Employer of Record vs PEO: What’s the Difference?

Both the Employer of Record (EOR) and the Professional Employer Organization (PEO) offer HR services but differ significantly in their structures, legal responsibilities, and service scope.

In this guide, we’ll examine the key differences between Employer of Record and PEO to determine which might be the best fit for your business needs.

Understanding the Professional Employer Organization (PEO)

A Professional Employer Organization (PEO) is a firm that provides comprehensive HR services to client companies. In a PEO arrangement, the PEO becomes the co-employer of the client company’s employees.

This means that the PEO shares employer responsibilities and liabilities with the client, including payroll processing, benefits administration, HR management, and compliance support.

PEOs typically establish a co-employment relationship with client companies. This setup enables businesses to leverage the PEO’s expertise and infrastructure while retaining control over day-to-day operations.

What Collaborating with a PEO Offers

Here are the benefits of using the services of a PEO:

Cost-effectiveness

PEOs provide cost-saving solutions for businesses by reducing employee turnover, eliminating the need for an in-house HR team, and avoiding expensive legal oversights.

Comprehensive HR services

Professional Employer Organizations (PEOs) offer a wide range of services that include managing payroll processing, administering employee benefits, and providing assistance with compliance-related matters.

Effective risk management

PEOs assist businesses in navigating workplace risks, including matters related to workers’ compensation and employee safety.

Enhanced employee benefits

Partnering with a PEO can provide businesses access to better insurance and benefits packages, which can help them attract and retain high-quality talent as they expand their workforce.

Nevertheless, it’s essential to recognize that working with a PEO has its limitations, particularly concerning the hiring of employees in regions where the business lacks a pre-existing legal entity.

What types of businesses can benefit from PEO services?

Small and medium-sized enterprises (SMEs) are often prime candidates for partnering with a PEO service.

Frequently, these businesses encounter constraints in resources and find it financially unfeasible to establish a dedicated HR department.

Exploring the Employer of Record (EOR)

On the other hand, an Employer of Record (EOR) is a third-party entity that assumes the role of the legal employer for a client company’s employees.

Unlike a PEO, an EOR takes full legal responsibility for employment-related matters, including payroll management, benefits administration, and regulatory compliance.

Employers of Record manage all aspects of the employment relationship, from hiring to termination, while the client company retains control over the day-to-day operations and management of employees.

This allows businesses to expand globally, hire talent internationally, and manage a global team without the complexities of establishing their own legal entities in foreign jurisdictions.

What Collaborating with an EOR Offers

Here’s an expanded description of the typical services provided by an Employer of Record (EOR):

Managing employee benefits

EORs oversee the administration of employee benefit programs, including health insurance, retirement plans, and other perks. They ensure that employees receive the benefits they are entitled to and handle any related inquiries or issues.

Processing payroll

EORs handle all aspects of payroll processing, including calculating wages, withholding taxes, and distributing paychecks or direct deposits to employees. They ensure accuracy and timeliness in payroll disbursement, relieving businesses of this time-consuming task.

Ensuring compliance with regulations

EORs stay abreast of ever-changing employment laws and regulations, both locally and internationally. They ensure that businesses remain compliant with all relevant laws regarding employment, taxation, and labor practices.

Supplying legally compliant employment contracts

EORs provide legally sound employment contracts that outline the terms and conditions of employment for each hired individual. These contracts protect both the employer and the employee by clearly defining rights, responsibilities, and expectations.

Administrative support

EORs offer administrative support to businesses and their employees, handling tasks such as record-keeping, document management, and correspondence. This support streamlines operations and ensures efficiency in day-to-day administrative tasks.

Serving as the legal employer for new hires

EORs act as the official employer for newly hired individuals, assuming legal responsibility for employment-related matters such as taxes, insurance, and regulatory compliance.

This arrangement allows businesses to expand their workforce without establishing a legal entity in every jurisdiction.

Facilitating visa and work permit arrangements

For international hires, EORs facilitate the visa and work permit process, ensuring that employees have the necessary legal authorization to work in their designated location.

They handle the paperwork, liaise with immigration authorities, and expedite the process to minimize delays

Key Differences Between Employer of Record and PEO

While EOR and PEO share many similarities, they have some key differences. Here’s a brief overview of these differences:

Need for a Local Legal Entity:

• PEO: A PEO service necessitates the client business to have its local legal entity.
• EOR: An EOR enables organizations to hire employees in new locations without establishing a local legal entity. Employment is registered under the EOR provider’s legal entity.

Scope of HR Functions:

• PEO: Handles a range of HR tasks, including payroll processing, benefits administration, and compliance support.
• EOR: Focuses on managing the entire employment relationship, from hiring to termination, while handling all legal and administrative tasks.

Employment Relationship:

• PEO: Establishes a co-employment relationship with client companies.
• EOR: Acts as the sole legal employer for the client company’s employees.

Choosing the Right Solution for Your Business

When deciding between an Employer of Record and a Professional Employer Organization, it’s essential to consider your specific business needs, budget constraints, and long-term growth objectives.

While both can handle similar HR-related tasks required by your business, including payroll and benefits management, the key differences in legal obligations, scope of services, and cost structure can significantly impact your decision.

However, it’s crucial to note that your EOR always assumes the role of the local employer for your workforce on official documents. When expanding your team into new countries, having a comprehensive EOR partner to manage these critical processes alongside compliance issues can significantly simplify your operations.

Ultimately, whether you opt for an Employer of Record or a PEO, partnering with a reputable HR service provider can streamline your HR functions, mitigate compliance risks, and allow you to focus on driving business success.

FAQs

Here are some of the most frequently asked questions relating to the common solutions for employment outsourcing.

What is the difference between a PEO and an EOR?

The crucial difference between a PEO and an EOR lies in the legal structure. While both provide HR services to manage employees like payroll and benefits administration, a PEO requires the business to have its own legal entity, whereas an EOR does not. With a PEO, there’s a co-employment arrangement with your local entity, whereas an EOR acts as the legal employer directly.

What is the difference between ASO and PEO?

ASO (Administrative Services Organizations) and PEO (Professional Employer Organizations) both provide HR services, but the key difference is in the employment relationship.

ASOs offer HR support without taking on the role of the employer, whereas PEOs become the employer of record, assuming legal responsibilities for employees.

What is the difference between HRO and PEO?

HRO (Human Resources Outsourcing) and PEO (Professional Employer Organization) both involve outsourcing HR functions, but they differ in scope. HRO focuses on specific HR tasks, while PEO offers a comprehensive package, including assuming legal responsibilities for employees and co-employment relationships.

Does the EOR act as the legal employer for the workers they hire on behalf of the client?

Yes, the EOR acts as the legal employer for the workers they hire on behalf of the client. They handle employment contracts, ensure compliance with local labor laws, and legal liabilities for full-time employees, temporary, or contract workers.

 

FMC Group offers Employer of Record services in 40+ countries. Do not hesitate to reach out to us if you have any questions.