An employer of record (EOR) refers to a third-party entity that employs and pays workers on behalf of other companies. With EOR, companies can seamlessly hire and pay employees, domestically or abroad, and they’re not required to establish a legal presence in the country that that employee, or employees, reside in. This can involve navigating a complex regulatory environment, which adds significant friction to the hiring process.
By contrast, a professional employer organization (PEO) handles various HR tasks on behalf of a company. This can include payroll, tax filing, and benefits. Usually, PEOs can only operate in countries in which your company has a legal presence, but there are exceptions. Broadly speaking, EORs are great for businesses that want to expand internationally, and PEOs are better-suited to smaller businesses with a domestic focus.
Alongside getting the best HR software, an EOR or PEO can be a massive difference-maker for your business. In this guide, I’ll take you through the major differences between these two HR tools, the benefits of each, and how to decide which one is better suited to your business.
EOR VS PEO: What’s the Difference?
EOR and PEO both refer to third-party organizations that businesses can tap to handle important HR tasks. The former is often used by large enterprises that want to expand abroad, as it enables them to hire, work with, and pay employees from locations outside of their legal reach.
Most of the time, when a company is established, it is required to register in the territory it plans to be operating in to make it a legally recognized entity. US businesses are required to register with a state and a local government authority. The exception to this rule is if you conduct business as yourself using your legal name – but if you don’t register in this scenario, you could waive your right to liability protection and legal and tax benefits.
This is where EORs come in. They allow you to conduct your business internationally without needing to go through longwinded registration processes or ensure regulatory compliance and adherence to labor laws. The total administrative and compliance burden falls on them. Legally speaking, an EOR is designated as the employer of the people you hire.
PEOs, meanwhile, are a different proposition. They’re organizations that provide HR and employee management support for locally based businesses. In this case, compliance responsibility is shared between you and the PEO in question, and your business is the legal employer of your staff.
What Does an EOR Do?
A good EOR can perform several important functions. We’ve listed some of the biggest ones below.
Ensure compliance with local labor laws
Labor laws vary from jurisdiction to jurisdiction, and it can be difficult to keep track of which regulations apply in which areas. EOR will make sure that a business is hiring in accordance with the laws of that particular region, including adhering to local contract law.
Handle employee onboarding
Next up, the EOR will onboard your new hire. This involves exchanging paperwork, getting all the relevant documentation signed, and making sure they’re set up on the right systems ahead of starting at the company.
Manage payroll
The EOR is also responsible for employee payroll. That means ensuring local tax is adhered to, payslips are organized, and ultimately your workers are paid correctly and on time. This can also include fielding payroll-related inquiries from staff. As a part of this, EORs will look after any benefits, such as medical insurance, that your employees may be entitled to.
Manage contract termination
When required, your EOR of choice will also process any contract terminations that you are forced to make, whatever the reason may be. This includes redundancies, misconduct dismissals, and more.
What Does a PEO Do?
A PEO differs from an EOR in a few key areas, but the two organizations also have a lot in common. Below, we’ve outlined some of a PEO’s main responsibilities.
Payroll and tax filing
PEOs process employee payroll, including taxes and administering benefits, where applicable. Like an EOR, this can also include resolving pay disputes and, in the case of contract terminations, handling any compensation.
Maintain compliance
To avoid fines and penalties, PEOs will employ specialists who make sure your business is operating in compliance with local laws and regulations. This can include adhering to tax law, hiring regulations, and more.
Teach health and safety protocols
Often, PEOs will be responsible for administering health and safety training for your hires, and assisting with Occupational Safety and Health Administration (OSHA) inspections. This will help you to keep claims to a minimum.
Support with HR
For businesses that already have an in-house HR team, your PEO can provide invaluable support and consultation. For those that don’t, a PEO will handle everything that falls under the remit of HR. This can include recruitment, training, and performance management.
What Are the Benefits of EORs and PEOs?
Both EORs and PEOs can provide some great benefits for your business. We’ve taken a closer look at what the respective organizations can offer below.
What are the benefits of EORs?
With an EOR on your side, you can quickly establish a presence in new markets without needing to go through the rigamarole of setting up a legal entity, which can take months. This speed can give you a competitive edge and allow your business to quickly capitalize on market opportunities as they arise.
What’s more, with a dedicated third party at your disposal, handling multi-currency payroll is taken off your plate. This means your employees will be paid correctly and promptly, and you can avoid potential mishaps, such as inaccurate currency conversion.
Tapping the services of an EOR will also cut costs for your business in the long run. For example, it will keep your overheads to a minimum, as you won’t have to accommodate more people in your office, nor invest in training and equipment to get them up to speed. With the help of compliance specialists, you’ll save on fines and penalties that your business might otherwise have incurred.
What are the benefits of PEOs?
Business leaders often cite cost savings as one of the biggest reasons for using a PEO. According to the National Association of Professional Employer Organizations (NAPEO), the expected return on investment (ROI) for PEO clients can be as much as 27.3% per year – meaning that your business would save $1,273 for every $1,000 spent on PEO services.
Another benefit of PEOs is that they can help you to improve your employee experience. Because these organizations provide invaluable administrative support, this gives your HR team more time to focus on making your new hires feel welcome and improving your company culture. This can save you money in the long run by boosting employee retention, reducing churn, and generally promoting a happier work environment.
Similarly, employing a PEO makes it easier to recruit top talent. By leveraging their extensive networks, PEOs can offer an unbeatable benefits package that will make your business more attractive to prospective hires. What’s more, your PEO will handle parts of the recruitment process for you, which can contribute to an overall smoother experience for the candidate.
Which is Right For Your Business?
In simple terms, an EOR is suited to businesses with an international presence that wants to make new hires across different countries. PEOs, meanwhile, are geared towards smaller businesses with a local presence that are looking for HR support. Of course, the differences and similarities run a bit deeper than this in practice, so in this section, we’re going to break down which organization is a better fit for your business.
To begin with, the size of your workforce will influence whether you go for an EOR or a PEO. For a rapidly growing business that is looking to break into multiple new markets at once, it is recommended that you opt for the former. This is because an EOR can expedite the onboarding process, as well as take on sole responsibility for navigating the complex regulatory waters of different countries. This will lighten the load on your existing HR team, giving them more time to focus on providing a friendly face for your new hires.
On the other hand, if you’re already planning to open a new office in a different country or state, you might want to consider a PEO. Typically, they’re cheaper than EORs, especially in the short term, and you won’t waste money on extra functionality that your business doesn’t need.
That being said, if you’re looking to forge a relationship with a third-party entity over several years, you might find that an EOR works out as more cost-effective in the long run. This is due to the cost and time savings that your business will make with a dedicated organization absorbing all of your employment risk and liabilities.
It’s also important to think about the level of flexibility that you want to maintain. If your business has a lot of contracted or temporary employees, a PEO might not make much sense in terms of value. Often, PEO pricing is dependent on how many employees you have – so if your workforce is predominantly made up of full-time employees, you’ll get the most benefit.
By contrast, an EOR will typically offer more flexibility for companies that use temporary workers. These companies’ pricing models differ in that they either take a percentage of each employees’ salaries; charge a flat fee per employee; or offer a fixed price for all employees.
Final Thoughts on EORs and PEOs
With this guide at your disposal, hopefully you’ve now got enough information on EORs and PEOs to know which is a better fit for your business. To sum up, if your business is looking to expand internationally, but you don’t want to go through the ordeal of registering it as a legal entity in those new regions, an EOR is a great solution. It will handle important HR tasks, including onboarding new hires, ensuring compliance, and managing payroll.
By contrast, a PEO would generally suit smaller businesses that only plan to conduct business locally. In this scenario, it can be a hugely cost-saving endeavor, allowing you to make important hires, provide a better experience for your employees, and ultimately create a happier workplace – without needing to break the bank.
Of course, your business is your business, so you should only make a decision after carefully considering which model makes the most sense for you.