EOR vs. PEO: Which Is the Right Choice?
Updated: October 3rd, 2023
Are you a business owner looking to grow and hire more staff? If so, you've probably heard of Employer of Record (EOR) and Professional Employer Organization (PEO). Both have their pros and cons, but choosing between them can be tricky.
In this article, we'll explain the basics of EOR and PEO, highlight their similarities and differences, and show how they affect your business financially and in terms of risk. We'll also help you decide which one is best for your business. The right choice between these two HR outsourcing options can save you time and let you focus on your main business tasks.
Understanding Employer of Record (EOR)
An Employer of Record (EOR) is your new workforce's official employer, handling payroll and benefits and ensuring compliance with local laws and rules. These providers offer human resources services to companies that want to hire an international workforce without having to worry about local laws or setting up a legal entity in the new location.
They take full responsibility for the more complex HR tasks and global payroll management. This makes your HR work smoother when trying to enter a new market, lightens your workload, and ensures you're following local laws, especially since you don’t have an entity or knowledge of the rules in that country.
A study shows that the market size of EORs is projected to reach $196 million by 2029 due to the many benefits they provide, such as the low cost of expanding your business into a foreign market while still following the laws of that country. They take care of complex payroll processing, deductions, and returns for your global team according to your schedule without worrying about currency exchange or bank charges.
On the other hand, working with this provider can be risky since some of them work through third parties to employ your workers instead of doing so directly, which means they don't have legal entities in the countries where you want them to overlook or employ the new workers. This may incur an additional cost on top of what they will charge you, and it may also be confusing and unsatisfactory for you and your employees. Furthermore, an EOR may not have a full understanding of your company's culture and values, leading to the hiring of candidates with contrasting attitudes and traits.
Exploring Professional Employer Organization (PEO)
A Professional Employer Organization (PEO) serves as your co-employer, sharing employer obligations, liabilities, and administrative tasks. They provide HR services such as recruitment and performance management, making them useful resources for startups and medium-sized companies. They give your business access to employee benefits and cost-effective options that might be difficult to get when starting.
Larger businesses are also starting to see PEOs as great solutions for tedious human resources tasks, especially if they want to focus more on growing their company and branching out. PEOs function more or less like an HR department that is a part of your company.
Most businesses outsource to a PEO due to the numerous benefits it offers. With this HR outsourcing solution, you can have much more control over all of your human resources functions and your employees, depending on the client service agreement (CSA) you sign with them.
Some of the most important aspects taken care of include staff reviews, compliance with local and federal laws, following the State Unemployment Tax Act (SUTA) and Federal Unemployment Tax Act (FUTA) rates, competitive health insurance plans, and much more. This means that you won’t have to worry about staying up-to-date with all of the current or changing labor laws.
Clarifying Misconceptions: Similarities & Differences Between EORs & PEOs
The biggest difference between the two is your level of control over your employees. While you share responsibilities and risks with a PEO, you still control your employees. However, an EOR is the only legal employer in your workforce responsible for the employees, compliance, payroll, and benefits.
EOR arrangements allow you to hire talent and expand internationally without having to have a local legal entity in a foreign country, while a PEO only serves you in the locations where you have an entity. PEOs handle more HR services, while EORs handle-less but more in-depth.
Another difference is that a PEO doesn’t typically accept working for a company with less than five to ten employees, while EORs can provide more flexibility; they can offer their services to even one employee.
Both types of HR solutions are experts in compliance with rules and regulations for payroll, employment, and taxes. Both include services such as payroll, HR management, benefits, onboarding, and tax administration. They also provide the client company with the resources to focus on important business activities and avoid the risk that comes with running a business.
How do EOR and PEO services vary with temporary or full-time employees?
PEOs are better suited for full-time permanent employees, while EORs are better suited for temporary or remote employees. PEOs handle HR functions for a company's entire workforce, while EORs handle essential HR functions and offer more flexibility for companies that need access to talent in other locations.
EORs are an ideal choice for businesses that heavily rely on short-term or seasonal employees or independent contractors or need to tap into talent pools across different geographical locations. However, PEOs are better at supporting your business's long-term goals.
Cost comparison between EOR and PEO
They both have similar pricing plans: either a set fee per employee per month or a percentage of employee payroll, administrative fees, and onboarding costs.
EORs usually cost less than PEOs in the long run. If you don't already have a legal entity in the country, opening a new one can be expensive and take longer. Businesses save a lot of money with EORs because they pay for all perks and insurance plans provided for employees. PEOs, on the other hand, might be a cheaper choice if you already have a business in the country and want to offer more extensive HR services or expand your company.
Which solution—EOR or PEO—is better if you don't own a legal entity in the employee’s country?
An EOR service provider is better if you don't have a business in the employee's country. They let companies hire a global workforce in other countries without having to set up their own legal entity.
Making the Right Choice: Is EOR or PEO Better for Your Business?
When deciding between these two HR outsourcing options, it's crucial to consider various factors, such as:
- Business needs: A PEO is likely the more cost-effective choice if you have a local entity with at least five to ten employees in the target country and want to focus on business growth. On the other hand, if you lack a local entity but need temporary employees, EORs offer a quicker solution, ensuring compliance with local laws and mitigating risks, especially for smaller hires
- Cost and budget: EORs can be cost-effective for a small number of hires, but costs may rise as you hire more employees. PEOs can provide better cost control and efficiency, especially as your workforce expands
- Flexibility: PEOs allow you to maintain control over your staff and organization while offloading administrative burdens. EORs may be more suitable for short-term or specific hiring needs
- Risk management: Both options offer risk mitigation, but PEOs often come with more extensive experience in handling local compliance and HR matters, reducing potential risks
- Reputation and certifications: Because the PEO sector is highly regulated, finding a reputable option is easier. Look for PEO providers with certifications from organizations like the Employer Services Assurance Corporation (ESAC), the Internal Revenue Service (IRS), and the National Association of Professional Employer Organizations (NAPEO). These certifications signal reliability and high-quality services
In summary, while setting up a new branch in another country can be costly, partnering with a reputable PEO can ease the process while allowing you to retain control over your organization. Ensure you choose a PEO provider with a strong track record and certifications to ensure a reliable and smooth partnership that minimizes future risks and frustrations.
Deciding between an EOR and a PEO isn't a one-size-fits-all decision. Each option has advantages and disadvantages, and the right choice depends on your business needs and goals. If you're planning to hire employees in another country, an Employer of Record service might be the way to go. However, a PEO is a better fit if you're looking for a long-term partner to handle the responsibilities and risks of growing your business.
Consult with professionals and legal experts to make sure the choice you make is right for you and that the company you choose is compliant with laws and regulations. If a PEO fits more into your future plans, visit our PEO comparison page to find the company that's right for you.
Consider factors like your budget, how much control you want over HR matters, and your risk tolerance when making your decision. Also, think about how your choice fits with your global expansion plans. Will it provide the support and flexibility you need as you enter new markets? Take your time to carefully evaluate both options and seek advice from professionals who can help you make the best choice for your business.