PEO vs EOR | Difference Between PEO and EOR

PEO and EOR furnish essential solutions for the efficient administration of distributed employees, however, they function distinctively. This article explains what PEO and EOR are, the difference between them, and how to decide when availing services between the two.

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What Is a PEO?

A PEO is affiliated with small and medium-sized organizations to serve complete human resource solutions. These services include Tax filings, Regulatory compliance Payroll processing, and administration benefits. PEOs become a company’s outsourced human resources department letting in-house staff thin on operational endeavors. This means that while a PEO manages most of the administrative responsibilities that come with managing a company’s human resources, your company remains the official employer of the employees.

What this means is that, although the PEO assumes the responsibility for the various HR-related functions, your business retains the legal and operational liability for the registration of your company in the various places where talent is hired from.

Also read: Benefits of PEO

What Is an EOR?

An EOR is also referred to as a global PEO and is an organization that takes full responsibility for occupying employer liabilities for firms that have no physical offices or employees in certain countries. In theory, an EOR is the contractor of record for your employees which means that legally your workers are employed by the EOR.

However, it’s recommended to keep the working relationship with your employees rather close as it was before signing a contract with an EOR.

EORs manage comprehensive HR-related tasks, such as:

• Locality-specific onboarding
• Payroll
• Taxes
• Payroll compliance
• Benefits administration
• Unemployment claim reporting

An EOR allows organizations to employ the best talents in any location within the shortest time possible without having a legal entity office within that place. In this approach, it is comforting to know that legal compliance and HR matters are well in the hands of professionals and this frees your team to work on the core business functions.

The Key Difference Between PEO and EOR

Even though EORs and PEOs engage in the administration of human resource functions, there are distinctions between them. Here are five key differences:

1. Structure

• PEO: PEO is a co-employer, they take charge of managing the human resources of your business organization. If your business hires a PEO, they become the visible employer and accountability of all PEO-managed HR functions still returns to your business.
• EOR: An EOR is the third party that administers your distributed workforce in places where you do not have an affiliate. In return for choosing EOR, some of the control over the specific decisions in the sphere of HR is being given up, but, in exchange, you gain access to high-quality benefits and local knowledge.

2. Risk

• PEO: Co-employment leads to employment risks such as workplace safety since your organization is also considered an employer. However, as is the case with all contracts with a PEO, while they can assist with these risks, they do not bear full liability for them.
• EOR: An EOR can be referred to as the legal employer and takes all the employment responsibilities inclusive of risk and liability for the services that it offers.

3. Scale

• PEO: PEOs probably derive higher value from organizations that have many full-time workers rather than temporary ones. Such plans sometimes mandate that they be short-staffed so that they can be afforded certain benefit packages.
• EOR: To the companies that require temporary employees, EORs provide more flexibility as compared to staffing companies locally. Unlike ordinary organizations, EORs do not have a specified minimum number of employees and that makes it possible for a country to hire an employee.

4. Scope

• PEO: Actually, a PEO only offers HR services in the areas where your business already has an establishment. However, it is important to remember that your company cannot completely leave compliance with local labor laws to the local partners.
• EOR: An EOR is well-versed in hiring practices and legalities of each state or country, thus, reducing legal risks in cross-state or cross-country expansion.

5. Cost

• PEO Like most service-based businesses, both PEOs and EORs organize their rates with additional initial costs for services plus a monthly rate based on the number of employees or a percentage of payroll. PEOs may also charge PEO clients an initial setup fee. Nevertheless, it is worth mentioning that insurance and benefits are still the employer’s responsibility in cooperation with the PEO, which, therefore, can lead to higher costs in the long-term perspective.
• EOR: In general, EORs are more affordable in the long run because they manage insurance and benefits for your distributed team, which reduces your business’s expenses and resources.

Choosing the Right Solution for Your Business

Businesses need to understand the differences between an EOR and a PEO to decide effectively and specifically upon availing services. Here are three factors to consider:

•  Workforce Size: One challenge that small businesses and startups face while scaling is the high cost of doing it especially when this is initiated through the opening of other branches. This is perfect for a business that intends to open a new subsidiary in another state or country since a PEO can handle the HR issues in that region but is not integrated into the company’s structure. On the other hand, if the need arises to hire in several countries instantly, an EOR will speed up the hiring process and handle compliance with labor laws thus, enabling quick hiring without having to form new legal entities.

• Company Footprint: In case you have little or no ownership of elements in the regions where you plan to recruit, creating new ones tends to be costly and time-consuming. An EOR can function as a legal employer on your behalf, and establish a compliant employment model, thus, opening new markets for you without a huge capital investment. If you already have or intend to create an entity in a new location, a local PEO can handle the HR services, thus enabling you to concentrate on your business.

 Compliance and Complexity

Recruiting and selecting talent from other countries is quite a challenge because one is exposed to new legal frameworks of the host country. If managers fail to embrace diversity in their organizational practices, their organizations face regulatory problems, hefty penalties, and personnel talent wastage. EOR also has knowledge of the laws in all the regions hence there is a reduction in legal issues and companies remain on the right side of the law in every country they are operating.

Also read: A Comprehensive Guide on Co-Employment

Thus, analyzing factors such as labor force, the scope of your company’s operation, and legal regulation is the key to choosing the optimal solution. Each type of employer of record, whether a PEO or an EOR, has its benefits that will assist your business in a global environment. From the list, choose the one which best fits the strategic needs and plans of growth in your company.

This selection process depends on the needs that your organization has at a certain period or the achievement of certain objectives. PEOs are good for companies that would like to have a higher degree of control over HR choices and the creation of new establishments. It provides useful cooperation for the company to complete the human resource management and guarantee compliance in the regions your business is established. 

On the other hand, EORs operate as an efficient option if the company intends to source talent and establish a presence in several countries without establishing branches or subsidiaries. It covers all the responsibilities of the employers, thus giving you confidence and allowing your personnel to center their efforts on certain operations.

FAQs

What Is the Main Difference Between a PEO and an EOR?

The main difference is to be found within the sphere of employment. A PEO works in conjunction with your business to be responsible for a share of the human resources tasks; however, your business remains the employer of record. While an IC controls how workers perform their tasks, an EOR is the legal employer of your workforce in areas you have no entity.

Which Is More Cost-effective: PEO or EOR?

In any case, since EORs are financially more efficient for your distributed workforce, as they are responsible for insurance and benefits for your employees, so you avoid spending your organization’s time and money on it. As for disadvantages, PEOs might possess higher costs in the long run because your organization’s responsibility for insurance and benefits remains.

Can a PEO Help With International Hiring?

While PEOs are likely to operate where your business already has an entity, they are less suited for international hiring in comparison to an EOR that is designed for managing dispersed employees of different countries without the need for developing local entities.

How Do PEOs and EORs Handle Compliance?

Regarding compliance, PEOs assist in legal compliance in areas where your business is established though your firm has full accountability to local laws on labor. First, EORs are liable for the process of compliance in all places, being responsible for the observance of employment laws and regulations of the given country.

Which Is Better for a Small Startup: PEO or EOR?

EOR service is typically more suitable for small startups because it lets the company quickly and legally hire overseas talent without the necessity to register a subsidiary in the given country. Such flexibility is useful for a startup company especially when it wants to grow big but has little capital to invest in overheads.