The Difference Between A PEO And An EOR: Complete Guide
Something we get asked a lot is the difference between a PEO and an EOR. Well, here it goes:
Professional Employer Organizations (PEOs) are contracted by organizations to perform HR responsibilities such as payroll processing and benefits administration in what’s called a co-employment relationship.
An Employer of Record (EOR) will perform these tasks and take full legal responsibility for employment, making it the official employer for compliance and administrative purposes.
Read on for a deeper dive.
What Is A PEO?
A Professional Employer Organization (PEO) is a company that provides HR services to businesses through a co-employment arrangement. In this model, the PEO and the client company share employer responsibilities.
The PEO handles tasks such as:
- Payroll processing
- Employee benefits administration
- Compliance with labor laws and regulations
- Workers' total compensation and risk management
- Recruitment
- HR support and consulting.
While the PEO takes care of these HR functions, the client company retains control over day-to-day operations and direct management of employees.
This arrangement allows businesses to offload administrative tasks and focus on their core activities while benefiting from the PEO's expertise and economies of scale when it comes to things like negotiating benefits plans.
What Is An EOR?
An Employer of Record (EOR) is a company that serves as the legal employer for a workforce on behalf of a client company.
In this arrangement, the EOR takes full responsibility for all employment-related tasks while the client company manages the day-to-day work activities. The EOR handles:
- Payroll and tax administration
- Compliance with local labor laws and regulations
- Recruitment
- Employment contracts and onboarding
- Employee benefits and insurance management
- Handling of terminations and offboarding.
The EOR becomes the legal employer for tax and legal purposes, which simplifies hiring in countries or regions where the client company does not have a legal entity.
The benefit of working with an EOR is that it greatly simplifies the process of hiring international workers or remote workers in different locations without setting up local subsidiaries.
If you have a local subsidiary but don't want to handle the admin, then a global payroll service provider might be for you.
Key Differences Between A PEO And EOR
| Aspect | Professional Employer Organization | Employer of Record |
| Legal Employer Status | Company remains the legal employer | EOR is the legal employer on paper |
| Co-Employment Relationship | Co-employment with shared responsibilities | No co-employment; EOR is the sole legal employer |
| Use Cases | Suitable for companies with established entities | Ideal for hiring in new markets without local entities |
| Compliance and Risk | Company retains some compliance responsibilities | EOR assumes full responsibility for compliance |
| Contractual Relationship | Requires a co-employment agreement | Contract is between the client company and the EOR |
| Benefits Administration | Offers group benefits leveraging economies of scale | Manages benefits based on local labor laws |
A PEO and an EOR both help companies manage HR tasks, but they operate in different ways.
Here are the key differences:
1. Legal employer status
- PEO: The company remains the legal employer alongside the PEO. The PEO acts as a co-employer, taking on certain responsibilities such as payroll and benefits administration.
- EOR: The EOR is the legal employer, taking full responsibility for all employment-related tasks while the client company directs daily work activities.
2. Co-employment relationship
- PEO: In a co-employment arrangement, the company and the PEO share employer responsibilities. The company still needs to set up a legal entity in the country or state where employees are hired.
- EOR: There is no co-employment. The EOR is the sole employer for legal and tax purposes, which simplifies hiring in countries or states where the company has no legal entity.
3. Use cases
- PEO: Best suited for companies that have established entities and want to outsource HR functions like payroll, benefits, and HR compliance.
- EOR: As the EOR takes on legal employer responsibilities, this option is ideal for companies that want to hire quickly in a new country or region without setting up a local entity and dealing with tricky global HR compliance.
4. Compliance and risk
- PEO: The company retains more responsibility for compliance since it remains a legal employer.
- EOR: The EOR assumes full responsibility for compliance with local labor laws, taxes, and regulations.
5. Contractual relationship
- PEO: Requires a co-employment agreement, meaning both parties share specific responsibilities.
- EOR: The contract is between the EOR and the client company, with the EOR handling all employment-related legalities.
6. Benefits administration
- PEO: Typically offers group benefits that companies can opt into, leveraging economies of scale.
- EOR: Manages benefits based on local labor laws and can provide country-specific benefits packages.
Summary:
- PEO: Suitable for companies with established entities looking to offload HR tasks.
- EOR: Ideal for international expansion without a local entity, with the EOR taking full legal responsibility for employment.
How To Decide Between A PEO And EOR
Deciding between a PEO and an EOR depends on your company's specific needs and circumstances. Here are some factors to consider:
1. Legal entity setup
- Choose PEO: If your company already has a legal entity in the location where you plan to hire, or you’re willing to establish one.
- Choose EOR: If you don’t have a legal entity in the hiring location and want to avoid the complexities of setting one up.
2. Level of control
- Choose PEO: If you want to maintain some control over HR policies and employee benefits, as PEOs typically offer customizable options.
- Choose EOR: If you prefer to have employment administration completely handled by a third party, especially in unfamiliar or highly regulated markets.
3. Compliance and risk management
- Choose PEO: If you have the expertise to navigate local labor laws but need support to ensure compliance.
- Choose EOR: If you want the EOR to assume full responsibility for compliance with local employment laws, reducing your company’s legal risk.
4. Business expansion needs
- Choose PEO: If your focus is on streamlining HR functions for existing locations rather than rapid global expansion, a global PEO is a better fit.
- Choose EOR: If you are expanding quickly into new markets and need to hire employees in locations where you lack an established presence.
5. Long-term vs. short-term needs
- Choose PEO: For long-term HR outsourcing solutions where you have a local presence.
- Choose EOR: For short-term or project-based hiring, international expansions, or testing new markets without establishing a local entity.
6. Cost considerations
- Choose PEO: May offer cost savings for companies with large numbers of employees in one location due to group benefits.
- Choose EOR: Can be more cost-effective for smaller teams or remote workers spread across different countries.
Summary:
- PEO: Suitable if you have a legal entity and want support with HR tasks while retaining some control.
- EOR: Ideal for hiring in new markets without setting up a legal entity, with the EOR assuming full legal responsibility.
PEO And EOR Risks
While both can be good options for organizations who want to outsource HR, there are some potential risks to be aware of:
Potential Risks of Working with a PEO
Compliance gaps
One of the main risks of co-employment is that compliance risks are shared. If the PEO doesn’t fully handle compliance, your company may be liable for any legal or tax issues.
Loss of direct control
While a PEO can handle many HR tasks, your company may have less control over certain HR policies and benefits structures, which could impact the employee experience if not well managed.
Data security and privacy
Sharing sensitive employee data with a PEO can pose security risks.
Potential for increased costs
For larger organizations, PEOs may add a premium over in-house HR management. Additionally, PEOs typically charge a percentage of payroll, which may increase costs as you scale.
Potential Risks of Working With An EOR
Permanent establishment (PE) risk
This is one of the main EOR risks. Permanent establishment (PE) is a tax concept that determines if a business has enough presence in a country to be subject to local corporate taxes.
Some countries may interpret long-term contracts with an EOR or having multiple employees in the same location as creating a permanent establishment, which could lead to corporate tax obligations in that country.
For example, German law is very protective of workers, and long-term EOR arrangements could trigger a requirement for a direct employment relationship with the hiring company, particularly under the German Labor Leasing Act (AÜG).
Employee misclassification
Misclassification occurs if employees are categorized incorrectly, impacting taxes, benefits, and protections.
Some countries scrutinize EOR arrangements, especially if the worker performs duties that local authorities deem should be done by an employee of a locally established company.
Data privacy and security compliance
Many countries have data privacy regulations (e.g., GDPR in Europe) that require strict data handling and employee privacy protections.
In some countries, sharing employee data with an EOR could raise compliance issues. For example, GDPR requires companies to ensure that any third-party processors (like EORs) adhere to strict data protection standards.
Mitigating the risks
- Due diligence: Vet the PEO or EOR provider’s compliance practices, security measures, and reputation.
- Contracts and SLAs: Ensure clear contracts with service level agreements (SLAs) defining responsibilities, data handling, and compliance management.
- Communication and engagement: Maintain open lines of communication with employees to reinforce company culture and address any concerns about the employment arrangement.
Ready To Start Your Search?
Think a PEO or EOR could benefit your org? As a starting point, take a read of our shortlists of the best employer of record services and best PEO companies.
Best EORs shortlist
Here's my pick of the 10 best software from the 10 tools reviewed.
You can also see our summaries of the costs of working with an EOR and PEO costs.
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