Today you will learn the difference between a PEO and an EOR, why they matter, and how to choose the best solution for your business.
Let’s begin.
Choosing between a PEO or an EOR can mean all the difference, because they look similar but functionally, they’re completely different.
At their core, PEOs and EORs extend an existing business. They simply enable a business to expand their staff numbers. But they have a few significant differences in certain key areas.
Now, obviously, in a perfect situation you would have the ability to hire any number of staff that you require in any part of the world. Without any red tape or hassle.
Unfortunately, we don't live in an ideal world and there are certain rules and regulations that we must follow to keep our businesses compliant. This is where understanding the difference between an EoR and a PEO becomes important.
Basic Definitions
Ok before we go any further let's look at the basic definitions so that there's no confusion beyond this point.
PEO: Professional Employer Organization
Provides a human resource solution. You co-employ them, and the PEO take care of payroll, H.R. etc. You also share compliance risks if anything goes wrong as you are technically responsible for them.
EOR: Employer of Record
An Employer Of Record is a third-party company that is contracted to deal with payroll, VISAs, taxes, insurance and benefits. They might also deal with onboarding of new staff members.
A Quick Rundown
- An EOR is a cross-border service. They can employ workers for your business across country lines.
- A PEO requires the business owner (you) to have a legal entity in the geographic area you wish to hire staff.
- Both PEOs and EORs handle, HR, onboarding, payroll, benefits & reporting.
- Local labor laws are taken care of with an EOR, with a PEO, you are liable for the legal status of the employee.
- The EOR is the employer of the staff member. They work with you via a service agreement. With a PEO, it’s a co-employment arrangement, the staff member works for you and the PEO.
Things To Be Aware Of
1: Minimum Employee Counts
EORs work with businesses of all sizes because they generally hire skilled talent, which means they can onboard a single employee for your company. They understand international labor laws and work alongside local tax, insurance and benefits legislation daily.
A PEO usually requires a minimum of 5 to 10 employees onboarded because it isn’t worth the PEO taking on single employee contracts, unlike an EOR. They can’t employ cross-border either, so if you need employees in a different country, a PEO is not the way to go. It’s also worth noting that if you engage this many employees, it might be more cost effective to set up an entity in that country, rather than partnering with a PEO.
2: Local Business Registration
This is usually where most businesses decide a PEO is not for them. While the H.R. part of the PEO is remarkably similar to an EOR, the sticky topic of business registration isn’t. If you wish to hire employees across state lines or across country border, you will need to register a legal entity for that business in the area you wish to hire.
An EOR negates this because the EOR will most likely have an established legal entity in that region.
3: The Insurance Problem
The elephant in the room when choosing to work with a PEO is the problem of insurance. An EOR provides general liability insurance and worker’s compensation insurance. PEOs require you to provide your own insurance, whereas an employee that is employed through an EOR comes fully covered.
Damages to property, workplace related illnesses, or injuries are covered by an EOR, whereas as PEO can sometimes find it difficult to get insurance for anything more than basic administrative office work.
Summary:
- If you need staff locally, and you need a lot of them to fill basic roles, a PEO is the better option.
- If you need staff in multiple countries, and the roles are skilled and/or talent based, an EoR is the better option.
If you’re still unsure about which solution is right for you, here are a few questions to get your brain ticking.
How Many Employees Do You Need?
Most PEOs have a minimum head count for onboarding.
Let’s say you own a SaaS business that serves the fintech industry in the U.K. You want to break into the New York market. You want 4 staff members to open a small footprint office in N.Y. to get some traction, boots on the ground.
Well, a PEO can’t help, firstly they would require you to commit to a much larger number of staff. Second, they can’t hire staff in the U.S. Or any other country.
Do You Have A Legal Entity In The Employees Country?
Again, if you want to hire an employee in Germany and you don’t have any presence in that country, a PEO can’t help. The same rule applies to every other country outside of your jurisdiction. An EOR is the best choice.
We understand this can be confusing and technically a bit of a minefield to navigate. But we are on hand to answer your questions. Reach out to us today and we can walk you through the PEO/EOR landscape.
Let our team, build your team.
See also more EOR guides