EOR vs PEO Differences: What Do They Mean and Which Do I Need?
Erez Greenberg| Mar 10, 2021
- An employer of record (EOR) can employ workers on your behalf in other countries, without needing to open a registered local entity
- A PEO as known in the USA requires you to own a local entity. With a PEO you enter into a co-employee arrangement between your company, your employee and the PEO
- Main purpose of an EOR is to enable a company to hire a worker in an agile, quick manner in a new country
- Main purpose of a PEO is to provide companies with cost-effective HR related services
We often get asked about when US companies should choose to work with Professional Employer Organizations (PEOs) or when their needs might be better met with an Employer of Record (EoR). We’ve noticed some confusion about the terms. Let’s settle the matter once and for all with an overview of how the two options are different and the main use cases for each of them.
|PEO||Global PEO/International PEO|
|Definition||Provides HR services to businesses within the US||Provides HR services on a global scale|
|Services||Payroll processing, benefits, and compliance with US labor laws and regulations||Global payroll services, benefits, and compliance with local laws and regulations in different countries.|
|Benefits||Offers US local competitive benefits packages||Offers global benefits, from different insurance companies and compliance policies|
|Employee Management||In charge of the administrative HR tasks of the worker.||The global PEO acts as the employer of record and handles the legal employer, while the client manages the worker’s professional tasks.|
|Legal compliance||Limited services regarding legal compliance issues||Offers full legal compliance service and risk management, in different countries|
What is a PEO?
In the US, a PEO arrangement is used when a company wants to outsource certain employee management responsibilities, which usually come under the remit of human resources. Your company will utilize a service provider arrangement, and effectively outsource tasks such as payroll, compensation, benefits, and risk management to the PEO. More robust offerings could include learning and development responsibilities such as training, too.
In many cases, this is done through what’s known as a co-employment arrangement, and also known as joint employment. This means that the service provider will be the co-employer for your own staff, taking on tax and benefits management. On a day-to-day basis, you will still be responsible for the employees, assigning tasks, and managing the workload.
On the PEO’s side, the reason why this works is that they can offer competitive rates for benefits such as health insurance, training, or compensation, by treating all of their employees across all of their clients as a single bundle to benefit from economies of scale and bulk discounts.
Note that co-employment only exists inside the United States, and in some countries such as France, is actually illegal, considered as working for two employers at the same time.
Are There Other Names for this Arrangement?
In the US, you may hear about the same kind of relationship through an Administrative Services Organization (ASO). In other countries, similar agreements can be made through organizations that go by other names. Examples include Umbrella companies, and Pass-through Agencies, who tend to work with independent contractors enabling them to compliantly manage their tax and insurance requirements.
In some niche cases, Financial Intermediaries can also utilize a similar PEO-type relationship, when a process needs to be put in place for high-risk workers where no entity is the natural employer, such as at-home carers who work on behalf of the government, or financial advisors for enterprise businesses.
When is a PEO Right for my Organization?
According to recent studies, “small businesses that use PEOs grow 7 to 9% faster, have 10 to 14% lower employee turnover, and are 50% less likely to go out of business.” This is likely to be down to a combination of less operational hassle, more time to focus on core values, and avoiding the costs of global workforce management.
However, it’s important to recognize that using a PEO as a service provider is a local solution inside the United States only, and does not remove the need for you to have your own entity within the countries in which your employees are working. You hold any liability related to the employment over your staff, including keeping to their employment contract and any other legal responsibilities, and you’ll need business registration in every country in which you operate.
What is an EoR?
An employer of record (EoR) has some similarities to PEO, but is less about the benefits of simply outsourcing HR tasks, and more about the focus on expanding into a new international location. If your company is looking to onboard employees in a new location where you do not have an entity, EoR (also known as Global PEO outside the US) allows you to do that compliantly by outsourcing their employment to a local in-country partner in that region. Another name you may hear for this service is Global Employment Outsourcing (GEO).
With an EoR relationship, your company won’t need to open a foreign entity or subsidiary, saving a lot of the initial resources involved in setting up a new team abroad with regards to both time and money.
Use cases include:
Candidate in a new location: Hiring for the best talent can mean being prepared to hire anywhere in the world, but this can be hard to do compliantly and can be expensive if you only want to hire a single candidate.
Testing out a new area for global expansion: The costs of setting up an entity (and closing one down, too) can be prohibitive, especially if you aren’t sure that a new location is going to be a good fit. Looking for a new sales manager to check our growth potential in the UK? Use a Global PEO such as a UK professional employment organization and bypass the months it can take to register and set up a local entity
Getting started quickly in a hypergrowth environment: In a fast-moving start-up, you may lose business opportunities if you need to wait months to set up a legal entity in a new location, EORs can help start-ups scale quickly.
In all of these use cases and more, a PEO or an EoR can help you hit the ground running. Both PEO and EoR providers take on certain roles usually associated with HR, including payroll and employment benefits while you continue the day-to-day management of your overseas teams. The fundamental difference is that in the US, to use a PEO you still need a local registered entity, unlike with an EoR.
The Papaya Advantage
At Papaya Global, we are a single end-to-end platform for global workforce management, helping you to streamline and optimize your local HR responsibilities such as payroll and tax management, as well as compliantly and quickly expand into new geographies with the help of in-country partners, as part of an international strategy for expansion and growth.
Ready to talk about your unique organizational context? Schedule a call.