PEO vs. EOR: Which is Best for Your Business?

What is a PEO?

Before deciding whether to engage a PEO vs. an EOR, it’s important to understand how a professional employer organization operates and what services it provides.

In a unique structure known as co-employment, PEOs provide HR administration and support, payroll processing, employee benefits, and other services for small and mid-sized businesses.

In a co-employment agreement, you retain full control of the management of your employees, all business decisions, and day-to-day operations. The PEO becomes the employer of record for your business, handles back-office HR tasks on your behalf, and shares liability on employment-related matters with you.

Stated another way: the PEO is an administrative employer for your business and manages employment-related services on your behalf.

One main advantage of partnering with a PEO is that the organization takes time-consuming HR administration off your plate, so you can focus on growing your business while still ensuring your employees receive the care they deserve.

Some PEOs, such as G&A Partners, offer strategic HR services, including:

• HR management
• Payroll processing
• Payroll taxes
• Employee benefits and administration
• Risk management and safety services
• Compliance assistance
• Performance management and employee training and development
• HR technology
  

The PEO co-employment model also puts economies of scale to work in your favor. PEOs are the employer of record for hundreds and thousands of companies, and each of those company’s employees become “worksite employees” of the PEO. Therefore, many PEOs are able to negotiate better rates for more comprehensive benefits, such as medical, dental, vision, and life insurance options.

What is an EOR?

An employer of record (EOR) – sometimes referred to as an international PEO – is an organization that legally employs workers in foreign countries on your behalf. Whereas a PEO works with a business in a co-employment agreement and shares liability on employment-related matters, an EOR assumes full liability for hiring and managing employees for businesses it works with.

The adoption of EOR services has increased recently, mostly due to the rise of remote work. Labor shortages and a tight job market have also forced companies to seek talent in other countries to fill open positions.

However, hiring employees abroad is a complicated process. You must register your business as an entity in the country where your workers are domiciled, and you are responsible for knowing and understanding labor laws in that country – which can become time-consuming and expensive. What an EOR provides is a more efficient and cost-effective way for employers to expand internationally.

Common reasons you might work with an EOR:

• You wish to hire a remote employee who is currently living in another country.
• You have a current employee who is relocating to another country, but you wish to retain the employee.
• You have a short-term need to fill a few positions with workers abroad.
• You have a low employee count in another country, making it difficult to manage employee benefits.
• You are interested in testing your business in another market.
• You’ve acquired or merged with a small international business and want to ensure a quick and smooth transition for your new employees.

Though these are just a few scenarios that are ideal for working with an EOR, it’s important to note that an EOR is often a bridge or temporary solution for businesses with long-term global expansion plans. Establishing your business as an entity can take several months in some countries, so engaging an EOR allows you to begin working in that market while you set up the entity.

When you engage with an EOR, you enter into an agreement with the organization to be the official employer of record for your international employees. Much like a PEO, the EOR handles the administrative tasks associated with employment, such as onboarding, processing payroll, handling taxes, managing terminations, and understanding and abiding by local employment laws and requirements.

The main difference between an EOR and PEO is, the EOR is the legal employer for the worker and is fully responsible for compliance with labor laws in that country.

When working with an EOR or a PEO, you manage your employees as you normally would. You manage their day-to-day responsibilities, outline job expectations, assess job performance, and make decisions related to promotions and terminations.

What is an EOR employee?

With an EOR, employees enter an employer-employee relationship through an employment contract. Though you may work with the EOR to customize the contract – such as changing the number of paid days off – the employer of record organization will ensure the contract is compliant with local labor laws.

Your company will also sign a service agreement with the EOR, and that agreement will define your relationship with the employee and the EOR. For example, the service agreement will likely outline that your business is responsible for day-to-day management and tasks for your employee.

In addition, the service agreement will address liability limitations, which can vary by EOR. A common example: if your company makes an error, such as terminating an employee in a way that violates local labor laws – your company could be liable if the employee files a complaint.

Additional contractual agreements can be made between you and the EOR employee to protect your company, such as confidentiality or non-compete clauses.

What is an EOR’s role once you’re ready to hire international talent? The EOR will manage onboarding for the employee, ensuring that all required paperwork is completed for the country the employee is domiciled in. Many EORs can also facilitate the process of sponsoring and applying for a work visa, if the employee requires one.

From that point, the EOR will handle all HR administrative tasks for your employee, such as processing payroll, withholding taxes according to local requirements, administering benefits, and ensuring compliance with local labor laws. Should you decide to terminate the employee, the EOR will ensure the termination is handled properly and legally.

A snapshot: What is the difference between PEO and EOR?

When comparing PEO vs. EOR models, keep in mind that both organizations offer similar HR outsourcing services. For example, you receive HR administrative support with both a PEO and EOR, meaning they perform many employee-related tasks such as payroll processing and benefits administration on your behalf.

The key difference between a PEO and EOR is who employs the employee and who assumes risk for employment-related compliance violations.

Another key difference between an EOR and PEO is how long you may utilize their services. Small and mid-sized businesses often partner with PEOs for years and in all stages of business growth. With an EOR, however, some countries may have limitations on the length of EOR arrangements, how many EOR workers a company can have, or even the activities the EOR employees engage in.

What are the pros and cons of an EOR?

Before deciding whether an EOR is the right solution, it’s important to weigh employer of record pros and cons.

As with choosing any HR outsourcing provider, you’ll also want to evaluate potential EORs and determine:

• What kind of service does the EOR provide you and your employees? Are they easily accessible when you or employees have employment-related questions?
• How effective is their employee management? Not all HR outsourcing providers offer the same level of care, so it’s a good idea to evaluate the organization’s values and assess how they manage their EOR employees. Ask about the typical onboarding process to determine if it’s thorough, what processes are in place to ensure timely payroll, or how the EOR handles employee concerns.
• Determine which countries the EOR has established entities in. If you know where your employees will be living, ensure that potential EORs are registered as entities in those countries. And if you have plans to expand beyond one country, it may be helpful to ask about those locations now, too.
• How can the EOR help you grow internationally? EORs have expertise in establishing an entity in other countries and some will help you through the process. If you have plans to expand beyond a handful of international employees, consider choosing an EOR that can assist you with the process.
• What HR technology and data security does the EOR provide? Technology can streamline HR processes and reduce errors, so it’s good to ask potential EORs what technology they currently use with their EOR employees, how you’ll receive reports regarding time and attendance or payroll, and what measures are in place to protect the employees’ data.

Does your business need a PEO or an EOR?

How do you know when to engage a PEO or EOR? See the below information to help determine which HR outsourcing option is the best fit for your business needs.

You are more likely to engage a PEO when:

• You lack resources, HR expertise, or time to manage your HR internally.
• Your workforce is located primarily within one state or country.
• You seek affordable, comprehensive, high-quality benefits for your employees.
• You need assistance maintaining compliance with local, state, and federal regulations.
• You own a small or mid-sized business, though businesses of all sizes can benefit from a PEO’s services.

You are more likely to engage an EOR when:

• You are expanding your workforce globally but lack the time or money to establish an entity abroad.
• You don’t want to assume the risk of maintaining compliance with labor laws and requirements in other countries.
• You want help providing benefits for a small number of global employees.
• You’ve acquired or merged with a small business that employs workers abroad.
• You want to test your business in a new market or you want to employ workers abroad now and plan to set up an entity later.

Instead of choosing either a PEO or EOR, is it possible to work with both? Yes, many PEOs like G&A Partners have established relationships with EORs that they can recommend to clients who want to hire international talent.

How it works: The PEO provides HR management, payroll processing, benefits administration, help with compliance, and more for your U.S.-based workforce. The EOR provides HR administration, payroll, benefits administration, and assumes full risk for compliance with labor laws for your global employees.