PEO vs. EOR: Your employment service options and how to choose one
- 24 Nov 2023
- 6 mins read
- Posted in
With intricate new ways of working, come sophisticated solutions to manage new work processes. Consider the way remote and distributed teams have become so widely accepted over the last few years.
Today, 44% of companies report having full-time employees who work remotely. In fact, 16% of companies globally are completely remote. This includes many pandemic-born businesses that started out with virtual teams and have now decided to stay remote as they grow. And as for the future, one study predicts that 22% of all workers will be remote employees by the year 2025.
But as remote and distributed teams go from being a temporary necessity to a more permanent preference, employers have started realizing the legal and human intricacies of managing such teams. How do you reconcile the different labor laws in different countries? What happens when you want to hire talent in a geography where you don’t have offices? Do the same rules apply for all your employees or are some of them entitled to different perks?
As a solution to these nuances, employment services like EOR and PEO are becoming more common too. But what do these services entail – and what are the differences between the two? Many employers still use the terms interchangeably, but these services come with a distinct set of benefits. Let’s get to know them better.
What is a PEO?
This refers to a Professional Employer Organization. A PEO is essentially a company that acts as your co-employer and handles certain human resource responsibilities on your behalf while you focus on your core business operations.
Think of them as an external HR department. You still remain the official employer for your workforce and your employees sign a contract with you. Once they are on board, the PEO then steps in to execute responsibilities like handling payroll, carrying out tax deductions, administering employee benefits and perks, and managing local regulatory compliance.
But since you are the employer, you still bear the legal and contractual responsibilities for your employees. You will need to set up registered entities in each new location, hire talent there in a compliant way, and only then can you engage a PEO to manage your HR tasks.
What is an EOR?
This stands for an Employer Of Record. Unlike a PEO, an EOR partners with you to act as the legal employer for your employees in various locations.
Although you do remain the end employer for all your workers, they will sign their hiring contracts with the EOR agency, making them the employer on paper. The EOR will then go on to handle HR responsibilities like payroll, taxes, employment law compliance, benefit administration and more.
In addition, they will also take over your legal responsibilities as an employer – like handling contracts or setting up operational protocols aligned to labor laws in that region. What’s more, since they are the registered employer, you need not first set up an entity in that location before you can start hiring – the EOR’s presence will suffice.
So now that you know what the two entities are, how do you make the decision of whether to engage a PEO vs. an EOR? To understand this, let us look at the distinctions between them.
What are the key differences between a PEO and an EOR?
- Nature of relationship. A PEO acts as your co-employer whereas the EOR is the legal employer to your workforce. What this means is that the PEO will share your responsibilities, especially when it comes to the HR functions – but they will not assume full liability.
An EOR on the other hand, takes over all your responsibilities towards your employees in the region you have engaged them in.
- Registrations and licensing. Following the previous point, since a PEO is your co-employer, it means you cannot get away without establishing a local presence in that geography. Your PEO cannot operate independently on your behalf – you will need to set up a legal entity there.
An EOR however, can operate without you needing to establish an entity in that location – that is one of the major benefits they offer. For example, if your business is based in the US, and you want to hire talent in France, an EOR ensures you don’t have to worry about the time, money, bureaucracy and paperwork it takes to register your business there first. The EOR will themselves be registered in that geography, so all you need to do is empower them to act on your behalf – and you’re ready to start hiring.
- Area of responsibilities. Both PEOs and EORs handle HR responsibilities. They automate your payroll functions and ensure all the employees under their purview are paid on time. They may also offer access to the best tools and platforms for HR management. They ensure the right tax details are on file for each employee, and that the correct tax deductions are made when paying them. They distribute health benefits, insurance, dental care cover and more, as per the laws of the region, and may even handle reimbursements, vacation days and more. Additionally, they may also offer advice on other HR-related practices.
- Compliance. A PEO will help you manage HR-related compliance locally. Given that they are your co-employer, they will not shoulder this responsibility entirely – you as an employer are expected to stay abreast of your obligations towards your employees. However, your PEO will work with you to ensure that you adhere to the laws and regulations, and they will advise you where needed.
An EOR will additionally handle international contractual compliance. Labor laws differ from country to country – and they often get updated based on changes in policy. With EORs, you will not need to keep up with details like how many vacation days your employees in France are entitled to, or what’s the current maternity policy in India – the EOR partner entity will take care of all this.
EOR vs. PEO: How to decide which service your business needs?
Now that you understand the key differences between a PEO and an EOR, the service you choose will depend largely on your requirements as a company. Answering the following questions will help you make your decision.
- Where do you want to hire employees?
Are you looking to hire people in locations where you already have an established entity (or somewhere where you’re planning to set up an entity anyway)? If so, you can choose either a Professional Employer Organization or an Employer Of Record.
However, if you want to hire talent in countries where you do not want to set up entities, an EOR service is what you should opt for. This will let you hire compliantly, without the unnecessary costs of business registrations you do not need or want.
- What kind of employment support do you need?
Next consider the type of support and assistance you are looking for. If you simply want to free up some operational bandwidth, outsourcing your HR obligations is a simple and easy way to do so. In that case, a PEO is what you should choose.
If on the other hand, you are looking for a wider range of employment services spanning HR, legal and contractual obligations – and are looking for this support across several countries – you will need to engage the services of an Employer Of Record.
- How many employees do you want to hire?
A PEO agency typically requires you to have a minimum number of workers in a particular region before they partner with you. This enables them to offer access to certain perks, health packages, insurance benefits and more. This normally aligns well with employers’ business goals as well. After all, if you have already set up an entity in a particular country, chances are you are looking at targeted expansion in that geography, and will probably hire in large numbers there anyway.
But an EOR has no such minimum headcount requirements. This works well even if you want to hire a single employee in a new country. However, do keep in mind that there may be limitations on how many people you can keep hiring through an EOR. For instance, if you want to engage a few sales professionals in Sydney, going through an EOR would be an easy way to get started. But if you then identify greater opportunities in the region and now want to conduct targeted expansion, you will eventually need to register your business there and get the mandatory licenses.
- What degree of control do you want to retain?
If you want to have more say in how your operations are being run, opt for a PEO service. Being a co-employer, they will work collaboratively with you on your HR functions, giving you greater control.
With an EOR, you must be prepared to cede some control. For example, if you want to terminate an employee with immediate effect, your EOR may not agree to proceed with the action if they know that doing so would go against the local labor laws. Since they are the legal employer in that region, you will need to trust them to execute the action in a way that’s compliant. Likewise, if there are some new changes in the benefits that you need to provide in a certain country, your EOR partner may put that into effect independently to protect your company from falling foul of the laws there.
When should you get EOR or PEO services?
Hopefully, answering the questions above will help you make your decision on which employment service you need. As for when to engage them at all – consider your expansion plans.
As an employer, keeping up with the intricacies of a fast-growing team can get overwhelming. From onboarding, compliance management, payments and more, there are multiple factors to keep in mind – especially if you’re doing this across the globe. So, whenever you are ready to expand (be it in terms of team size or geographical footprint or both), you will see immense advantages in opting for a PEO or an EOR service.
If you are growing your team internationally, TalentDesk can help you there. We bring you quality EOR services through a trusted partner that will enable you to hire, onboard and work with professionals around the world seamlessly. This saves you a lot of time, effort and operational bandwidth, making it easy for you to break into new markets and scale quickly.
Alternatively, if you want to meet specific, high-skill project requirements in a new geography, you may not want to make full-time hires there at all. In these cases, consider engaging top industry professionals on a freelance or contract basis. Here too, we can help you manage your operations through our comprehensive Agent of Record (AOR) services. As you may have guessed, an AOR functions in a very similar way to an EOR service – but it is designed to help you cater to the needs of your independent contractors.
Know more about the differences between AOR and EOR services here – and then opt for the service that fits your needs the best.
Speak to us to find out how we can help keep you compliant
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