If you want to make your People team more effective without adding headcount, you'll love a professional employer organization (PEO); if your issue is managing a global, distributed workforce, an employer of record (EOR) will be the one for you.
Here's everything you need to know about PEO and EOR services so you can decide what's best for your organization.
PEO vs. EOR: Key Considerations on the Fundamental Differences
I want to make choosing the right software as easy as possible for you, so I created this table covering the key considerations for choosing a system.
If there are any key differences you think I've missed, leave a comment at the bottom of this article and I'll update it accordingly!
|Consideration||PEO (Professional Employer Organization)||EOR (Employer of Record)|
|Employment Status||Co-employment model; you and your PEO share responsibilities.||Acts as the full legal employer for tax and employment law purposes.|
|HR Services||Provides comprehensive HR services like payroll, tax filing, and benefits admin.||Similar HR functions as PEO but also acts as the legal employer.|
|Legal Liability||Shares legal responsibilities with your company.||Assumes full legal liability for employees.|
|Insurance||Require you to pay for employee insurance.||Pays for employee insurance.|
|Employee Minimum||Typically require at least 5-10 employees.||No minimum employee requirement.|
|Business Registration||Require you to register in every state/province an employee is hired in.||Does not require you to register in different geographies.|
|Flexibility||More flexibility over HR processes and operations; less geographic flexibility.||More flexibility for your business; less over the specifics of your HR operations.|
|Scalability||Very scalable within limited geographies.||Increased overall scalability, particularly in international operations.|
|Target Audience||Small to medium-sized businesses that want to outsource HR services but retain a degree of control over them.||Companies seeking to employ remote, international teams without establishing new legal entities.|
What is a PEO?
A professional employment organization is an outsourced business partner you can hire to take on some of your HR tasks, including:
- Tax filing
- Benefits administration
- Compliance with employment laws
When you hire a PEO, you're entering a co-employment relationship; in other words, they're doing work on your behalf and if they make a mistake with labor laws, you're both on the hook.
The most common reason for hiring a PEO is to outsource specific HR tasks to avoid bloating your organization and taking time away from higher-value tasks.
When using a PEO, beware of borders. If you're hiring a global workforce and don't want to register your business in every single country your employees live in, you should look at an EOR instead.
How much does a PEO cost?
PEOs typically charge based on one of two pricing models. Either:
- Flat fee per employee, or
- Percentage of employee compensation
The average cost across the best PEOs is a flat fee ranging from $500-1,500 per employee per year or 2-12% of each employee's wages.
Those are some wide ranges but, generally speaking, costs increase as the PEO performs more services for you. If all they're doing is completing payroll, you can expect them to land on the low end of that range; if you're using their A-Z offering, you'll pay more.
I recommend starting with a clear idea of what you want to outsource to the PEO and then comparing specific pricing for that tier of service across your options. Also, consider the composition of your workforce:
- Do you have a high number of low-wage employees? Find a PEO that charges on a percentage basis.
- Conversely, if your workforce consists of a small group of highly paid individuals, the flat fee would be better for you.
Why use a PEO?
Easy: Save money, grow faster, decrease employee turnover, and outsource repetitive work.
Considering PEOs commonly:
- Have HR expertise
- Give access to employee benefits plans
- Complete payroll processing
- Withhold and pay payroll taxes
- Maintain workers' compensation coverage
- Administer employee benefits
- Provide human resources guidance
- Help maintain compliance with federal and state employment laws
- And more...
Chances are good that you'll benefit from using PEO services. With all the extra time you'll find yourself with, you can make sure your culture isn't turning toxic right under your nose. ;)
Figure out which aspects of your HR function can be outsourced, then use our up-to-date list of the best PEO companies to find one that fits your budget.
What businesses benefit from using a PEO?
PEOs are best for small to medium-sized businesses that want to outsource HR services but retain a degree of control over them. These are usually companies that have small (or nonexistent) HR teams and operate in one, or a small number of, geographies.
When you're choosing which PEO to work with, there are a few final things to keep in mind. Namely:
- How do other companies like using them? Look at reviews, read testimonials, and request references from previous customers.
- What responsibilities do they take on, exactly? If they "handle" a certain process, determine if that means 100% of the process or if you still have a role to play.
- What other benefits do they provide? Some PEO companies offer platform and specialist access or professional development portals; figure out what you're getting from them.
- What is the bottom line? Additional bells and whistles are great but ROI is what really matters. How much will you save on labor vs. the total PEO cost?
The odds of you saving money and time by using a PEO are high; however, do your research, be clear on what you actually need, and don't get swept up by all the extra features.
Find the option that offers what you're looking for, reliably, at a good price.
What is an EOR?
An employer of record is an entity that legally employs workers on behalf of your business, taking full responsibility for payroll, taxes, benefits, and compliance. If you want nothing to do with employment contracts (and the details that come with them), an EOR is a great option for you.
Companies also use EORs when they:
- Want to hire talent from a country where they don't have a local entity (legally).
- Don't have a dedicated HR department but are still too small to use a PEO.
- Have common fluctuations in their business needs and labor demands.
It seems really simple and, for the most part, it is. However, there are risks associated with using an EOR, which chiefly result from another entity taking operations on for you. If they make a mistake, you pay for it.
How much does an EOR cost?
As you probably guessed, there are different pricing models and ranges for EOR services, too. EORs use the same pricing models as PEOs, charging either:
- Flat fee per employee, or
- Percentage of employee compensation
There are also a few other fees you could encounter when going with an EOR, such as:
- A one-time setup fee for new employees, covering the cost of onboarding and creating a new profile.
- Ongoing FX fees. Employees typically need to be paid in their home currency for compliance reasons and, assuming you don't normally hold that currency, you'll need to pay an exchange fee.
These fees may seem steep but, when you consider how much it costs to do everything in-house, you'll see why it's often a better financial decision to go with an EOR.
Why use an EOR?
Most companies don't have the resources or knowledge required for global hiring and international employee management... which is a shame. There's a giant global pool of talent available and finding a great EOR is your key to accessing those people at preferred rates.
Other benefits of using an EOR
- Simplify your operations. Focus on the things that matter, not foreign labor laws, administration, and paperwork.
- Rightsize your workforce. In the busy season, you can scale your team and get more full-time help; when business drops off, you can correct quickly.
- Reduce compliance concerns. Let your EOR partner, and its experts, read through the fine print.
- Keep your core team lean. Eliminate extraneous HR needs, managerial headaches, and slow communication timelines by outsourcing functions that aren't business-critical.
You may also find a lot of value in connecting with and learning from your employees from different countries. Who knows, a few conversations could turn into new markets in the future!
What businesses would benefit from using an EOR?
Businesses looking to expand into new international markets or hire remote teams globally without establishing a local legal entity would benefit most from using an EOR. An EOR simplifies the legal and administrative complexities associated with global employment.
Ask yourself the following questions:
- How much does institutional HR knowledge matter to me? By using an EOR, you pay a fee to have the technical aspects of employment handled for you. You don't retain institutional knowledge but you do save time and money.
- How important is a local team? We've seen a ton of arguments around the value of in-person work; figure out how important it is to you.
- How rapidly do I need to scale (up or down)? EORs can make things happen quickly. Like, really quickly. Does that matter to you?
Dive into the reasons you're in business. If achieving your company's mission is more important to you than the way it happens, you'll probably want to consider a globalized workforce and an EOR.
How to Decide Between a PEO Partner and an EOR Partner
Choosing the best system doesn't have to be difficult. I've laid out the key questions for you here:
What is the size and growth stage of your business?
PEOs typically have a minimum headcount and are better suited for medium to large businesses with steady, predictable growth.
EORs are flexible enough to suit any business size and respond to rapid changes (as might be expected in small companies and startups).
Do you require assistance with global talent acquisition or managing remote teams in different provinces or countries?
If yes, EOR is the one for you.
EORs can help without requiring you to register your company in all jurisdictions you operate in; PEOs can't.
Are you looking for a long-term HR partnership or more flexibility in employment management?
PEOs are best for long-term HR partnerships and companies with consistent growth.
EORs, on the other hand, offer the flexibility needed for dynamic staffing needs and project-based work.
How do you plan to manage legal liabilities and insurance for your employees?
PEOs involve shared legal and insurance responsibilities, fitting co-employment arrangements.
EORs take on the full legal employer status, simplifying your liability management.
When to Use a PEO or EOR
If you're in an established business, expecting steady growth, don't expect sudden geographic expansion, and are looking for a long-term HR partnership, a PEO is going to be your best option.
If your business has more complexity due to international borders or fluctuating labor requirements, an EOR is going to be the right choice for you.
Or, if you're simply finding that you're outgrowing your PEO, it may be time to upgrade. EORs are like PEOs' big brother; they do everything that a PEO can do and more, offering more services and a fully hands-off experience... for a higher price.
Want to find out what other people are choosing? Join the conversation in the People Managing People Community, a supportive community of HR and business leaders passionate about sharing the top tips for making an impact in your organization and your career.