Although global talent acquisition can solve many problems, it doesn’t come without its challenges, mainly abiding by international labor laws and providing the needed infrastructure for business expansion.
Traditional business models aren’t built to overcome these challenges, which explains the rise of two workforce management models: Professional Employer Organization (PEO) and an Employer of Record (EOR).
Both resources are third-party entities that shoulder some of the responsibilities involved in expanding your organization, but what exactly does each one offer, and how can you know whether a PEO vs EOR is best for your workforce?
Here, we provide a comparative analysis of PEOs and EORs to help you choose the right solution for your needs.
Understanding PEOs (Professional Employer Organizations)
Before we get into the details of PEO vs EOR, know that PEOs are employment partners that offer you HR resources to accommodate various employee needs. Simply, a PEO is a co-employment solution, which requires you to establish your own entity in the country you wish to operate in, while helping to outsource some basic People management functions.
The core functions of a PEO are HR offerings, they may be as follows:
- Processing payroll
- Filing taxes
- Complying with payroll
- Issuing International payment
- Administering employee benefits
- Sponsoring health insurance, business insurance, and worker’s compensation sponsorship
- Employee management
- Recruitment and offboarding
- Tax filing
The shared responsibility between business owners and PEOs renders these partners co-employers. In order to engage a PEO’s services, businesses must be registered within the country they are operating within (also referred to as a target country). This enables PEOs to hire employees on your behalf, process local payroll, and handle the HR responsibilities you delegate to them.
In addition to HR procedures, PEOs can give you access to comprehensive insurance plans at lower premiums for your employees. Additional benefits include the assumption of liability when it comes to tax filing. Because PEOs are the employer of record, any fines or penalties that may arise due to incomplete, late, or inaccurate tax filings are absorbed by the PEO, relieving your HR team and company from responsibility.
The main PEO limitation lies in the inability to use a PEO without a local business registration. This means organization’s cannot enlist a PEO to hire foreign workers in countries outside of the company’s jurisdiction, limiting the ability to expand to a global organization.
Additionally, some PEOs have a minimum requirement to enlist their services, meaning organizations may not utilize their services for single employees, making PEOs a more viable option for growing or established businesses.
Understanding EORs (Employers of Record)
An EOR is a third-party agency that assumes the legal responsibility of recruitment, hiring, payments, international employee managers, and other HR processes on your behalf. In other words, they become the registered employer, which eradicates the need for an entity in the target country.
Let’s take a look at the fundamental responsibilities of an EOR:
- Hiring, onboarding, and firing international employees in a compliant manner
- Drafting locally-compliant employment contracts
- Providing work visas and permits as needed
- Conducting any administrative tasks needed locally
- Processing payroll
- Administering employee benefits
- Managing timesheets for some employees
A critical point for understanding PEO vs EOR is that EOR facilitates global employment; it exempts you from establishing a local entity in the foreign country you wish to hire an employee. EORs navigate complex employment laws and negotiations. They can easily avoid fines, penalties, and legal disputes, reducing risk and liability concerns for organizations.
Since EORs allow organizations to skip the business registration process, hiring an EOR saves you time and lets you focus on core operations while another entity handles the legalities. Additionally, you can scale your team up or down as needed.
As a business owner, this arrangement will take away some of your direct control, especially in the context of weighing PEO vs EOR.
Key Differences Between PEO vs EOR
When we look at PEO vs EOR, we can highlight where these 2 employee management models part. These differences are key to choosing the right service for your business goals and needs.
Legal Employment Relationship
If you hire a PEO, they become a co-employer. You own a local entity in the target country and let the PEO manage some of your HR functions. In that sense, you’re partly responsible for the risks and liabilities associated with functions such as payroll, tax filing, and employment laws.
EORs on the other hand, assume full legal responsibility for the talent you employ under their services. Without your organization’s registration in the foreign country, it’s up to the EOR provider to meet local labor regulations.
Scope of Services
PEOs oversee comprehensive HR and benefits management. You choose which HR functions to delegate to them, which typically include benefits administration, payroll processing, taxation, worker’s compensation, and risk management.
EORs offer services that fall under global employment and compliance, such as running background checks, managing locally compliant employment contracts, and more. An EOR is your legal employer, registering your business in its new locations and complying with local labor laws. EORs may also offer the same HR services that a PEO does—although on a more limited scale.
In a PEO arrangement, you retain control over your employees as well as direct management oversight. You can manage day-to-day tasks, salaries, and scheduling. To put it simply, you get more control over HR responsibilities than with an EOR.
To compare, the EOR model involves outsourcing employee management. Accordingly, the EOR has their own HR team. They control daily affairs, including payroll, benefits, and compliance, whereas you control company operations, salary values, and the distribution of tasks.
PEOs usually have a domestic or regional focus. You must establish a legal entity in the foreign country or work with them locally. They may lack the wide legal expertise of EORs, which is crucial to compliance when working with international employees.
EORs are typically better suited if you’re after international coverage. They have legal entities in foreign countries and the required infrastructure for workforce expansion.
EORs handle the paperwork required to keep your business compliant thanks to their extensive knowledge of international labor law. Their services facilitate easier global expansion.
When to Choose a PEO
- When you own legal entities in your target countries but lack the resources to meet all of your employees’ needs such as payroll processing and benefits administration.
- If you’re looking to hire many employees in a new country, PEOs often require a minimum employee count.
- When you’re looking to retain employee management responsibilities.
When to Choose an EOR
- When you want to employ full-time workers in a country where you do not own a legal entity.
- When you want to be completely excluded from any legal liabilities tied to your foreign workers.
- If you wish to outsource all employee management responsibilities.
Making the Decision
Still unclear on whether you’d benefit from a PEO vs EOR? Ask yourselves the following questions to further assess which option is right for you.
Assessing Your Organization’s Specific Needs and Objectives
Is it global, regional, or local expansion that you’re after? Do you want a third party to assume the legal responsibilities or conduct HR processes? Define your current business goals and needs, and anticipate future ones. This step will help you pick between PEO vs EOR and determine which tasks to delegate.
Considerations for Industry, Size, and Geography Scope
Does the industry you’re in have unique features (like industries with frequent injuries and damage)? This should tip the scales when you consider PEO vs EOR. What is the desired size or scale of your workforce? Are you focused on local or global expansion?
Conducting Due Diligence in Selecting a PEO vs EOR Partner
By now, you should have a clear picture of whether PEO vs EOR works best for your business. It’s time to research and assess the available service providers for whichever model you pick. Here are some questions to ask about each:
- Does their range of services fulfill your goals?
- Do their employees abide by state regulations?
- Can they provide you with multiple references from professionals and clients?
- What is their insurance policy like? Does it give you full or partial coverage?
- Is the internal staff competent, experienced, and trained?
- Does the company use the latest technology and have the best infrastructure for operations and employee management?
- Is the service flexible, allowing you to alter your package to accommodate changes in your business needs?
- Is the company a member of NAPEO? (Specific to PEOs)
- Is the company IRS certified? (Specific to PEOs)
- Is the customer support team responsive? (More relevant to EORs due to your limited control)
Exploring Other Workforce Solutions
If neither PEO vs EOR work for your company’s needs, you may want to consider an alternative solution that combines features to best align with your business goals. Human Resources Information Systems, or HRIS help organizations automate People management functions such as payroll, performance management, and records management. HRIS can be a great option for organizations with many employees both globally and regionally. With features such as visa tracking, tax withholdings, and automated reminders, HRIS can make managing employees easier and reduce the risk of manual errors.
Workforce Solutions to Accommodate Your Organizational Goals
Ultimately, the core of the PEO vs EOR debate lies in the range of services each offers. A PEO focuses on HR services, but an EOR centers legal compliance with laws for international employees. Accordingly, the former gives you more control over employees and more legal responsibility than the second.
As you see, there’s no ultimate winner here, which is why you must evaluate your specific business needs. Only then can you pick the employment model whose workforce solutions accommodate your organizational goals.
These third-party entities are born out of the evolving needs of the ever-changing workforce management field. They turn global expansion via outsourcing into a reality, helping overcome any potential hurdles.
Still not sure if a PEO vs EOR is right for your business? Chat with the Omni team to learn more about how our HRIS solution can help you supercharge your business operations as you grow.