EOR

EOR vs PEO Differences: What Do They Mean and Which Do I Need?

Table of contents

Key Takeaways

  1. An employer of record (EOR) can employ workers on your behalf in other countries, without needing to open a registered local entity
  2. 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
  3. Main purpose of an EOR is to enable a company to hire a worker in an agile, quick manner in a new country
  4. Main purpose of a PEO is to provide companies with cost-effective HR related services

We often get asked about the differences between EORs and PEOs. US companies, especially, find themselves unsure whether to work with an EOR or a PEO.
In this blog post, we’re putting an end to the confusion. Keep reading to learn about the exact components, differences, and use cases of both PEOs and EORs.

First of all, what is a PEO?

A Professional Employer Organization (PEO) is a business that handles another company’s HR operations through what’s called a co-employment arrangement—also known as joint employment. In this case, both the company and the PEO share employment responsibilities.

PEOs are specific to the US, and generally take over tasks like payroll, compensation, employee benefits, and risk management. More robust offerings could include learning and development responsibilities such as training, too.

Note: co-employment only exists inside the United States. In some countries, such as France, it’s actually illegal, and is considered working for two employers at the same time.

Second, what is an EOR?

While an EOR may have similarities to a PEO, its purpose differs significantly. An employer of record, also sometimes referred to as a global PEO, focuses on enabling expansion into new international locations.

If your company is looking to onboard employees in a new location where you do not have an entity, an EOR service allows you to do so compliantly. Additionally, since an EOR acts as a legal employer, you’re not required to open a foreign entity or subsidiary, saving both time and money.

The main differences between EORs and PEOs

While PEOs and EORs are both outsourcing solutions for HR and payroll processes and functions, they have some important differences. These can be boiled down to structure, risk, scale, and scope

Structure

EOR and PEO arrangements have important structural distinctions – specifically when it comes to employment responsibility.
A PEO operates through a co-employment relationship. In this case, both the PEO and the EOR share employment responsibilities.

EORs, meanwhile, are third-party entities and take complete responsibility over employees, while the client company is left to manage day-to-day operations.

Risk

In a PEO arrangement, both the client company and the PEO are liable regarding employment matters – whether it’s to do with compensation claims or compliance mishaps.
Meanwhile, in an EOR partnership, the employer of record acts as the legal employer and takes on the bulk of legal liability, leaving the client company less exposed to these types of risks.

Scale

Generally, PEOs are used by US-based SMBs to manage HR processes and avoid the additional costs and expenses of managing them themselves. EORs on the other hand, are used by businesses of all sizes, including enterprises, to explore and grow across new markets, without the need of opening a local entity.

Scope

PEOs tend to offer a wide range of HR support and services – whether onboarding, compliance, or employee benefits. For EORs, the focus is a little different. Rather than just handling HR processes, the EOR acts as the legal employer on behalf of the client company, taking on all aspects of that role – from compliance to taxes. Some employer of record providers may even take over the payment aspect completely.

Cost

The pricing model for PEO differs from the pricing model for an EOR. Factors PEO pricing depend on may include number of employees and the scope of services you’re requesting. In the case of HR of EORs, though, because of the matter of international expansion, pricing becomes more complicated and will likely have to do with the countries you’re expanding into and the specific requirements associated with the relevant regions.

PEO vs EOR – summary table

PEOGlobal PEO/International PEO
DefinitionProvides HR services to businesses within the USProvides HR services on a global scale
ServicesPayroll processing, benefits, and compliance with US labor laws and regulationsGlobal payroll services, benefits, and compliance with local laws and regulations in different countries.
BenefitsOffers US local competitive benefits packagesOffers global benefits, from different insurance companies and compliance policies
Employee ManagementIn 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 complianceLimited services regarding legal compliance issuesOffers full legal compliance service and risk management, in different countries

How to Choose Between a PEO and an EOR: Guiding Questions

Not sure whether to choose an EOR or a PEO for your expansion strategy? Here are some guiding questions to help you make the right decision:

  • Are you planning on hiring domestically or internationally?
    While there are a few exceptions, if your growth plans are only within the US, you will likely want to stick to a PEO, since it’s less costly.
  • Are you hiring full-time employees or contractors?
    Remember those few exceptions we mentioned? Hiring a contractor is one of them.
    If you’re hiring contractors, even within the US, EOR services will likely be more beneficial in helping you manage the compliance portion of your contingent workforce. Of course, not all providers are equipped with this expertise so it’s important to do your research beforehand.
  • How many employees do you want to hire?
    If you have a clear amount of how many international employees to hire, and aren’t planning on expanding overseas PEOs may be your go-to. But if you’re more in a ‘flexible’ mode of hiring – say, onboarding two people in one country and 15 in another, then working with an EOR will likely be more useful for you.
  • 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 a local entity within other countries in which your employees work.

When is an EOR Right for my Organization?

Getting the best talent: You may find the best talent in a country you don’t operate in. An EOr can ease the process of hiring the best person for the job.

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. Using EOR services can be a great way to bypass these obstacles.

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 use cases like these, an EoR can help you hit the ground running.

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.