Employer of Record (EOR) vs Professional Employer Organization (PEO): What's the difference?

What is a PEO?

A Professional Employer Organization (PEO) provides services related to HR outsourcing to business under a co-employment agreement. It takes care of all the functions related to HR while the client company retains control over management and daily operations of the employees.

Features of PEO:

• Requires existence of a physical entity in the region the business is planning to hire from.
• HR outsourcing services include employee onboarding, payroll management, and benefits administration.
• Both, the PEO and the firm are equally liable and share compliance responsibilities.

What is an EOR?

An Employer of Record (EOR) is a legal local employer on behalf of the business planning to expand and hire its workforce beyond its country's geographical borders without establishing a local physical entity.

Features of EOR:

• Manages employee hiring, onboarding, payroll, tax, compliance and employee benefits for a global workforce.
• EOR is the legal employer in foreign markets.
• Takes on the responsibility to ensure compliance with local employment laws.

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EOR vs PEO - Understanding the difference

1. Who is the Official Employer? - The Employment Model:

A PEO operates under the co-employment model, whereby it functions with the company and shares the responsibilities of an employer. Moreover, it manages all the HR functions of that company. An Employer of Record is the legal employer for a firm's potential employees. The HR outsourcing services provided by an EOR are similar to a PEO, however, it takes on complete responsibility to ensure that the firm stays compliant while hiring internationally.

2. Geographical Reach: Local vs. Global Expansion

PEOs are ideal in helping companies expand domestically, as this model primarily supports companies operating within their own country of operations. They act as an outsourced HR department when it is complex for small and medium sized businesses to have an in-house HR team. However, when planning to hire from multiple countries, EOR can be a go-to solution as this model is designed for international expansion. Since the EOR serves as the legal employer, businesses can hire talent in new regions.

3. Legal Entity Requirements: Do You Need One?

To use a PEO, your company should have an existing registered entity in the country you are planning to hire from. PEO then partners with your business to handle HR operations. An EOR is a better option when planning to expand in multiple countries as it does not require the presence of physical entity in those countries. It is ideal for businesses looking to test new markets with minimal risk.

4. Liability and Compliance: Who Takes On Employment Risk/ Who is Liable?

Both PEO and firm are equally liable when any risks arise, since PEOs operate under a co-working model. The firm opting for a PEO partner remains equally responsible for taxes, employment law compliance, and employment contracts along with the PEO partner. However, working with an EOR frees up the businesses from the risks associated with compliance as it acts as the official employer on behalf of the firm.

5. Hiring Speed: How Quickly Can You Expand?

Since companies must first register a legal entity in a new location before using a PEO, the hiring process can take weeks or even months. This is best suited for businesses with long-term plans in a specific country. EOR is suitable for companies looking to hire employees immediately in a new country without waiting for entity registration. This is ideal for short-term projects, contract-based hiring, or rapid global expansion.

To summarize:

Employer of Record (EOR):

1. No need for entity registration—faster market entry.
2. Legal employer for the international workforce.
3. Best for startups and businesses testing new markets.
4. Quick and flexible hiring for short-term or project-based work.
5. Ideal for remote teams, and businesses in transition.
6. Eliminates the risk of misclassification and potential legal fines.
7. Best suited for companies hiring internationally.
8. Ensures seamless onboarding of employees without HR disruptions.

Professional Employer Organization (PEO):

1. Provides co-employment, firm retains control while outsourcing HR functions.
2. Best for small and mid-sized businesses needing HR expertise.
3. Helps manage HR, payroll, and compliance once an entity is established.