When you’re building a team for your business, you may need to think about how you’ll approach human resource services. Hiring in-house HR is one way to go about it, but you have options for outsourcing admin tasks through a professional employer organization or employer of record. The right option for you largely depends on your growth plans for your business.
What is a professional employer organization (PEO)?
A PEO, or professional employer organization, is a company that provides HR services for another business. Small to medium-sized companies typically use PEO services, which work best when the company already has a legal entity in its target country and wants to outsource HR functions. These functions may include:
- Tax filings
- Benefits administration
- Employment law compliance
- Hiring, termination, and risk management services
When you sign a contract with a PEO, it acts as your co-employer and shares legal liabilities with you. To pay for its services, PEOs may either charge your company a percentage of your total payroll or charge a flat monthly fee for each employee. The cost—and the services the PEO handles for you—can vary with each company.
Contracting with a PEO can potentially help:
- Streamline HR services.
- Allow you and your team to focus on core, internal tasks.
- Save money with less employee turnover and lower hiring expenses.
What is an employer of record (EOR)?
An EOR, or employer of record, acts as your employees’ full legal employer in locations where your business doesn’t currently have a presence. Companies that want to hire workers in another country—but don’t want to set up a local entity there—typically use this option.
Under this arrangement, your employees legally work for the EOR instead of your company. The EOR assumes all liability in employee affairs and handles many of your HR functions, such as payroll, workers’ comp, benefits administration, tax filing, compliance, and timekeeping. But you (as the parent company) hold decision-making power regarding worker compensation, projects, workload, and general day-to-day operations.
Like with a PEO, the EOR can either charge you a flat fee for each employee per month or a percentage of your total employee compensation.
Working with an EOR comes with the same benefits of contracting a PEO, but it can also help you:
- Hire employees or contract workers in a country where you haven’t established a local legal entity.
- Ensure compliance with local labor laws and regulations.
- Reduce costs and liability risks.
PEO vs. EOR: Key differences
PEOs and EORs offer many of the same services, but some key differences set them apart:
A PEO acts as your co-employer where you can outsource your HR duties. Because the PEO shares liabilities with you, it can help manage your risks and ensure your workplace is safe. An EOR, on the other hand, assumes full legal responsibility for your team. Both setups allow you to maintain control over day-to-day operations.
A PEO may offer greater value to companies with more full-time employees rather than temporary or contract workers. PEOs may also require a minimum number of employees in order to offer its services. EORs are a good fit for companies that need the flexibility of hiring contract workers or employees in other countries. EORs are also less likely to have employee minimums, so you may be able to hire just one employee in a region.
Both types of organizations can handle HR tasks like payroll, benefits administration, and workers’ compensation dues. And because EORs and PEOs are typically large companies, they can use their size to access better insurance plans and negotiate lower premiums.
However, because EORs specialize in global workforce management, they can also help with legal advice for local labor laws, arranging work visas, and supporting employees when they need to communicate with government authorities.
A PEO offers HR services in locations where you already have a legal entity. An EOR can hire workers in multiple states or countries where you aren’t formally established and knows the hiring practices and laws in those areas.
PEOs and EORs have similar payment structures: You may either pay a flat fee per employee per month, or a simple percentage of monthly payroll. PEOs may also charge one-time fees to set up services.
An EOR may cost less than a PEO in the long run because it covers insurance plans and benefits for your workforce, which saves you money and time.
Here’s a breakdown of how the two types of organizations compare and differ:
|Co-employer; shares responsibilities and liabilities with your business
|Full legal employer; takes full legal responsibilities and liabilities
|Typically works best for companies with mostly local, full-time employees
|Typically a good fit for companies that hire employees abroad or contract and temporary workers
|Provides HR services where you already have an entity
|Hires and manages employees where you don’t have an entity
|Typically cheaper than an EOR
|Often cheaper than setting up a local entity
PEO vs. EOR: How to choose
PEOs are generally best for small to medium-sized businesses that operate in one region. A PEO may be a good choice for your business if you:
- Have already established a legal entity in the target region or country.
- Have the time and expertise to manage legal compliance issues.
- Are planning to hire a large number of employees for the long term.
EORs are typically a good choice for larger companies that want to hire globally and manage employees across borders. Consider using an EOR if you:
- Want to expand into new international markets or hire remote teams in other countries without establishing a local legal entity.
- Don’t already have a legal entity in the target country.
- Don’t want to shoulder the legal responsibility for employees.
- Are planning to hire temporary or contractor-based roles for shorter-term projects.