Last Updated on February 17, 2022 by DMEditor
In an ideal world, companies would have a dedicated HR department that takes care of all the legal, taxes, and practical questions regarding employment. The associated costs and administrative burdens, however, make this a rarity. As a result, many companies seek help in an HR outsourcing service.
Two of the most popular services are Employer of Record (EOR) and Professional Employer Organization (PEO). Both service providers simplify HR policies and reduce costs associated with employee management. However, several important differences between these two service models may influence a company’s decision.
This EOR vs PEO article will compare the two service models, explaining their functions and differences. You’ll also find a complete review of their benefits and drawbacks to help you decide which service model is the right fit for your company.
Table of Contents
- 1 Bottom Line Up Front
- 2 Main Differences Between EOR vs PEO
- 3 What Is an EOR (Employer of Record)?
- 4 Functions of an Employer of Record (EOR)
- 5 Benefits of Hiring an EOR
- 6 Limitations of Employer of Records
- 7 What Is a PEO (Professional Employer Organization)?
- 8 Functional Differences Between an EOR vs PEO
- 9 FAQs
- 10 Conclusion
Bottom Line Up Front
The main difference between an EOR vs PEO is the relationship with the client. An EOR is more of an independent HR services provider, whereas a PEO is a co-employer of the client company. Both companies provide HR administration and legal compliance services.
Main Differences Between EOR vs PEO
The main differences between EOR vs PEO are:
- An EOR allows companies to outsource employees from other states or countries without the need for the client to register in that state or country, whereas for a PEO a company must establish operations to register for licenses in a state or country it intends to recruit
- An EOR is solely liable for any mistakes done by employees, whereas a PEO is a co-employer so the company also shares legal liability for mistakes done by employees
- EORs offer companies a full suite of employee benefits and insurance programs, whereas PEOs offer only selective benefits
- EORs have complete control of the hiring process and provide all the onsite HR-related services, whereas a PEO gives you some level of control and final decision-making
- EORs don’t have a minimum employee requirement, whereas PEOs require client companies to have at least 10 employees
What Is an EOR (Employer of Record)?
An employer of record is an entity that acts as the official employer of a company’s employees. In other words, an employer of record is the functional equivalent of a company as far as employment law and taxes go. It has all the responsibilities associated with an employer, such as hiring and firing, providing benefits, managing payroll, and taking on the liabilities for required payments such as state unemployment insurance.
In today’s global market, the employer of record also serves as a shield between businesses and employees. It allows firms to hire people from other countries without having to adhere to the regulations of that country. This feature enables enterprises to operate in multiple nations, each with different laws and regulations.
Functions of an Employer of Record (EOR)
Below are some of the significant roles and responsibilities of an employer of record.
- It ensures compliance with local, state, and federal employment laws
- It manages all employment-related information through one central hub
- It hires and pays employees as well as bills to the government on behalf of employers
- It handles workers’ compensation
- It collects and processes timesheets
- It issues W-2 forms
- In charge of terminating employment
- It provides unemployment insurance coverage for the company’s employees
- Controls all tax, filing, liabilities, and payments
- Carry out payroll and human resource-related tasks for employers
Benefits of Hiring an EOR
In today’s global economy, hiring an employer of record is one of the most reliable ways to comply with local, state, and federal employment laws. A dedicated HR service provider makes it easy for companies to adhere to their jurisdictional requirements.
It allows businesses to recruit people from other countries without worrying about complex immigration or employee transfer rules. Below are additional benefits of hiring an employer of record to serve as the functional equivalent of a company.
59% of companies outsource to save costs. The costs of managing payroll, employee benefits, and other HR-related tasks can be high. However, because an employer of record employs and pays these individuals as its own, a company can potentially save money on HR-related expenses.
By offloading the work of compliance on an outside agency, a company can avoid potential legal and reputational risks. Should the government find out that a business does not comply with employment laws, it can levy hefty fines. On the other hand, if a company is not compliant with local and state rules, it could lose customers and hurt its reputation.
Streamlines global expansion
Offloading HR functions onto an HR service provider simplifies international expansion. Hiring a company to manage these responsibilities makes it easy to expand into multiple countries without worrying about complex immigration and foreign employee transfer laws.
Less time spent on administrative tasks
Employees can devote more time to perform core business operations with an outside agency taking care of the HR-related functions.
The people an employer of record hires are their direct responsibility, meaning they work for it and not its clients or customers. Therefore, companies benefit by hiring people committed to working on their behalf instead of those who don’t care about their employer’s goals and objectives.
Limitations of Employer of Records
While hiring through an employer of record can significantly streamline and reduce administrative tasks, there are limitations to this model.
Loss of control
The ability to hire, manage, and terminate employees are significant aspects of HR responsibilities. When an employer offloads these tasks onto an external agency, it loses some control over the management and termination of its workforce.
External influence on company culture
The external agency acts as the employer, shaping and forming a company’s culture. A company may not like this since its own people and processes influence how it works and affects its business goals and objectives.
Potential loss of information
Although an employer of record is committed to providing the best possible service, there are limitations. For example, should it go out of business or lose employees with key knowledge and experience, a company’s data might become inaccessible.
Atrophy of HR
The company no longer manages its HR department or staff when working with an employer of record. Employers often focus on core business operations while delegating administrative functions to agencies specializing in these services. As a result, there is less investment by management into training and developing their internal people.
What Is a PEO (Professional Employer Organization)?
A professional employer organization (PEO) is an external agency that contracts with an employer to provide human resources (HR) services such as recruiting and hiring, payroll, benefits administration, and risk management. They serve as professional employers for their clients, ensuring compliance with local and federal employment laws.
Depending on the type of contract and services it provides, a PEO can either offer all HR functions or focus on specific ones like payroll, benefits, or employee training. Generally, larger companies prefer PEOs to handle more HR-related tasks, while smaller companies may outsource particular functions.
Functions of a Professional Employer Organization (PEO)
Typically, PEOs provide many of the same services as traditional employers. These include:
- Handle comprehensive HR-related tasks
- Reduce liability associated with wage payment, taxes, insurance premiums, and other benefits
- Assist companies with the hiring process
- Provide employee relations services
- Handle compensation services
- Terminate employment
- Drug testing
- Perform background checks
- Provide training and professional development
- Handle payroll processes
Benefits of Hiring a PEO
About 173,000 small and mid-sized businesses work, with PEOs employing more than 4 million people. The essence of the PEO model is to provide high-quality HR-related services that free up clients’ time to focus on running their business.
PEOs offer the following benefits:
- Reduced liability: PEOs handle legal compliance and share responsibility for negligent acts committed by employees. It helps reduce a company’s exposure to lawsuits and liability claims.
- Compliance: PEOs assist in hiring and managing employees and help to ensure that all policies and procedures are adhered to by the workforce. They provide HR-related compliance training for employees, managers, and executives.
- Reduced HR overhead costs: Since PEOs typically take on many HR-related tasks, employers can reduce costs associated with these activities. An employer can save about 54% of internal HR salaries and benefits.
- Reduces turnover rates: A study by the National Association of Professional Employer Organization (NAPEO) found that businesses that used PEOs had lower turnover rates of 28%—32% compared to the overall employee turnover rate in the USA, which stands at 42%.
- Saves time: PEOs provide various HR-related services, allowing employers to concentrate on their core business operations. Since most tasks are automated, employers save significant time and effort.
Limitations of Hiring a PEO
Below are some of the limitations of hiring a PEO;
- You are still responsible: A PEO is a co-employer of the clients it serves. For any mistakes committed by the PEO, both the client and the agency are liable.
- Loss of control: Critical business processes may be out of your control. You may have to abide by the PEO’s policies and procedures, even if it means sacrificing business goals. Also, you lose some control over the hiring process.
- Cultural influence: PEOs are responsible for the day-to-day operations of their clients, including strategy making. Consequently, they can influence your business practices regarding HR strategies and other critical decision-making processes.
- Additional fees: Hiring a PEO means additional HR-related services and costs, including a monthly payment fee, an annual price negotiation session, and a termination fee.
- Pricing is subjective: Sometimes negotiable, the price varies from one PEO to another, making it difficult to establish a fair price.
Functional Differences Between an EOR vs PEO
Despite many similarities, there are critical functional differences between an EOR and a PEO.
1. Client’s Liability
EORs are legal businesses with complete control over their operations. When customers hire an EOR, they are essentially hiring a separate company to handle their labor and processing needs. In this situation, if the EOR makes a mistake, only that firm is held responsible for any wrongdoing or negligence.
In contrast, a PEO is a co-employer of the clients it serves. A PEO is an extension of the client’s business. For any mistakes made by the PEO, both the client and the agency are held liable for their actions.
2. Business Registration
EORs are employers of the people who work for your company. They establish a base of operations, register for business licenses, and are registered as employers. As such, you don’t need to register a business in a particular state or comply with their state laws.
PEOs are essentially co-employers of the businesses they serve. For this reason, a client must register a company acquire licenses and permits for the state or area they intend to hire employees.
3. International Compliance and Legal Responsibility
When using a PEO, you must comply with all the legal requirements imposed by the country, state, and city where you plan to hire employees. In addition, a PEO cannot provide HR-related services to clients within specific countries or regions.
However, when using an EOR, your business is not bound by any international laws. The EOR registers itself as a company and does all the hiring and processing within that country or region. You don’t have to worry about locating and hiring an EOR in a particular country or region, as they work for you regardless of where they’re located.
4. Employee Benefits and Insurance
EORs offer employees superior benefits and insurance programs because they are exclusively responsible for managing their core business functions. Some come with a full suite of employee benefits, while others offer a select few. In addition to health insurance and other standard options, EORs can develop international benefits plan compliant with local laws and regulations.
PEOs may offer some employee benefits and insurance programs, but it’s not their primary responsibility. As co-employers of the clients, companies may be on the hook to provide benefits and employment insurance. Some PEOs rarely cover worker compensations, while others may include it in the agreement.
5. Hiring and Onboarding
EORs hire, measure performance, and deliver termination notices. In addition to the standard recruiting process, they can offer clients a more internationally responsive service by hiring employees from a specific country or region.
PEOs perform similar tasks as EORs, including hiring and firing. However, most PEOs do not support international employment and do not hire employees based on geographical location. Instead, the PEO goals are to maintain benefits compliance, perform direct payroll services for clients, handle HR accounting tasks, and provide legal assistance.
6. Employee Classification
The employee relationship service arrangement with a PEO can allow other third-party service providers to provide HR-related services. For example, a recruitment agency may be hired to deliver HR-related services in addition to hiring employees.
EORs have complete control over the hiring process and provide all the onsite HR-related services. Full administration and liability for EORs allow them to perform all hiring-related tasks from start to finish. They provide the kind of work environment that employees expect and a sense of security and stability.
Answer: PEO and EOR are not the same. PEO is a co-employer to a company and provides HR-related services. An EOR is an independent employer responsible for registering, hiring employees, and performing standard HR-related tasks.
Answer: A PEO is not necessarily an employer of record; however, they can serve as one depending on the contract terms. The PEO credentials include providing direct payroll services and offering a range of HR-related solutions. In most cases, an employer of the record serves as the employer essentially for tax purposes.
Answer: ADP provides EOR services for clients seeking to hire employees in specific countries. Through ADP TotalSource, companies can hire employees in the U.S., Canada, and Puerto Rico without registering within those countries.
Answer: EOR is a company that hires employees and performs HR-related tasks on behalf of other companies. It’s a business model where clients can access HR solutions without registering in specific countries or regions.
Understanding the difference between EOR vs. PEO will help employers with their business goals and regional requirements. An EOR is more suitable for international-related businesses, whereas PEOs are better suited to domestic companies.
When choosing between an EOR and PEO, consider your company’s international employment needs as well as the services you require. In addition to standard HR-related services, some EORs offer a full suite of employee benefits and insurance programs.