Table of Contents
- Let’s Define What is an EOR
- Understanding what PEO means
- The difference between EOR and PEO
- Scenarios where EOR and PEO can be Advantageous
- EOR or PEO? What should I choose for my business?
- Finding the right EOR and PEO service provider
In today’s globalized business world, companies are constantly seeking innovative ways to expand their operations, manage their teams, and comply with local regulations — all while keeping costs manageable.
Two popular solutions that help businesses achieve these goals are Employer of Record (EOR) and Professional Employer Organization (PEO). While both models offer outsourced support for managing employees, they function in distinct ways and are suited for different types of business needs.
In this article, we’ll break down the differences between EOR and PEO, exploring how each model works, their respective benefits, and how to choose the best option for your organization’s unique goals.
Let’s Define What is an EOR
To start, let’s define EOR in the simplest terms. EOR, or Employer of Record, is a third-party HR provider that helps companies outsource, recruit, and legally hire global talents. For business, EOR will serve your legal entity in your chosen country without establishing your own, ensuring all HR compliance for local employment and tax regulation. EOR will act as the legal employer of your workforce on your behalf and will handle all your regulatory compliance, from tax to labor law.
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Understanding What PEO means
On the other hand, a PEO, or Professional Employment Organization, is similar in practice to EOR but entirely different in discipline. A PEO revolves around co-employment arrangements with your business, employees, and the PEO provider.
The ultimate distinction between the two is that a PEO will act only as part of your company to lift HR responsibilities and do specific HR tasks such as compensation and benefits, payroll, tax filing, employee relations, and overall labor compliance. Compared to EOR, which acts as the sole employer of your workforce and assumes all the legal responsibilities, a PEO is anchored in co-employment, which is 50/50 in terms of an employee’s legal obligations.
The Difference Between EOR and PEO
The main difference between EOR and PEO is in legality and responsibilities. EOR acts as the legal employer and assumes all legal responsibilities, while PEO relies on a co-employment arrangement between the business and the PEO provider.
To better understand how EOR and PEO work, let’s picture a scenario where your business is growing and ready to expand abroad. See the differences and similarities of EOR and PEO applicable to your business needs.
EOR vs PEO: What’s the difference in terms of the following:
- Legal Entity
EOR is the easiest way to do it, assuming you want to quickly enter a new market without establishing your own entity. EOR is perfect for saving time, money, and resources, as building your legal entity is time-consuming and opens you up to legal loopholes.
PEO, meanwhile, is the answer if you want to pursue and establish your legal entity. If you expand abroad through mergers and acquisitions, PEO is more reliable to use as you have a legal entity— technically— in the area. However, PEO might not be for you if your expansion aims to reach a new market from scratch. Unless you decide to invest long-term in your chosen country and only want temporary HR help from a PEO before having an in-house HR of your own. - Number of Employees
EOR is more flexible in terms of number of employees. EOR providers can help you with big or small numbers. The only key factor in which the EOR has more advantages is that the EOR provider can ensure the end-to-end cycle of an employee without the need for your interference aside from approval of who to hire or not, plus the key performance indicator you’ll set. On top of that, they assume all the employee’s legal responsibilities.
Fun fact: If you choose an EOR service provider, make sure to check whether the EOR is partner-dependent or its own entity. Partner-dependent EORs can be more risky due to the layered business relationship and costly, as they charge more fees than EORs with their own entity.
EOR partner dependent is more like your HR business partner without a legal entity but has its partner in your chosen country. A middle man-with a middle man or a contractor with a subcontractor, while your entity EOR has an actual entity in your chosen country.
Conversely, PEO is reliable for optimizing your HR processes, assuming you have a legal entity. In practice, it’s the same with EOR minus talent acquisition and recruitment, as PEO’s industry-standard commonly does not include these two services. Still, PEO is more advantageous if you already have a team in your target market and/or country and need HR assistance to manage the administrative work, including payroll and tax filing. - Business size
Regarding business size, EOR is favorable for multinational and enterprise-level companies. Suppose your business is expanding and wants to take a safe route to outsourcing. In that case, it’s best to use EOR as it lessens the legal risks, saves you time to operate immediately, and protects you from any HR concerns and responsibilities.
For small-medium businesses that like to expand abroad, PEO is better (assuming you have an entity already) to have access to affordable compensation and benefits. With local expertise and connections, small-medium businesses get better chances to use this kind of service, given the small number of employees. PEO is also suitable for multinational and enterprise-level companies who want HR-related concerns lifted on their end yet with direct participation of its employee’s compensation and benefits. - Long-term and Short-term
When it comes to long-term and short-term goals, EOR can do both. If your expansion strategy is to enter new markets quickly and see how it grows, EOR will suit your company. Hitting the ground running without the complexity of building your entity or needing to comply with local tax and labor law is the true power of EOR. Your company can adjust whether to pursue a long-term EOR plan, short-term use of EOR for establishing your in-house team in the future, or both, depending on your current needs.
EOR, however, doesn’t establish a culture for your business. As mentioned, they are the legal and sole employer of your workforce. Your interaction with your “employee” is anchored only to service delivery and day-to-day business operations, which is losing the dynamic to build genuine relationships with your chosen talents.
PEO can do long-term and short-term goals, too. What sets PEO apart from EOR is that PEO leans toward HR assistance and support as partners. It gives you the power to manage your employees, be involved in their actual needs, and show ownership of responsibility, as PEO is known for its co-employment relationships.
For long-term goals, assuming you already built your entity, PEO can assist you in lifting all HR tasks while you start your business in a new market. Think of it as your company’s outsourced HR department. They can be a long-term or short-term partner if you ever decide to build your internal HR team sooner or later. - Risk Management
From a business perspective, local or international expansion has its risks. EOR, as mentioned many times, becomes the legal employer of your workforce. They assumed all the legal risks and responsibilities of the employee. The good thing is that it’s easier to end a business relationship when you decide to pull out or finish a contract and /or a bond. Easy come, and ideally, easy go.
While in PEO, you have shared responsibilities with your employees. Although it’s good that you have direct control of your business operations and oversee HR processes, the risk and all legal obligations of your employees will always be shared under a co-employment arrangement.
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Scenarios Where EOR and PEO can be Advantageous
PEO (Professional Employer Organization) and EOR (Employer of Record) are both models that businesses use to handle employment-related tasks, but they serve different functions and offer distinct advantages depending on a company’s needs. Here’s how the two differ in various scenarios:
1. Scenario: Expanding a Business Internationally
- PEO:
When a company expands internationally, a PEO helps by co-employing the workforce. The company still maintains control over hiring decisions, job responsibilities, and day-to-day operations, but the PEO manages the legal employment aspects (like compliance, payroll, and benefits).
- Example: A U.S.-based company wants to expand into Germany. They partner with a PEO that helps manage local employment law, taxes, and benefits while the company manages its business operations and employee performance.
- EOR:
For companies expanding internationally and not wanting to establish a legal entity in the new country, an EOR is often the better option. The EOR becomes the legal employer of the workers, handling all local employment law, tax compliance, and employee benefits. The company still directs and oversees the employees’ work, but the EOR assumes the legal responsibilities.
- Example: A U.S. company wants to hire remote employees in France without setting up a French entity. They use an EOR to handle employment compliance, while the company manages work assignments and performance.
2. Scenario: Startups Hiring Remote Employees in Multiple States
- PEO:
In the case of a startup that hires employees across multiple states in the U.S., a PEO can streamline HR functions. The PEO will handle payroll, benefits administration, compliance with state and federal labor laws, and even recruiting. The startup retains control over job descriptions, compensation structures, and employee performance.
- Example: A growing tech startup hires developers in California, Texas, and New York. The startup uses a PEO to ensure payroll taxes are correctly calculated for each state and to provide consistent benefits across locations.
- EOR:
If the startup needs to hire quickly without worrying about the administrative burden, they might opt for an EOR. The EOR acts as the legal employer, ensuring the startup remains compliant with state-specific employment laws. The startup retains the ability to manage the day-to-day responsibilities of the employees.
- Example: The same tech startup hires a remote developer in New York. The startup uses an EOR, which handles the legal employment, compliance, and payroll, while the startup focuses on the developer’s tasks.
3. Scenario: A Company Seeking to Mitigate HR Risk and Liability
- PEO:
A PEO offers shared responsibility when it comes to HR tasks, but the business still keeps ultimate control over its employees. The company can mitigate risks associated with compliance, workers’ compensation, and benefits, but there is still a level of control.
- Example: A medium-sized retail company with 50 employees wants to ensure that they’re meeting all labor law compliance requirements, especially regarding workers’ compensation and health insurance. The company partners with a PEO to offload those responsibilities.
- EOR:
In a situation where a company wants to fully transfer its employment-related liabilities to another entity, an EOR might be the better choice. The EOR assumes full responsibility for employment laws, including disputes, workers’ compensation claims, and taxes. The company’s risk is reduced, but they may have less control over the legal aspects of the employee relationship.
- Example: A company has a limited HR department but needs to hire workers in a region with complex labor laws. They use an EOR to fully assume the employer responsibilities, reducing their exposure to risk.
4. Scenario: A Company With a Temporary Workforce
- PEO:
If a company hires a large number of temporary workers for a specific project, the PEO can manage the administration of payroll, benefits, and taxes. However, the business still keeps control over the worker’s role and performance.
- Example: A marketing agency needs temporary workers for a big campaign. They use a PEO to manage the temporary workforce’s benefits and tax compliance.
- EOR:
For temporary workers hired across multiple locations, using an EOR makes it easier to navigate different employment regulations. The EOR becomes the employer of record, handling payroll, benefits, and compliance, while the company manages the work.
- Example: A global consulting firm hires temporary consultants for a large project in various countries. The firm uses an EOR to handle the employment and compliance aspects while overseeing the consultants’ work.
5. Scenario: Compliance With Complex or Constantly Changing Labor Laws
- PEO:
A PEO is beneficial for businesses that need ongoing compliance support. The PEO ensures that all aspects of employment (benefits, taxes, etc.) align with the latest federal, state, and local laws, which is especially useful in a highly regulated environment.
- Example: A financial services company operating in multiple states uses a PEO to stay compliant with ever-evolving regulations regarding retirement plans, healthcare, and other HR-related compliance issues.
- EOR:
An EOR is ideal for businesses operating in regions with complex or shifting labor laws, especially if the business has no local expertise in those jurisdictions. The EOR can take on the full responsibility of ensuring legal compliance, eliminating the company’s risk.
Key Differences at a Glance:
- PEO: Co-employer relationship where the company retains more control over day-to-day operations and employee management.
- EOR: The EOR becomes the legal employer, handling all compliance and administrative tasks, while the company maintains control over work assignments and performance.
The choice between PEO and EOR depends on the level of control a company wants to maintain and how much responsibility it’s willing to delegate to the provider.
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EOR or PEO? What Should I Choose for my Business?
It depends on your business needs and how you want to proceed. But in summary, you must consider whether or not, entity is a must on your business expansion or outsourcing. Here’s a quick table guide for better appreciation of EOR and PEO.
| Things to Consider | Employer of Record (EOR) | Professional Employment Organization (PEO) |
| Employer | Sole Legal Employer | Co-employment |
| Entity | Not required | Required |
| Responsibilities | You’ll handle business operations; EOR will handle all HR and legal compliance | You’ll handle business operation and oversee HR processes; PEO optimizes HR and administrative processes |
| Risk Management | EOR | You and PEO |
Business size and focus | Global expansion of multinational and enterprise level companies; HR and legal compliance | Business with local presence with entities from SMEs to enterprise level companies; HR and legal compliance |
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Finding the Right EOR and PEO Service Provider
Do your research and do your due diligence when finding the right EOR and PEO service provider. Check for certification, compliance, and even read customer feedback for reviews. Always find an HR business partner to trust for your long-term and short-term business needs, like Hexa Business. With over 20 years of HR and Outsourcing expertise in the ASEAN region, your business can thrive easily and confidently, lifting all your HR and outsourcing concerns.
Hexa Business is strategically present in Bangladesh, Indonesia, Malaysia, Myanmar, Nepal, Philippines, Singapore, Sri Lanka, Taiwan, and Vietnam, providing excellent HR and outsourcing services to businesses that want to expand, outsource, and grow. Talk to us today to learn more about how we can help you with your EOR and PEO concerns.
Meet us here.