Global employment guides

PEO vs EOR: Which one does your business need?

January 27, 2023

Most business owners feel intimidated the moment they see the international regulations required to hire talent overseas. While this may be a valid reaction considering how complex and difficult these regulations are especially for the small and growing businesses, it may be a sign for you to consider options like the Employers of Record and the Professional Employer Organization to assist you to perform these exact tasks.

Content Overview

PEO Defined: What is a PEO?

A Professional Employer Organization (PEO) is an organization that provides joint-employment relationships with an employer by leasing PEO employees to that employer. PEO services usually include payrolling, employment benefits recommendation, tax administration, and regulatory compliance. Some companies, especially small and medium-sized businesses, opt to have their PEOs provide comprehensive PEO Human Resource (HR) solutions.

(READ: Professional Employer Organizations: Allies in Crises)

EOR Meaning: What is an EOR?

An Employer of Record is a third-party organization that takes over the role of hiring and paying the employees of their client-company as well as all the other employment-related tasks from their client. The EOR is the registered employer of the employees. However, the client-company does not lose its administrative freedom to make all the decisions related to job descriptions, compensations, and employee termination under this arrangement. 

Some Employer of Record services includes hiring, retaining, and paying the client-company’s employees. They are also expected to take over many of the Human Resource tasks associated with managing international employees, depending on the terms and conditions stipulated in the EOR agreement.  

(READ: Daring Global Expansion with the Employers of Record)

EOR vs PEO: What is the difference?

There are various options available to you if you decide to outsource HR. The first is a dispute between two categories of third-party suppliers, EORs and PEOs. There are substantial distinctions between the two, and failing to comprehend them puts your business in danger. Both of these solutions provide some form of HR outsourcing; however, there are some key differences between them that you should be aware of before deciding which one is best for your needs as a business owner.

The most notable distinction is that with PEOs, you engage in a co-employment agreement, which means that the individuals you hire are still employees of your firm. The EOR, on the other hand, is the legal employer of everyone you recruit via them. We explain in detail the differences between these organizations using different points: 

1. Insurance

With a Professional Employer Organization, it is your responsibility to handle insurance, compliance, and payments related to employee coverage such as worker’s compensation and healthcare. In contrast, the Employer of Record Organization may administer all of these tasks, especially when indicated in the service contract. 

2. Compliance 

If you want to recruit workers from another country, you must be aware of all of the labor laws and regulatory compliance paperwork in that country. If you work with a PEO, you must review the compliance documentation yourself and take legal action to verify you are in compliance with the country's employment regulations.

Unlike the professional employer organization, the EOR will handle all of the paperwork for the nation in which they are employed. This means you won't have to deal with healthcare programs, labor rules, health insurance, or worker's compensation. Employers of records will handle everything, including tax filing, for you.

3. Business Registration

An EOR allows you to hire workers in places where you are not even a registered firm. This is a significant advantage over a PEO since each state has unique employment laws that are prone to change. Getting your company registered in another state might be an easy or difficult procedure. If you are a sole proprietorship or partnership, all you need to do is submit doing business as documentation. There is a lot more to think about with C corporations, S corporations, and limited liability firms.

If you are in the latter category, think about if an EOR can satisfy your needs instead. If you have to go to considerable efforts to find mint, you're probably going to take mojitos off the menu.

4. Control

Your Human Resource functions will be handled by both the PEO and the EOR. With a PEO, on the other hand, you are in control. The PEO handles onboarding, employee evaluations, contract termination, and occasionally provides helpful information to assist you to make educated recruiting decisions. But, in the end, it will be up to you to make the ultimate decision.

On the other hand, an EOR performs all of the work for you. They will hire workers and handle contracts, benefits, and insurance. This, of course, provides them additional power over your human resources services. Giving up control of the recruiting process, as unpleasant as it may sound, may really fit your requirements better. EORs are typically employed by small organizations that lack a dedicated human resource division or by enterprises that want extra service providers to complete a temporary project.

5. Employee Requirements

Most, if not all Professional Employer Organizations require the organizations to who they are extending their services to have at least 10 employees. This is not the case for Employers of Record. Because EORs are primarily employed for variable or contract-based workforces, they are more inclined to deal with tiny enterprises that may only have one or two regular employees.

Employing contractors for short periods of time, especially on such tiny teams, can cause HR difficulties. In the absence of an EOR, one of those regular workers must be knowledgeable with the Fair Labor Standards Act and associated employment regulations. EORs are well-versed in these rules, and they will be responsible for all taxes, insurance, and benefits related to contingent labor.

Which one do you need?

There are several basic factors to consider when choosing the right employee management service to invest in for your business; matters such as how many remote employees you are planning to hire, what type of employment you want, and other factors. To help you decide, here are a few basic questions to go through:

What benefits can you extend to your employees?

Your current capabilities and resources can determine which employee management service you should opt for. In some cases, companies that own a legal entity in a country may still decide to work with an EOR because of the more complete system it has in managing compliance and liability.

EORs usually pay higher prices for insurance than PEOs, because insurance providers charge more for companies below the minimum employee count. While most EORs include these in their cost and fees for companies, Rivermate offers a flat rate without hidden charges and minimum costs; just simple transparent pricing. 

How big is your organization?

Most PEOs and EORs impose minimum employee counts to begin a partnership. This can be unreasonably costly for startups and small businesses. Rivermate breaks barriers by removing this obstacle for your business and is more than happy to help you manage employees anywhere in the world. 

If you plan to hire a team of employees in another country without an EOR, you just need at least one of your new employees to serve as your local labor law expert on site. 

What type of workers do you want to hire? 

As you already know, PEOs work best for businesses that have legal entities in other countries. So if you are only hiring a few contractors in another country like Denmark for example. The most logical choice would be to partner with an Employer of Record in Denmark. For full-time employees, it is fully dependent on your legal status in the country of operation--whether you own a legal entity or not. If not, EOR is always the answer.

Do you have a legal presence in the nation where the employee resides?

Local legal entities make the distinction between EORs from PEOs. It is a known fact that businesses are required to have a local legal entity or partner with an EOR when hiring employees from another country. This process can be time-consuming and expensive, even for large companies that already have presences in several countries 

Partnering with an EOR would be the most practical choice for companies that are not looking into major expansions in other countries, and so, would not need to open a legal entity in another country. Yet, even businesses that do own legal entities in their target countries may still lack resources that provide for all their employees’ needs. This is where the PEO is needed. 

Choosing the right PEO or EOR for your team 

Whether you are choosing to work with an EOR to employ global workers or a PEO to manage their benefits, do not forget that employee experience is what matters most as employee satisfaction and loyalty are the keys to any successful business. Rivermate can be your trusted  Global Employment Solutions provider. Contact us and let us help you hire remote talent efficiently.

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