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EOR vs PEO: The Differences Between Employer of Record and Professional Employer Organization

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November 10, 2020
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Choosing the best HR solutions for your company will require knowing what each one does. When it comes to the differences between EOR and PEO, they are small but crucial and knowing them will help you make a more viable choice when outsourcing your hiring process or HR functions.

EOR vs PEO: Main differences

Both of these solutions offer a sort of HR outsourcing, let’s take a look at the key differences between them so you can decide which one would better suit your needs as a business owner.
The most prominent difference would be that with PEOs you enter a co-employment relationship, which means that the people you hire are still your company’s employees. Conversely, the EOR is the legal employer of anyone you hire through them. We wouldn’t blame you if this seems like a small difference to you, but it can change quite a lot in many different aspects of your business such as:

  • Control
  • Insurance
  • Business registration
  • Compliance
  • Employee Contracts

PEOs give you more control

The first difference between a Professional Employer Organization and Employer of Record is one of control. They will both take care of your HR functions, but with a PEO, you’re still in the driver’s seat. The PEO is there to take care of onboarding, employee reviews, contract termination, and sometimes offer valuable advice that will help you make informed decisions when hiring. But, in the end, it will be you who’s making the final choice.

The employer of record, on the other hand, does all the work for you. They will hire employees, take care of contracts, benefits, and insurance. This, of course, gives them more control over your HR services. Giving up control over the hiring process, no matter how bad it sounds, might actually suit your needs better. EORs are usually hired by small businesses that don’t have a designated human resource division or companies that need additional service providers for the realization of a temporary project.

Employers of Record provide better insurance

While mostly the same PEOs and EORs differ greatly when it comes to insurance coverage. If you opt for a PEO, you may have to provide the insurance for your workers yourself. A PEO will handle State Unemployment Tax and Federal Unemployment Tax Act rates and health insurance in some cases. If your business is in an industry where material damage or bodily harm on the job is not uncommon a PEO you might need to get your own insurance. For example, if you run a delivery service, a PEO won't cover the insurance if one of your delivery guys damages the package or hurts themselves while on the job, while an employer of record will.

An employer of record provides General Liability, Workers’ Compensation as well as anything else that might be required by the country they’re operating in. So, as far as risk management goes and employee benefits go, an EOR is superior to a PEO, only because they have their own insurance and leave you with less time doing paperwork and hunting down insurance and more time to plan your business. Employers of record also take on the full liability of the employment arrangement for the client company.

Business Registration is not required with EOR

The biggest advantage an employer of record has over a professional employer organization is accessibility. Namely, if you are partnered with an EOR in a certain state or country, you don’t have to set up a branch office there as they are already registered in all places they operate in. Partnering up with an Employer of Record allows you to hire anyone, anywhere in the world without having to register your company in that particular country or state. This means that expanding your business to new markets is pretty easy.

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The approach to compliance

If you are looking to hire workers outside of your country, you will need to be familiar with all of the labor laws and regulatory compliance forms in that specific country. If you are partnered up with a PEO, you will need to purview the compliance documents yourself, as well as take legal action to ensure you are compliant with the country’s employment laws.

Unlike the professional employer organization, the EOR will take care of all of the documents for the country they’re hiring in. This means you wouldn’t have to worry about healthcare plans, labor laws, health insurance, or worker’s compensation. Employers of records will take care of everything for you, including tax filing.

Employment contracts

PEOs and EORs also differ when service agreements or employment contracts are concerned. Even though a PEO can be a co-employer with your company, they only help you find the right people and handle your HR needs. So, you will still be the legal employer of the service providers hired.

With EORs, it’s a completely different story. Employers of record enter an employment relationship with the service providers and take full legal responsibility for them. This includes healthcare, benefits administration, and payroll processing, which helps you streamline payroll without an accounting team.

Conclusion

Employers of record and Professional Employer Organizations are pretty similar, but also fundamentally different. But, which one is better? Unfortunately, there is no simple answer to that question. Instead, we should think of them as different tools created for different purposes. They can both help you grow your business and expand your workforce, but they are used in very different situations. However, how do you know which one is better suited for your needs? While PEO services are used to basically replace your HR department while still allowing you some measure of control, EOR services are designed to employ and maintain a smaller contingent workforce.

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