or co-employment relationship.

Q: What is an EOR provider?

A: An EOR provider acts as an employer on behalf of a company hiring employees in countries where they are not registered.

Q: How can I engage a worker in a country where my business has no establishment?

A: The solution for most companies involves opting for an Employer of Record (EOR) service who will employ workers on their behalf in 150+ countries.

Q: How can I provide benefits for my small-business employees in my home country?

A: Opting for a PEO means you can outsource your HR department to a professional employer organization in countries where you are already established.

Summary

Deciding what solution is right for your business can be tricky, but if you’re looking to lessen your company’s HR load, there is no doubt an EOR or PEO service can become your most valuable partner. When making the decision to outsource, make sure you are informed about the costs, benefits, and legal obligations of both services.

With this post, we hope you have learned about the key differences between an Employer of Record (EOR) and a Professional Employer Organization (PEO), and finally, we’d like to congratulate you for taking the right steps to grow your business further!