EOR and PEO are two popular HR outsourcing models that offer distinct approaches to managing employee-related tasks.
Many businesses today turn to HR outsourcing as a way to streamline operations, reduce costs and improve efficiency, helping them focus on their main business while driving strategic growth.
With numerous providers and models available, it may be difficult to determine the option that suits your business needs. We have provided an in-depth comparison and contrast between two popular models, Employer of Record and Professional Employment Organization.
In this article, we’ll take a closer look at EOR vs PEO, exploring their distinct benefits, drawbacks, and applications to help you make an informed decision.
What is an Employer of Record (EOR)?
The employer of record is a service provider that allows companies to compliantly employ talent around the world without having to open a legal entity overseas. The company focuses on managing the employees’ daily work, while the EOR ensures that everything related to employment laws and regulations is handled correctly.
The traditional process of international business expansion is tedious and resource-intensive. Firstly, businesses would have to establish a legal entity (like a subsidiary or branch office) to carry out operations in a foreign country. Secondly, they must officially register the company with the appropriate authorities, fill out paperwork, open local bank accounts, register for taxes and obtain the necessary licenses and permits to operate legally. Lastly, they would need to comply with local labor laws, hire and onboard employees, and manage payroll, which can be time-consuming and costly.
These days, companies choose to work with employer of records, which is a modern solution that eliminates many of the steps involved in the traditional process above.
Here’s a great example. A local employer from the US may choose to hire software engineers from Vietnam because of lower cost and availability of skilled talent. Instead of going through the hassle of setting up an office there, the company can use an EOR. The EOR handles all the legal stuff like payroll, taxes, and making sure local labor laws are followed, while the company just focuses on managing the engineers’ work. This makes it easier to hire internationally without setting up in each country.
What is a Professional Employer Organization(PEO)?
A professional employer organization also known as PEO is another common type of HR outsourcing. A PEO is an organization that enters a co-employment relationship with a client business. They function as a co-employer, sharing employer responsibilities with the client.
The PEO gets to handle the administrative and compliance aspects of employment, such as payroll, benefits, taxes, insurance, and legal issues, while the client business handles the operational and strategic aspects of employment, such as hiring, firing, training, and performance.
Businesses using PEOs experience 7-9% faster growth, and are 50% less likely to close compared to non PEO firms, as per research by the National Association of Professional Employer Organizations. Additionally, PEO saves clients about $450 per employee on administrative costs.
EOR vs. PEO: Key Distinctions
When choosing between an EOR (Employer of Record) and a PEO (Professional Employer Organization), it’s crucial to understand how each can impact your business operations. Below, we provide key differences between both models.
Legal Entity
EOR: An EOR manages the legal, HR, tax, and local compliance responsibilities of employees in a country where the business does not have a legal entity.
PEO: A PEO supports a business by handling its HR-related tasks where the business has a legal entity.
Employment Relationship
EOR: Employer of records act as full, legal employers. They assume all the risks and liabilities associated with the services they provide. Under the EOR model, a business has little control over its HR functions.
PEO: Professional employment organizations, on the other hand, are in a co-employment relationship with the client organization. They partner with the client business to share the employment, tax and legal responsibilities of the employees. Since most of the responsibilities are shared, the business can determine how much control they wish to retain over their HR functions.
Compliance and Liability
EOR: The EOR is solely responsible for ensuring compliance with local labor and tax laws. The client company is generally not directly liable for any non-compliance issues.
PEO: The PEO helps manage compliance for existing employees, but the company retains legal accountability in the case of any employment law violations.
Flexibility
EOR: An EOR can provide more flexibility and customization for companies. For example, they can hire and manage employees in multiple countries.
PEO: A PEO may have more standardized and limited services. PEOs focus on serving domestic markets.
Ideal Use Cases
EOR: Ideal for companies hiring internationally or in regions where they don’t have a legal identity. (A UK company uses an EOR to hire a sales rep in California without needing to establish a U.S. legal entity.)
PEO: Commonly used for domestic or in-country employees, especially to reduce HR burdens and manage payroll, benefits, and compliance more efficiently. It is ideal for businesses that already have a legal entity in the region. (A Texas company hires employees in California and uses a PEO to handle payroll, benefits, and compliance with state labor laws.)
Similarities Between EOR and PEO
To provide a better understanding of both EOR and PEO models, below are their similarities.
HR Outsourcing
Businesses who face challenges with handling HR tasks in-house often choose to outsource these responsibilities to third-parties such as EORs and PEOs. They both manage HR-related functions such as recruitment, employee onboarding payroll processing, benefits administration, performance management and training.
Risk Management
Both models provide businesses with the expert guidance needed to navigate complex labor laws and regulations. By ensuring compliance with employment laws, they reduce the risk of legal issues, fines, or penalties, allowing companies to operate confidently within local and international markets.
Recap Of EOR Vs. PEO
The table below provides a summary of the similarities and differences between both HR outsourcing models.
| Feature | EOR | PEO |
|---|---|---|
| Legal Entity | Manages legal, HR, tax, and compliance where you have no legal entity. | Handles HR for companies with a legal entity. |
| Employment Relations | Acts as the full employer; assumes all risks and liabilities. | Co-employment model; responsibilities are shared. |
| Compliance and Liability | EOR is fully responsible for compliance and risks. | Companies retain legal accountability for compliance issues. |
| Flexibility | More flexible — EORs have a broader geographical reach making them suitable for businesses with international expansion plans. | Less flexible — only suitable for companies hiring within a specified region. |
| Ideal Use Case | Best for hiring in regions without a legal entity. | Best for hiring domestic workers where a legal entity doesn’t exist. |
| Control Over HR Functions | Businesses have limited control over HR. | Businesses can decide the level of HR functions to retain. |
| HR Outsourcing | Both models help to manage HR tasks like payroll, onboarding and benefits. | |
| Risk Management | Both provide expert guidance to ensure compliance with local and international employment laws. |
How to Choose Between EOR and PEO
Now that we’ve examined both differences and similarities between EORs and PEOs, below are some key questions to further guide you to determine whether an EOR or a POE is the best fit for your HR outsourcing strategy.
1. Do you own a legal entity in the country where the employee lives?
If your business has an official registered presence (such as a branch, subsidiary, or local office) in the country you’re hiring or plans to hire employees, PEO is a great choice for your outsourcing needs. However, if there is no legal presence in the location you choose to expand your firm, you should opt for the EOR model.
2. How large is your workforce?
PEOs typically partner with businesses that range in size from 1 employee up to 500 employees. They offer a co-employment model that works well for companies with a more established workforce, allowing them to maintain some internal control over HR functions while outsourcing key responsibilities. On the other hand, smaller companies or startups with little resources and employees might prefer the services of an EOR.
3. Does your company plan to expand globally?
When determining the right model for outsourcing needs, it is important to consider whether your company plans to hire locally or expand globally. If your company plans to hire locally, a PEO may be the better option, as they manage HR functions within your home country. However, if you’re expanding internationally and need to hire employees in other countries, an EOR is often the best choice.
4. Are you hiring full-time employees, contractors, or both?
If you’re hiring internationally or need to handle both contractors and full-time employees seamlessly, an EOR is likely the better fit. A PEO, on the other hand, is more suited for managing full-time employees in domestic or established regions.
5. Are you looking for ongoing HR management in a country where you already have an entity?
Working with an EOR might not be necessary in this case, as an EOR is typically used for hiring in regions where you don’t have a legal entity. Instead, you would likely benefit more from partnering with a PEO to manage HR tasks like payroll, benefits, and compliance while retaining full control of employee management in that country.
6. How much control do you want to retain over employment responsibilities like compliance?
An EOR fully takes over the employment relationship including compliance from the client business, while a PEO shares it with the client business. If you don’t mind having more control over the HR processes and overall employee management, then outsourcing to a PEO is the best choice.
Frequently Asked Questions (FAQs)
Yes, it is possible to switch co-employment arrangements from a PEO to an EOR. To transition from a PEO to an EOR, you must select an EOR provider, carefully migrate employee data such as contracts, payroll and benefits to the EOR. Conversely, switching from an EOR to a PEO requires that you have a legal entity to establish co-employment with a PEO. Both transitions must be handled with careful planning to ensure compliance with labor laws.
Both EORs and PEOs have different pricing models. This is also dependent on certain factors like location, number of employees being hired, taxes, statutory benefits, and compliance. EORs may charge based on a fixed per each employee or a percentage of your employee’s salaries. PEOs typically charge a fixed per-employee fee.
Both PEOs and EORs can assist with hiring and managing contractors, as well as full time employees.
An AEO (used interchangeably with an ASO) stands for Administrative Employer Organization. It is a common type of HR outsourcing arrangement. The difference between an AEO and a PEO lies in the structure and extent of services they offer. With the AEO model, the client business retains its status as the employer. A PEO becomes the co-employer of employees, while an AEO provides administrative support only. An AEO provides customizable services like payroll, benefits, and HR support while a PEO offers a comprehensive range of HR services.
A PEO offers a wide range of HR services including payroll, benefits administration, taxes, insurance and legal issues. A payroll service provider on the other hand, primarily focuses on payroll processing, tax compliance and payment processing. PEOs become co-employers of your employees. A payroll service provider is not in a co-employment relationship with employees.
Conclusion
Deciding between an EOR vs. PEO to optimize your workforce management requires a deep understanding of your business needs, growth goals and workforce structure. Both models offer valuable benefits from cost-effective services, streamlined solutions and compliance management.
EORs suit businesses with global or remote workforces, providing centralized employment solutions. PEOs are ideal for small to mid-sized domestic businesses seeking co-employment relationships and HR support.