PEO vs. EOR: Understanding the Distinctions

If you have a small or medium-sized business, you may want help with your human resources responsibilities — especially if you are expanding outside your state or country. Two primary types of companies that can assist you if you want to outsource your HR functions are a professional employer organization (PEO) and an employer of record (EOR).

PEOs and EORs share many similarities. Both are third-party providers of comprehensive outsourced HR services. They both take on certain responsibilities for their clients’ HR functions and help provide HR compliance best practices. And with both, the client companies maintain day-to-day management of their employees.

However, there is an essential difference between the two. An EOR, also can be known as global EOR, generally provides an entity in the global location and hires employees there on its clients’ behalf. A PEO provide services to companies that already have their own registered business in the locations where they are hiring.

This article will provide more information on the question of PEO vs. EOR and offer some key considerations to help you decide which type of organization would be best for your business.

What is a PEO?

A PEO works with businesses that want to outsource their HR functions. PEOs operate under a co-employment model in which the PEO, as a co-employer, typically issues the Form W-2 for the compensation paid to its customer employees under its EIN. The contract between the PEO and the client business determines which HR functions get outsourced to the PEO. A PEO typically provides comprehensive services, including:

• Payroll processing
• Benefits administration
• HR compliance best practice
• Workers' compensation coverage
• Recruiting and onboarding tools
• Employee engagement resources

The PEO is responsible for withholding, remitting and filing payroll taxes paid through the PEO’s platform on behalf of the client's business. PEOs may also offer strategic services. The customer retains control of its regular operations — providing services or products for its customers — as well as workforce decisions, like hiring, firing, compensation and culture.

For small and medium-sized businesses, working with a PEO relieves them of the burden of handling HR functions in-house. The PEO provides services as an outsourced HR department, helping to save their customer time and money.

Some PEOs charge a bundled amount as a percent of a client's total payroll. This means the fees fluctuate as employees get raises. TriNet charges a flat administrative fee on a per-employee-per-month (PEPM) basis, so admin HR costs can be more predictable.

What is an EOR?

An EOR may provide a full range of outsourced HR services to companies that want to hire workers in another country. An EOR will have its own entity in the location that it uses to hire the client company’s foreign employees.

Services an EOR may provide include:

• Core HR functions, such as payroll processing and benefits administration
• HR administration
• HR compliance
• Recruiting, hiring, and onboarding employees
• Visas and work permits
• Providing an interface between employees and agencies
• Advising on local employment rules

The EOR is generally the hiring employer of the company’s employees. The EOR hires and onboards the employees on the company’s behalf. While the EOR is, on paper, the full employer, your company still controls the day-to-day management of your employees.

An EOR gives companies the opportunity to access a worldwide talent pool or enter a new international market without taking on the burden of dealing with complexity and compliance requirements or setting up a new legal entity in every new location.

EORs often have entities in many countries throughout the world, which provides flexibility for companies that are expanding or hiring in different locations. Working with an EOR may be a good for businesses, such as finance companies, that have a spirit of entrepreneurship and want to test new international markets or quickly grow their global workforces.

EORs typically charge clients using either a flat fee structure and or a percentage structure. One factor to note here: With the percentage-based model, when a company gives raises to valuable employees it also may pay more in EOR fees.

PEO vs. EOR

Risks associated

As the hiring employer, an EOR may assume and or take on certain country’s employment-related compliance requirements.

For PEOs, generally, certain HR risks remains with the client company. Some PEOs also deliver guidance, administration and reference resources to help client companies navigate HR compliance so they can comply.

Hiring internationally

Hiring practices differ around the world. A global EOR generally offers the local knowledge to recruit and hire top talent while staying in compliance. An EOR will hire your international employees using its own business entity, manage the employment contracts with the employees. On paper, the EOR becomes the local employees’ hiring employer.

While a PEO provides support and tools for your recruitment and hiring practices, it works with already established business entities and does not become the hiring employer.

Benefits

A PEO can provide employees of small and medium-sized companies access to premium healthcare plans that are usually available only to larger companies. A PEO will help administer their sponsor-ed plan and other employee benefits.

An EOR may offer a variety of employee benefits, but the range can vary depending on the EOR. It helps to ensure that employees are offered the insurance that may be required for that specific country or locality requirements.

Scope of HR services

Both PEOs and EORs offer comprehensive services in handling core HR functions. EORs, in addition, provide assistance with issues arising from operating in another country, such as visas and being a liaison for employees with the local agency.

Payroll compliance

As the hiring employer, an EOR may take on the responsibility for payroll and local tax compliance and may be liable for noncompliance of the payroll laws of its location.

A PEO provides payroll services such as withholding and remitting payroll taxes paid through its platform, filing payroll tax returns, and maintain payroll records. The PEO also provide their clients with best practices to navigate payroll compliance; however, the client is responsible to comply with payroll compliance.

Payroll services

A PEO administers payroll processing and recordkeeping, but the client is responsible to pay and fund the payroll.

An EOR, by contrast, both handles the processing and funds the payments itself.

Long-term or seasonal needs

An EOR provides more flexibility if you want to hire seasonal or other temporary global workers.

A PEO may be a better fit for companies with long-term employees.

Key considerations

Here are some factors to consider when trying to decide between choosing a PEO or an EOR for your HR outsourcing needs in other states or countries.

Do you own separate entities in the state or country you are looking to hire?

If you don’t already own separate registered business entities in the foreign locations where you want to hire, and you don’t have time or room in your budget to create them, then you should consider working with an EOR. Setting up new foreign entities is time-consuming and expensive. An EOR may be able to help you.

However, if you already own separate entities that are registered in the new locations where you want to hire that is not globally, then a PEO may be your best choice. PEOs work with companies that have existing domestic entities.

Do you plan to set up a business entity?

If you are planning to set up a new business entity, you may be able to use an EOR to cover the transition time until your entity is fully established. It can take substantial time to get your new entity set up. In the meantime, you may be losing out on opportunities. Using an EOR, you may be able to start hiring immediately in the new locality and avoid delays in expanding your business.

How many people are you looking to hire?

PEOs often work with companies that have a specified minimum number of employees, typically at least five or 10. EORs usually don’t have minimum requirements.

Do you need full-time employees or part-time employees?

If you need full-time or part-time employees in a foreign location where you don’t own a business entity, you should consider working with an EOR.

TriNet Provides a Complete PEO Solution

Are you considering outsourcing your HR functions? A PEO is a great choice if:

• You have no employees that works outside the U.S.

To meet the challenges of a more remote and global workforce, you need incredible HR. In recognizing businesses going global, TriNet has engaged in a strategic relationship with G-P, a market leader in the global employer of record (EOR) industry. Businesses can rely on TriNet’s full-service HR solutions in the U.S. and G-P’s global employment platform and employer of record services to hire outside the U.S.

Contact us today to find out more about how our deep HR expertise and cutting-edge technology can benefit your small or medium-sized company.

This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance.

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