EOR vs PEO Differences: What Do They Mean and Which Do I Need?

We often get asked about the differences between EORs and PEOs. US companies, especially, find themselves unsure whether to work with an EOR or a PEO.
In this blog post, we’re putting an end to the confusion. Keep reading to learn about the exact components, differences, and use cases of both PEOs and EORs.

What is a PEO?

A Professional Employer Organization (PEO) is a business that handles another company’s HR operations through a co-employment arrangement where both the company and the PEO share employment responsibilities.

PEOs are specific to the US, and generally take over tasks like payroll, compensation, employee benefits, and risk management. More robust offerings could include learning and development responsibilities such as training.

Note: co-employment only exists inside the United States. In some countries, such as France, it’s actually illegal, and considered working for two employers at the same time.

What is an EOR?

While an EOR may have similarities to a PEO, it has a different purpose. An employer of record, also sometimes referred to as a global PEO, is a third-party company that enables a business to hire people in other countries their by acting as the local legal employer.

The EOR takes on all the legal and compliance responsibilities, while you oversee the day-to-day relationship with the team member.

Additionally, an EOR acts as a legal employer, avoiding the need to open a foreign entity or subsidiary, which saves time and money.

Similarities between PEO and EOR

PEO and EOR services several overlaps—otherwise, they probably wouldn’t be confused as much. Here’s what they have in common:

• Both PEOs and EORs provide HR services to other businesses
• Both are employment solutions that ensure compliance regarding payroll, employment, and taxes
• Both provide payroll, HR management, benefits management, onboarding, and payroll tax administration services
• The purpose of taking on a PEO or an EOR is to free up resources so your business can focus on core activities and avoid compliance issues
• Both models can reduce HR costs by leveraging their expertise to manage employee benefits and payroll

The main differences between EORs and PEOs

While PEOs and EORs are both outsourcing solutions for HR and payroll processes and functions, they have some important differences. These can be boiled down to structure, risk, scale, and scope

Structure

EOR and PEO arrangements have important structural distinctions – specifically when it comes to employment responsibility.
A PEO operates through a co-employment relationship. In this case, both the PEO and the EOR share employment responsibilities.

EORs, meanwhile, are third-party entities and take complete responsibility over employees, while the client company is left to manage day-to-day operations.

Risk

In a PEO arrangement, both the client company and the PEO are liable regarding employment matters – whether it’s to do with compensation claims or compliance mishaps.
Meanwhile, in an EOR partnership, the employer of record acts as the legal employer and takes on the bulk of legal liability, leaving the client company less exposed to these types of risks.

Scale

Generally, PEOs are used by US-based SMBs to manage HR processes and avoid the additional costs and expenses of managing them themselves. EORs on the other hand, are used by businesses of all sizes, including enterprises, to explore and grow across new markets, without the need of opening a local entity.

Scope

PEOs tend to offer a wide range of HR support and services – whether onboarding, compliance, or employee benefits. For EORs, the focus is a little different. Rather than just handling HR processes, the EOR acts as the legal employer on behalf of the client company, taking on all aspects of that role – from compliance to taxes. Some employer of record providers may even take over the payment aspect completely.

Cost

The pricing model for PEO differs from the pricing model for an EOR. Factors PEO pricing depend on may include number of employees and the scope of services you’re requesting. In the case of HR of EORs, though, because of the matter of international expansion, pricing becomes more complicated and will likely have to do with the countries you’re expanding into and the specific requirements associated with the relevant regions.

Need for a legal entity

PEOs are co-employers, meaning you need a business registration wherever your employees are located. This usually isn’t too complicated when hiring domestically. But when hiring outside your country borders, you’ll need to get your business registered or set up a local entity where you’re looking to hire.

Partnering with an EOR allows you hire workers wherever the EOR has established a local entity so you don’t need to establish a new branch in a new country to hire a resident.

Co-employment vs. proper employment outsourcing

PEOs are essentially outsourced HR departments with little involvement in like hiring and negotiating contracts. They take on employee onboarding, performance reviews, and other day-to-day HR services, but your business is still responsible for running employment.
EORs are your workers’ legal employers.

For example, if you you hire a remote worker in Denmark, the EOR’s legal entity in Denmark is their employer. This highlights the differences between EOR and payroll provider models, as the EOR is fully responsible for local taxes, payroll details, and labor laws.

Payments to employees

Having a PEO pay employees isn’t always straightforward. Some countries require the legal employer to issue payments. This means your PEO might not be authorized to pay the employee for you in certain cases. An EOR is responsible for paying the employee’s salary, benefits, bonuses, and more.

What works better for international employees: a PEO or an EOR?

When deciding between a PEO and an EOR for international employees, it’s essential to understand how each option works and your organization’s goals.

For instance, if your business created a long-term strategy in a foreign market and wants to foster an ongoing relationship with employees, a PEO may be best. Or if you already have a legal entity in the country you’d like to hire in, you can pay workers as contractors and use a PEO, but need to be sure you’re legally treating the worker as a contractor and not an employee. This ensures you don’t misclassify employees as contractors.
If you’re looking to hire employees in different countries where you don’t have a local operation, choose an EOR. If you go the EOR route, just be sure to use a provider that owns their legal entities in all countries they offer services.

Finally, consider how many employees you want to hire. If you’re looking to scale significantly in a country, you may not have enough internal resources to manage employees and run administrative duties. In this case, an EOR would be the most practical choice.

How to Choose Between a PEO and an EOR: Guiding Questions

Not sure whether to choose an EOR or a PEO for your expansion strategy? Here are some guiding questions to help you make the right decision:

• Are you planning on hiring domestically or internationally?
  While there are a few exceptions, if your growth plans are only within the US, you will likely want to stick to a PEO, since it’s less costly.
• Are you hiring full-time employees or contractors?
  Remember those few exceptions we mentioned? Hiring a contractor is one of them.
  If you’re hiring contractors, even within the US, EOR services will likely be more beneficial in helping you manage the compliance portion of your contingent workforce. Of course, not all providers are equipped with this expertise so it’s important to do your research beforehand.
• How many employees do you want to hire?
  If you have a clear amount of how many international employees to hire, and aren’t planning on expanding overseas PEOs may be your go-to. But if you’re more in a ‘flexible’ mode of hiring – say, onboarding two people in one country and 15 in another, then working with an EOR will likely be more useful for you.
• When is a PEO Right for my Organization?
  According to recent studies, “small businesses that use PEOs grow 7 to 9% faster, have 10 to 14% lower employee turnover, and are 50% less likely to go out of business.” This is likely to be down to a combination of less operational hassle, more time to focus on core values, and avoiding the costs of global workforce management. However, it’s important to recognize that using a PEO as a service provider is a local solution inside the United States only, and does not remove the need for a local entity within other countries in which your employees work.

When is an EOR Right for my Organization?

Getting the best talent: You may find the best talent in a country you don’t operate in. An EOR can ease the process of hiring the best person for the job.

Testing out a new area for global expansion: The costs of setting up an entity (and closing one down, too) can be prohibitive, especially if you aren’t sure that a new location is going to be a good fit. Using EOR services can be a great way to bypass these obstacles.

Looking for a new sales manager to check our growth potential in the UK? Use a Global PEO such as a UK professional employment organization and bypass the months it can take to register and set up a local entity

Getting started quickly in a hypergrowth environment: In a fast-moving start-up, you may lose business opportunities if you need to wait months to set up a legal entity in a new location. EORs can help start-ups scale quickly.

In use cases like these, an EoR can help you hit the ground running.

The Papaya Advantage

At Papaya Global, we are a single end-to-end platform for global workforce management, helping you to streamline and optimize your local HR responsibilities such as payroll and tax management, as well as compliantly and quickly expand into new geographies with the help of in-country partners, as part of an international strategy for expansion and growth.

Ready to talk about your unique organizational context? Schedule a call.