PEO vs. EOR: key differences explained
Pros and cons of each, how to select one, and the best providers
.png)
1 minute
August 7, 2024
Let’s say your startup is growing rapidly and you want to explore new markets overseas. You don’t have a robust in-house HR team yet nor the time to hire one.
Should you hire a Professional Employer Organization (PEO) or an Employer of Record (EOR) to handle your human resource (HR) tasks? What are the pros and cons of a PEO versus an EOR? What about their fee structures? In this article, we’re going to dive into all the details.
Eliminate annoying banking fees, earn yield on your cash, and operate more efficiently with Rho.
Isabel Peña Alfaro is a guest contributor. The views expressed are hers and do not necessarily reflect the views of Rho.
A Professional Employer Organization (PEO) is a firm that provides full HR solutions for small and mid-sized businesses. PEOs operate on a co-employment model, sharing certain employer responsibilities with their client companies. This arrangement allows businesses to outsource various HR functions, enabling them to focus on core business activities.
PEOs handle time-consuming tasks like payroll processing, tax filings, and benefits administration. They also help with workers' compensation administration and workplace safety programs.
Here are the types of companies that may benefit from these services:
Because they may lack extensive HR department expertise or resources internally, SMEs and growing companies can benefit from PEO services.
On that same note, businesses that want to focus on core operations while outsourcing HR administrative tasks like payroll, benefits administration, and compliance can benefit from PEO services, too. This also applies to companies that serve businesses across various industries, such as real estate, engineering, law, manufacturing, IT, and wholesale.
Companies seeking better benefits and/or access to HR professionals and expertise can also benefit from PEO services. (FYI: PEOs can often negotiate better rates for employee benefits packages due to their larger pool of employees.)
PEOs help companies stay compliant with complex and changing labor laws and regulations.
Choosing the right PEO is a critical decision. Ask these questions before deciding on one:
Determine what HR functions you need help with, such as payroll, benefits administration, compliance, risk management, and employee training. Then, make sure the PEO has experience working with companies in your industry to understand unique challenges and requirements.
Verify if the PEO is accredited by organizations like the Employer Services Assurance Corporation (ESAC) and if it is IRS-certified (CPEO). Also ensure the PEO is licensed to operate in your state and complies with local regulations.
Check if the PEO’s financial statements are independently audited by a CPA. As for their reputation, look for client testimonials, professional references, and reviews on platforms like Glassdoor.
Review the full range of services and ensure they align with your business needs. Determine if the PEO can tailor services to fit your specific requirements and scale with your business growth.
Assess the PEO’s technology stack, including HR software and employee portals, for ease of use and integration with your existing system. Make sure the technology is user-friendly and accessible for both administrators and employees.
Understand the PEO’s pricing structure, whether a flat fee per employee or a percentage of payroll, and evaluate any hidden fees. Compare the overall value provided by the PEO against the costs to ensure it’s a cost-effective solution for your business.
Look into the quality and range of employee benefits, such as health insurance, retirement plans, and wellness programs. Check who administers the benefits and if they are authorized to operate in your state.
Carefully review the service agreement to understand the responsibilities, liabilities, and termination clauses. Look for any guarantees provided by the PEO regarding service quality and performance.
Ask about the staff support ratio to ensure adequate customer service. Test the responsiveness and quality of customer support through initial interactions and references.
Perform thorough research on the PEO’s history, including any legal issues or complaints. Meet the people managing your account to gauge their expertise and compatibility with your business culture.
An Employer of Record (EOR) is a third-party organization that takes on the legal and administrative responsibilities of employing workers on behalf of another company.
In other words, an EOR becomes the official employer for tax purposes and handles HR-related tasks. All the while, the client company controls the employee's day-to-day work and responsibilities.
EOR key functions include:
An EOR enables companies to hire internationally without establishing a legal entity in each country, allows faster entry into new markets, provides access to local expertise on employment laws and practices, and reduces administrative burden and compliance risks.
Businesses looking to expand globally, access international talent, reduce administrative complexity, ensure compliance, and manage costs associated with international employment may benefit from an EOR. Let’s go over some examples.
EORs allow businesses to hire employees in foreign countries without setting up their legal entities, making global expansion faster and easier.
They also help smaller companies access a global workforce and expand into new markets without the resources needed to manage international employment complexities. So, with EORs, rapidly scaling businesses can quickly hire top talent in new locations.
EORs provide HR expertise and services that may not be available in-house, especially for global employment.
In that same vein, EORs enable companies to hire employees in new countries to evaluate market potential before fully committing to expansion. Using an EOR can often be more cost-effective than establishing foreign subsidiaries.
EORs handle global payroll, benefits, taxes (including payroll taxes), and compliance, allowing businesses to focus on core operations.
EORs have expertise in local employment laws and regulations, helping businesses stay compliant across multiple jurisdictions. Remember, EORs take on legal employer responsibilities, reducing compliance and operational risks for the client company.
You’ll want to cover the following characteristics and traits when choosing the best EOR for your business.
Ensure the EOR has a strong presence and expertise in the specific countries where you plan to hire employees. Determine if they use their legal entities in each country or rely on third-party partners. Direct EORs with their own entities may offer more control and responsiveness. Also, check if they have in-depth knowledge of local labor laws, regulations, and cultural nuances.
Assess the comprehensive services offered, including payroll processing, benefits administration, tax compliance, and HR support.
Do they support your specific workforce needs (e.g. contractors, full-time employees)? Consider, too, how they handle employee onboarding, benefits, and ongoing support.
Evaluate their technology infrastructure and whether it integrates with your existing systems. Look for user-friendly platforms for managing payroll, employee data, and HR processes. Assess their data protection measures and compliance with privacy regulations like General Data Protection Regulation (GDPR).
What is their track record regarding compliance with local employment laws and regulations?
Also, assess their approach to risk management and handling legal/compliance issues.
Understand their fee structure (e.g. fixed fee vs. percentage of payroll). And, ensure transparency about all costs, including any potential hidden fees.
Evaluate the quality and responsiveness of their customer support. Check if they provide dedicated account managers and local language support. Research their track record, client testimonials, and industry reputation. Also, consider their experience in your specific industry.
Can they accommodate your growth plans and evolving needs? What is their ability to handle changes in employment requirements or market entry? Do they offer value-added services like immigration support or global mobility solutions?
PEOs and EORs have various differences and similarities. Let’s review them.
The key difference between an EOR and a PEO is that an EOR acts as the full legal employer of the workers, allowing businesses to hire international employees without setting up local entities. In contrast, a PEO operates under a co-employment model, requiring the client company to have a legal entity and sharing employer responsibilities for domestic HR functions.
Their services differ primarily in terms of entity presence and employment liability. An EOR generally allows businesses to hire employees in foreign countries without establishing a local legal entity, assuming full legal responsibility for compliance with local labor laws and tax regulations.
In contrast, a PEO typically requires the client company to have a legal entity in the country of operation and shares employer responsibilities under a co-employment model.
The main disadvantage of using a PEO compared to an EOR service provider is that a PEO usually is limited to domestic operations and cannot hire internationally without the client company having local legal entities established. This significantly restricts a company's ability to expand globally and access international talent pools.
In contrast, an EOR generally allows companies to hire employees in foreign countries without needing to set up their own legal entities, providing much more flexibility for international hiring and expansion.
There are no states that completely fail to recognize PEOs. However, the level of recognition and regulation varies significantly across states. You should check each state for specific, up-to-date licensing or registration requirements that PEOs must meet to legally operate within their jurisdictions.
This will depend on your company’s circumstances. When hiring internationally, it may make sense to use an EOR because it allows you to hire employees in foreign countries without needing to establish a local legal entity. A PEO, on the other hand, may generally require you to have a legal presence in the country of operation, which could complicate international expansion.
Both PEOs and EORs provide HR services (payroll, benefits administration, and regulatory compliance support). PEOs may provide more comprehensive domestic HR support while EORs typically offer more flexibility for global hiring.
You can integrate your favorite accounting and HR software in seconds (yes, this includes PEOs and EORs like Bamboo, Gusto, Workday, Rippling, Paychex and more) through Rho, a business banking platform that is frictionless and easy to use. Interested in learning more about the Rho platform, learn more here.
Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management, LLC, and its partner banks.
Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.