EOR vs. PEO: what's the difference?

Are you interested in hiring employees from around the world? If so, you're probably going to need some type of outsourced HR services. Professional Employer Organizations (PEOs) and Employer of Record companies (EORs) are two of your options.

PEOs and EORs both operate as third-party providers of various HR functions and responsibilities, offering essential services for businesses with distributed international workforces.

But there are critical differences between the two. Here's a brief outline of PEOs vs EORs, along with a few tips on deciding which service might be best for you.

What is a PEO?

A professional employer organization, or PEO, enters into a "co-employment" arrangement with another company to manage that business's HR activities. 

So, a PEO is a business process outsourcing company focusing on human resources. These companies specialize in taking care of HR functions – especially for businesses operating in different countries.

What is an EOR?

An employer of record, or EOR, acts as the legal employer of another company's workers to take care of end-to-end HR responsibilities.

EORs only offer services in countries where they own legal entities. Maintaining a registered business in these locales allows EORs to operate as a third-party legal employer, conducting various employee-related tax, legal, compliance, regulatory tasks and HR functions.

EOR vs PEO: 6 differences

Let's take a closer look at the differences between these two types of organizations to break down the distinctions even further.  

Legal employer

The core EOR vs PEO difference lies in whether or not the company can act as a legal employer.

An EOR can serve as the legal employer of people working for your company, essentially becoming a way to outsource employment itself. So, when you hire an employee with an EOR, the EOR holds that employee's employment contract (and legal responsibilities). 

With a PEO, you are still the legal employer of your global employees, meaning you must own a legal entity in the country where your employees reside. PEOs only offer outsourced HR services.

All other differences stem from this.

Acting as the legal employer allows EORs to offer more comprehensive outsourced HR services, including those restricted to a traditional full-time employer. PEOs, on the other hand, are limited to offering a smaller range of HR functions and responsibilities.

Outsourced HR scope

EORs and PEOs both offer a selection of outsourced HR services. However, due to their legal employer status, they don't take care of the same things.

An Employer of Record can handle pretty much every employee-related task. That includes legal hiring, onboarding, payroll, management, compliance, taxes, deductions, terminations, severance, unemployment claim management, etc.

A professional employer organization can only administer and manage another company's HR responsibilities and tasks. So, a PEO can manage payroll, benefits, compliance issues, tax filing, and other HR functions.

Employee minimum and contract

EORs are agile organizations already set up as legal employer entities in various countries and fully equipped to offer outsourced HR services in these locations. This enables them to take on new clients without requiring a minimum number of employees or locking them into a lengthy contract.

PEOs are third-party "co-employers" that provide outsourced HR assistance to organizations. Therefore, organizations utilizing PEO services must maintain their own legal entity presence wherever their employees are.

Since PEOs don't maintain operations as regional legal employers, most require their clients to commit to a minimum amount of employees and binding contracts. 

Local legal entity and business registration

Businesses need to have a legal presence wherever they have employees. EORs serve as the legal employer and maintain legal entities wherever the workers are, so you don't have to.  

PEOs don't act as legal employers, thus requiring each business they partner with to have its own local legal entity, which can be incredibly costly. 

To rephrase that, you can use an EOR to work with international employees in countries where your business isn't registered as a local legal entity. However, if you want to use PEO services to work with international employees, you will need to register a local business and use the PEO to manage its HR functions.

Employee benefits

An EOR acting as the legal employer can offer your workers a full range of benefits and insurance, including health insurance, workers' compensation, general liability insurance, etc. And EORs assume all related legal and HR responsibilities for doing so.

A PEO that only co-employs your workers is more limited in what they can provide. For example, many will handle taxes for you; some offer health insurance, but that's about all they offer. Professional employer organizations also typically don't provide workers' compensation or business liability insurance. The legal employer must offer those benefits.

Legal regulatory compliance burden

All registered businesses must comply with local labor laws, tax rules, and other regulations. As a legal employer, an EOR assumes those for you, along with all associated risks.

A PEO can help you manage tax and HR responsibilities, but your organization's legal compliance burden remains with your company.

PEO vs EOR: Which is right for my company?

Professional Employer Organizations and Employer of Record companies are two ways to outsource HR. However, EORs act as your legal employer, while PEOs do not.

Here's a recap of crucial EOR vs PEO differences:

• EORs act as your workers' legal employer
• PEOs operate as "co-employers" that manage various HR functions
• EORs assume your employee-related compliance burden
• PEOs help you carry out compliance-related tasks but aren't legally responsible
• EORs offer comprehensive employee benefits and insurance, including health insurance, workers' compensation and general liability insurance
• PEOs might provide some health benefits, but that's about it
• EORs pay your workers, manage payroll and file and pay taxes
• PEOs can manage payroll and file taxes
• EORs can recruit, hire, onboard and manage employees – from issuing contracts to handling terminations and severances
• PEOs can assist with recruiting, onboarding, and managing. However, they don't manage contracts or terminations

So, what's right for you? An EOR or a PEO? That comes down to internal capabilities and resource optimization.

• Do you want to hire international remote workers without opening up a business entity in their country? Then, an EOR is likely the right fit for you. 
• Do you need help managing HR functions in an overseas office? Either a PEO or EOR can work for you.
• Do you want to offer remote employees benefits? Use an EOR to provide healthcare, dental, workers' compensation or other benefits.
• Would you like to eliminate legal risks and liabilities when hiring international workers? Go with an EOR. 
• Would you prefer to outsource payroll, taxes and compliance? Many businesses choose EORs to optimize internal resources and eliminate legal, tax and compliance burdens. 

Overall, unless you have a legal entity in the country where you want to hire employees, then an EOR is usually the best choice. But, even then, going with an EOR can help reduce liability and compliance. 

EORs can offer comprehensive outsourced HR services, enabling full-spectrum outsourcing and allowing businesses to hire international workers without opening up regional legal entities. Additionally, an EOR is a flexible service. Companies can choose which features to utilize for a custom-tailored remote HR solution. 

Are you interested in leveraging an EOR to hire, onboard and manage your global team? We can help. 

At Outstaffer.com, we offer end-to-end Employer of Record services. Additionally, our #WorkFromAnywhere platform gives your global employees everything they need to thrive, including Managed Devices, Time & Attendance Tracking, Workforce Monitoring and more. 

Reach out now to see how Outstaffer.com can help you leverage the global talent pool.