Key Takeaways
1. ‘Employer of Record (EOR)’ and ‘Professional Employer Organization’ (PEO), as well as ‘Global PEO’ and ‘co-employment’, are all terms that refer to related forms of HR and payroll outsourcing.
2. These terms are sometimes used inconsistently online. Nevertheless, it can be important to use the correct term (e.g., in some US states it is a requirement that businesses be registered as a Professional Employer Organization to use the term “PEO”.
3. In business conversations about outsourcing options, make sure that everyone involved is working with the same understanding of these terms and the services included before proceeding with scoping, costing etc..
4.Whether a PEO or EOR arrangement makes most sense depends on the individual business, country of operation, speed of growth, the presence of existing legal entities in countries of operation, and the preferences of company leaders.
Outsourcing elements of your company’s HR, payroll and compliance functions to an expert partner is more efficient and cost-effective than carrying out the activity in-house. When you have new opportunities and growth overseas on your business horizon, PEO and/or EOR support are even more compelling options.
In this article, we look at the precise difference between the EOR and PEO models, and why you might choose either model.
Hire globally in 24 hours with Horizons EOR services.
How is ‘EOR’ defined?
The Employer of Record, or EOR, is a specialist HR company that becomes the official, legal employer of staff. The EOR is hired by a client company that wishes to outsource key administrative and compliance responsibilities including payroll and tax compliance.
In international operations, where the PEO/third party role lies in supporting strategic global growth and expansion, these companies taking on the full EOR role may be referred to as Global PEOs or Global Employment Organizations (GEOs).
Commonly, an EOR would take over the following for a client’s workforce:
- Legal employment — providing a registered legal entity which can employ and operate a legally compliant payroll for staff. Usually, that entity will be a wholly-owned subsidiary of the Employer of Record company.
- Official communication — interfacing with local authorities, such as tax and labor departments on behalf of international employees.
- Compliance — ensuring all operations comply with local law and customs in the relevant country, including around HR issues such as notice periods, leave allowances and severance payments.
- Global Mobility Services — dealing with all work permits and visa arrangements to ensure timely arrival of staff and issuing of necessary paperwork to allow them to begin working.
How is ‘PEO’ defined?
Professional Employer Organization is a term with several possible meanings, depending on the context and country. In the USA, a domestic PEO is a co-employer, taking on HR or payroll responsibilities but not becoming EOR. The IRS offers voluntary certification for US PEOs who meet certain criteria.
If your business is based in the USA, or you’re looking at US-based PEOs, co-employment vs sole employment is an important distinction to pin down early.
Co-employment is a working arrangement where both the client company and a PEO carry employer obligations, and staff is technically employed by both organizations. Typically, the client business continues to be responsible for daily employee direction and management, while the PEO takes on responsibility for HR, payroll, and taxes.
There can be significant advantages to PEO co-employment arrangements, especially in the US. The larger size of PEOs gives potential access to better employee benefits than a smaller client company could otherwise provide. This could include medical and dental care, pensions, disability insurance etc… As these schemes are already running, there is no need to negotiate rates and participation terms, and the PEO can handle all staff enrollment.
Some business leaders are simply more comfortable with the idea of staff remaining their employees in legal terms. Underpinning this preference might be concerns about staff engagement and loyalty, workforce cohesion, and ensuring that their senior executives maintain a real-world perspective.
In an international business context, ‘PEO’ more often refers to a Global PEO which will often take on the full EOR role on behalf of client companies, becoming the sole legal employer of staff.
PEO vs EOR — differences summarized
How is a ‘Global PEO’ defined?
Global PEOs provides a spectrum of international employee solutions for multinational businesses. This can run all the way from outsourcing single functions (e.g. payroll), or single country staffing, to traditional PEO services (as defined above) to full EOR services for the entire client company workforce across multiple regions, along with a range of advisory and support services around recruitment, visas, corporate taxes etc…
To loosely distinguish the two terms, GEOs might be thought of as the most versatile and multifunctional class of Global PEOs. GEOs are international expansion partners who can provide the broadest range of advice and support to companies hiring or managing an overseas workforce.
Why are Global PEOs necessary?
Recent decades of globalization have meant an ongoing surge in businesses expanding into foreign markets and hiring foreign staff.
At the same time, laws, customs and regulatory requirements around hiring and managing staff in overseas locations can be complex and challenging, especially for businesses without existing links or experience with their new markets.
The tension between the driver of globalization and the limiting factors around overseas operation creates demand for services which allow businesses the advantages of expansion into priority markets while taking away the burden of delivering compliance. This is why Global PEOs / GEOS exist.
EOR vs PEO: When to choose an EOR
There are several broad cases where you might want to choose an EOR solution as part of your EOR vs PEO calculation.
1. Quick and compliant global expansion
If you need to expand your workforce in a new country or region quickly and in compliance with local laws, then using an EOR service may be the best option to get up and running as fast as possible.
2. Complex local environment
When you’re operating in a country where the legal, labor and/or tax system are highly complex and/or subject to sudden changes, an EOR service will assure your compliance and avoid later legal difficulties or fines.
3. Slow, expensive or otherwise challenging business registration
Working through an EOR can save your company the time and effort of establishing and registering a legal entity which can conduct business and employ staff in your new country.
PEO vs EOR: When to choose a PEO
When to choose a co-employment PEO
You may choose a co-employment type PEO service if you are based in the US, or another country where co-employment makes good sense in terms of business, staff benefits, and local law. You might also choose this type of PEO arrangement if you wish to retain a greater sense of company control and remain the legal employer of all your staff.
When to choose a PEO without EOR service
You might choose a PEO without EOR service if you already have a well-known and well-established subsidiary of your business in-country and wish to continue to benefit from existing positive brand influence and publicity in-country. In this case, you could still outsource payroll, tax, and HR for a more efficient corporate operation but formally remain as the employer of staff.
When to choose a Global PEO or GEO
Global PEO or full GEO services can be useful for companies that need a package of assorted services and support for international growth, perhaps including EOR but also going beyond that service.
For example, post-Brexit, UK businesses who wish to expand further in EU countries could hire a GEO to provide recruitment services, run a Global PEO service for its European workforce, deal with any new visa, work, or residence permit requirements, and handle the legal set-up of subsidiary companies in countries where required.
PEO or EOR Solutions with Horizons
When making the EOR vs PEO decision, your international business can benefit from expert support with international employee hire.
Horizons provides PEO and EOR solutions in 180+ countries. Get in touch today for a tailored quote from one of our hiring experts.
Frequently asked questions
A PEO can be an EOR but isn’t necessarily, especially in the USA. A Global PEO is usually an EOR for its client company workforce, whereas a US domestic PEO is usually a co-employer alongside its client company.
You can also find cases where a Global PEO might not take on the EOR role (e.g. where a multinational already has a well-established legal entity in-country) and might only be hired to handle outsourced payroll and tax, or provide strategic advice.
In any discussion about PEO or EOR services, make sure that all sides have the same understanding of the terms used and the services covered by each one.
In HR terms, the Employer of Record, or EOR, is the official, legal employer of a workforce. The EOR can be a company that staff work for directly, or it may be a third-party PEO or umbrella company. HR, tax and payroll are all functions which may be outsourced to a PEO or other third party, regardless of which entity remains the EOR.
