A professional employer organization (PEO) is an external partner that helps companies co-manage HR functions like payroll, benefits, and compliance. A PEO handles all the HR and administrative tasks while the company retains legal employment responsibilities, giving the company a cost-effective way to manage its employees.
An Employer of Record (EOR) is a third-party service that legally employs workers on behalf of the company. The EOR also takes responsibility for administrative tasks like payroll, tax compliance, employee benefits, and following local labor laws. EORs help manage an organization’s employment sector efficiently and at a low cost.
The pros of using a PEO include affordable employee benefits, reduced administrative costs, HR compliance support, lower risks, and efficient hiring and training.
The cons of using a PEO include bundled services, limited access to HR, data privacy risks, compatibility issues, and high costs for small businesses.
The pros of using an EOR include access to global talent, mitigation of legal risks, simplified HR management, cost-efficiency, and company flexibility.
The cons of using an EOR include higher expenses, cultural misalignment, limited control, poor digital compliance, and inconsistent employee benefits.
PEOs are ideal for businesses with an established legal entity that seeks HR and employee management support. EORs suit companies aiming to expand quickly into new markets without setting up operations.
What is a PEO?
A professional employer organization (PEO) is an external company that provides efficient HR solutions to businesses by forming a co-employment relationship. The PEO abbreviation refers to an entity that shares HR responsibilities with its client companies, allowing businesses to focus on core operations. PEO services are commonly used by small to medium-sized companies that want to outsource their HR functions.
The structure of PEO allows the PEO to become the employer of record for the business and also handles tax and compliance tasks, while the company itself retains its control over daily business operations. The PEO acts as your co-employer and shares legal liabilities with you. PEOs can either charge a percentage of your total revenue or set a flat monthly fee per employee.
The services of a PEO include payroll management, employee benefits, tax filing, law compliance, employee hiring, and risk management.
How much does a PEO cost?
PEO costs depend on the pricing model used as PEOs can either charge a percentage of your total revenue or set a flat monthly fee per employee. The percentage of revenue can range from 2% to 12% and the flat monthly rate can range from $50 to $150 per employee, depending on the services.
What are the pros of using a PEO?
The pros of using a PEO include affordable employee benefits, reduced administrative costs, HR compliance support, lower risks, and efficient hiring and training.
These pros are described below.
- Affordable Employee Benefits: Affordable employee benefits are offered by PEOs including health insurance and retirement plans. This is done by pooling employees across multiple companies to secure group rates.
- Reduced Administrative Costs: Reduced administrative costs mean that by outsourcing payroll, benefits, and HR compliance, businesses can save a significant amount of money on hiring in-house HR teams and reduce time spent on administrative tasks.
- HR Compliance Support: HR compliance support means that PEOs help your business comply with local administrative and employment laws, reducing the risks of fines and legal issues.
- Lower Risks: Lower risks mean PEOs ensure that the work environment is properly managed and the safety, compensation claims, and unemployment insurance of the workers is kept so the employees stay loyal to the company and all operations are successful, reducing the risk of loss.
- Efficient Hiring and Training: Efficient hiring and training means that PEOs provide structured hiring processes and training programs, ensuring that the new employees meet the standards of the company and work seamlessly.
What are the cons of using a PEO?
The cons of using a PEO include bundled services, limited access to HR, data privacy risks, compatibility issues, and high costs for small businesses.
These cons are described below.
- Bundles Services: Bundled services mean that most PEOs only offer pre-made service packages which may include features that a business doesn’t need or miss something that they need, impacting its cost-effectiveness.
- Limited Access to HR: Limited Access to HR means that businesses can lose all the control they have over the quality of HR management, which may limit the customization of employee management.
- Data Privacy Risks: Data privacy risks refer to the increased risk of breaches during the process of sharing sensitive employee and company data with the PEO. This can lead to misuse of sensitive data and identity theft.
- Compatibility Issues: Compatibility issues mean that PEO systems may not fully suit your existing workflow or software, leading to inefficiency and can make everyday operations complex for employees.
- High Costs for Small Businesses: High costs for small businesses mean PEO fees can be very high for small organizations and startups, especially if they need all the necessary features and payroll services.
What is an EOR?
An employer of record (EOR) is a third-party employment outsourcing solution that takes full legal responsibility for employing workers on behalf of a business. The EOR definition mainly focuses on simplifying global hiring by managing employment contracts, taxes, compliance, and local labor laws, completely removing the need for businesses to establish their legal entities internationally.
The EOR structure features the legal employer for handling tax, regulatory purposes, payroll, and employee immigration. The company that hired the EOR manages the day-to-day tasks, operations, and performance. This allows businesses to expand internationally without going through legal compliance challenges.
The services offered by an EOR include legal employer services, payroll processing, employee benefits, labor law compliance, HR administration, and onboarding and offboarding services.
How Much Does an EOR Cost?
The cost of an Employer of Record (EOR) depends on factors like employee location, services required, and workforce size. Considering these factors, an EOR can charge a monthly fee ranging from $200 to $650 per employee.
What are the pros of using an EOR?
The pros of using an EOR include access to global talent, mitigation of legal risks, simplified HR management, cost-efficiency, and company flexibility.
These pros are described below.
- Access to Global Talent: Access to Global Talent means EORs allow businesses to hire employees from anywhere in the world without establishing local entities in those countries. This allows businesses to hire skilled professionals from various markets.
- Mitigation of Legal Risks: Mitigation of legal risks refers to the local employment laws compliance ensured by EORs which minimizes the risks of tax penalties, contract terminations, and misclassification of employees.
- Simplified HR Management: Simplified HR management means that by outsourcing payroll, benefits, and compliance, businesses can easily remove their administrative burden and focus on company goals while ensuring efficient employee management.
- Cost-Efficiency: Cost-efficiency means that EORs remove the need to set up expensive legal entities, making international expansion more affordable for businesses of all sizes.
- Company Flexibility: Company Flexibility means that EORs allow businesses to scale their workforce up or down quickly, depending on market demands without being restricted by local laws.
What are the cons of using an EOR?
The cons of using an EOR include higher expenses, cultural misalignment, limited control, poor digital compliance, and inconsistent employee benefits.
These cons are described below.
- Higher Expenses: Higher expenses mean EOR services can be costly for long-term employment needs, especially when establishing your business operations in multiple countries at once.
- Cultural Misalignment: Cultural misalignment refers to challenges that may occur while maintaining consistent employee engagement as EORs can sometimes lack deep knowledge of the company’s culture and values.
- Limited Control: Limited control means that businesses will have less access to employee management and its procedures, as the EOR handles all the employees and HR tasks, limiting the amount of internal customization.
- Poor Digital Compliance: Poor digital compliance means that some EORs use outdated digital systems or methods which leads to problems in processes like payroll, tax filing, or employee record management.
- Inconsistent Employee Benefits: Inconsistent employee benefits mean that EORs sometimes offer standardized packages of employee benefits and the company itself may be capable of offering more.
What are the similarities between a PEO and an EOR?
The similarities between a PEO and an EOR are HR management services, employee benefits, compliance support, and risk management.
These similarities are described below.
- HR Management Services: HR management services refer to features like payroll processing, employee onboarding, performance management, and handling workplace policies. These services are provided by both EOR and PEO models, ensuring that all HR tasks are handled seamlessly.
- Employee Benefits: Employee benefits like health insurance, retirement plans, and wellness programs are offered by both PEOs and EORs, allowing businesses to manage these benefits efficiently by offering them cost-effective packages.
- Compliance Support: Compliance support means the assurance of following business laws and regulations. Both services ensure compliance with labor laws, tax regulations, and employment standards, reducing the risk of legal penalties.
- Risk Management: Risk management means that both EORs and PEOs help with minimizing business risks by managing employment-related liabilities like workplace safety regulations, workers’ compensation, and unemployment claims.
What are the differences between a PEO and an EOR?
The differences between a PEO and an EOR are co-employment, country access, services focus, legal employer, and cost structure.
These differences are described below.
- Co-Employment: Co-employment means sharing the employee management responsibilities with the professional employer. The PEO follows a co-employment model in which it shares employment responsibilities with the client company to some extent, whereas an EOR acts as the only legal employer for the company and handles everything itself.
- Country Access: Country access refers to the countries in which the business can establish its employees. In the context of employer or record vs PEO, a PEO allows to only hire and manage employees in countries where the client business owns a legal entity, whereas an EOR allows to hire employees in any foreign country and there’s no need to own a legal entity.
- Services Focus: Services focus refers to the kind of features an employer model offers. A PEO mainly handles HR management tasks like employee benefits, payroll, and compliance for domestic operations. An EOR mainly facilitates enabling global employment and compliance with international labor laws.
- Legal Employer: Legal employer refers to a person or company that hires and pays employees. In the PEO vs EOR debate, a PEO allows the client company to remain the legal employer and it will work under the company to perform employee management tasks. On the other hand, an EOR takes the Legal Employer title and takes full responsibility for compliance, payroll, and contracts.
- Cost Structure: Cost structure means the fees and expenses required to get an employee management service. A PEO can either charge a monthly fee per employee or a small percentage of a company’s revenue. An EOR only charges a monthly fee per employee which is often more expensive than a PEO.
Costs
A PEO fee structure mainly includes payroll processing, employee benefits management, compliance support, workers’ compensation, and HR advisory services. These fees are usually charged as a percentage of total payroll, ranging from 2% to 12%, or as a flat rate per employee, which averages between $50 and $125 monthly.
An EOR fee structure typically covers payroll administration, employment contracts, benefits, tax compliance, and legal employment responsibilities. The EOR charges a higher monthly fee that can range from $200 to $650 per employee.
EORs are generally more expensive than PEOs as they have a broader range of services. PEOs operate under a co-employment model whereas EORs act as the legal employer and handle all international compliance, including employment contracts and taxes, which increases their costs.
Factors like the scope of services, employee location, workforce size, and whether the business has an existing legal entity cause cost differences between the two models.
Administrative costs also vary as PEOs share employment responsibilities with the client company which results in lower costs. On the other hand, EORs take full legal and administrative responsibilities, making them expensive but offering more convenience for businesses looking to expand globally without establishing legal entities.
Responsibilities
A PEO plays an important role in streamlining human resources as it manages responsibilities like payroll processing, employee benefits administration, compliance support, and workers’ compensation. This allows the client company to reduce its HR workload and focus on strategies and business operations.
In foreign countries, an EOR takes full legal responsibility and performs all HR activities including hiring employees, forming employment contracts, handling payroll, managing taxes, and handling employee benefits all while ensuring compliance with foreign labor laws. EORs are useful for businesses that want to expand globally without establishing legal entities.
PEO and EORs complement a company’s HR operations differently as the PEO makes HR activities efficient by supporting domestic operations but they require the company to have a legal entity in the operating country. An EOR eliminates the need for a legal entity and allows the business to expand internationally without any administrative burdens, but this comes at a higher cost.
Business Structure
Businesses can outsource several responsibilities with the help of a PEO including payroll processing, benefits administration, compliance monitoring, and tax filings. The PEO works under a co-employment model which allows the client company to still have control over its workforce and business operations, while the PEO handles administrative HR tasks.
An EOR structure is different as the EOR makes major changes in control and responsibility by becoming the legal employer for the company and taking full responsibility for tasks like employment contracts, payroll, taxes, and compliance with labor laws, particularly in foreign countries. The client company still has full control of business operations and everyday tasks but minimal control over employee management.
How to choose between a PEO and EOR for your business?
To choose between PEO and EOR for your business, you need to evaluate your needs and goals to make the right decision. First, you should think about what your business goals are. If your company aims to expand globally and hire professionals in a market where you lack a legal entity, an EOR is the best choice as it allows you to quickly hire and manage employees in nearly any country. If you want to expand it locally then a PEO is more suitable for hiring a local workforce while receiving comprehensive HR support.
You should also think about how many employees you want to hire. Many PEOs require a minimum number of employees to partner with a company. On the other hand, an EOR can work with businesses of any size, making them ideal for small to medium-sized businesses looking to hire 1-20 employees in a single location.
Lastly, you should evaluate if you have a legal entity in the target country. If you already own a legal entity in the country where you want to hire, then a PEO may be the best option. However, if you wish to hire employees in a country where you don’t have a legal entity and don’t want to establish one, an EOR is the most practical option.
What types of businesses can benefit from PEO services?
The types of businesses that can benefit from PEO services are companies with limited HR resources, firms in highly regulated industries, growing businesses, and small to medium-sized businesses focused on local operations.
These businesses are described below.
- Companies with Limited HR Resources: Companies with limited HR resources refer to businesses with small or under-resourced HR teams that can heavily benefit from PEOs, allowing them to manage their employees more efficiently.
- Firms in Highly Regulated Industries: Firms in highly regulated industries like healthcare, construction, or finance may need PEOs to navigate complex regulations and stay compliant with industry-specific laws.
- Growing Businesses: Growing businesses like expanding companies and startups may need PEOs to scale their HR operations without increasing internal resources, allowing them to seamlessly onboard employees and manage them during rapid growth.
- Small to Medium-Sized Businesses Focused on Local Operations: Small to medium-sized companies focused on local operations will find PEOs ideal for operating locally, as they provide affordable HR solutions and offer access to cost-effective employee benefits.
What types of businesses can benefit from EOR services?
The types of businesses that can benefit from EOR services are startups, tech companies, global consulting firms, and businesses that want to expand internationally.
These businesses are described below.
- Startups: Startups and newly launched businesses looking to hire employees globally can benefit from EORs as it allows them to access international talent and markets quickly and cost-effectively.
- Tech Companies: Tech companies aiming to produce high-quality products with the help of employees are the globe will need EORs as they can handle international hiring, legal compliance, and cross-border payroll, allowing the company to also sell their tech in international markets.
- Global Consulting Firms: Global consulting firms can get significant support from EORs as they can receive help in managing compliance, payroll, and employment contracts for their consultants who operate in different countries.
- Businesses that want to Expand Internationally: Businesses that want to expand internationally can easily enter new markets with the help of EORs as they allow them to manage compliant hiring and employment internationally without needing a local legal entity.
Which service works better for international employees PEO or EOR?
EOR works better for international employees as it allows businesses to hire and manage workers in countries where they don’t have a legal entity. PEOs require the company to have an established legal entity in the country so it is not the ideal option for that case.
Who are the best PEO and EOR providers?
The best PEO service providers are ADP TotalSource, Deel, Paychex, Papaya Global, Insperity, and TriNet. The best EOR service providers are Remofirst, Multiplier, Atlas, Remote, and Oyster.
What is the difference between a payroll service provider and an EOR?
The difference between a payroll service provider and an EOR lies in their responsibilities. A payroll service provider manages payroll processing, tax filings, and employee payments but does not handle employer responsibilities. On the other hand, an EOR acts as the legal employer while handling payroll, compliance, benefits, and contracts, ensuring the management of all employer responsibilities.
