Employer of Record vs. PEO: What's the Difference?

New solutions constantly enter the market, providing employers the difficult task of choosing the right tools for their business. Two of the options in the HR services space are employer of record services (EOR) or professional employer organizations (PEOs) The two are very similar on the surface but are fundamentally different when you look deeper.  

In this article, we’ll explain everything you need to know about Employer of Record vs. PEO services, helping you choose the right one for your business.

Employer of Record vs. PEO Meaning

When comparing Employer of Record vs. PEO, it's evident they both offer employment services to companies, yet distinct differences exist between these two entities.

An "employer of record" is a company that takes on the legal and administrative responsibilities of being an employer for a company's employees. This can include handling payroll, taxes, benefits, and compliance with state and federal laws. They are also known as "payrolling company" or "compliance company"

A "professional employer organization" (PEO) is a company that provides a wide range of employment-related services to companies. In addition to the services provided by an employer of record, a PEO can also provide human resource management services, such as recruiting and training employees, and employee benefits administration. PEOs typically enter into a co-employment relationship with the client company, meaning both the PEO and the client company have employer responsibilities for the worksite employees.

To sum it up in the context of Employer of Record vs. PEO, an EOR primarily manages legal and administrative employer duties, while a PEO extends its services to encompass a wider spectrum, including HR management and employee benefits administration.

What is an Employer of Record (EOR)?

An employer of record is a third-party entity that—among other functions—allows your business to employ people living in other countries without setting up a local legal entity in your employees’ home countries. This distinction is significant in the context of Employer of Record vs. PEO.

The employer of record acts as a legal employer in other countries, which means that the legal obligations associated with an employer-employee relationship are no longer the responsibility of the company.

Global Employee Classification enables companies to hire foreign employees legally, while the EOR handles all payroll-related activities such as salary payments, taxes and deductions, insurance contributions and more.

How do services of Employer of Record vs. PEO play out in practical scenarios?

• Enhanced and automated HR functions – An Employer of record like Playroll commonly offer payroll solutions, automating wage calculations, benefits deductions, tax reporting and more. 

• Compliance monitoring – For companies hiring employees abroad, EORs perform the heavy lifting of regulatory compliance. Software platforms and global HR experts ensure legal compliance worldwide, shouldering the burden of liability. 

• Third-party employment – When utilizing an EOR, your team members, from a legal standpoint, become employees of the EOR rather than your company. The EOR assumes responsibility for payroll distribution, employment agreements, and benefits management. This distinction is essential in the context of Employer of Record vs. PEO. 

• Financial planning for staffing investments – Planning to hire more people to take on a new market? Ready to scale after an exponentially profitable year? An EOR can help your business plan and calculate the financial impacts of hiring new staff. 

What is a Professional Employer Organization (PEO)?

A Professional Employer Organization (PEO) collaborates with your company to deliver HR services, such as payroll management, thereby alleviating operational responsibilities, liabilities, and compliance monitoring. In the context of Employer of Record vs. PEO, this distinction becomes clear.

The benefits of International PEOs are that they provide businesses with an array of benefits that aid in the expansion into new countries. The major advantage is the security and assurance of having all your hiring processes within international compliance regulations. This provides a sense of ease, knowing that you are operating in accordance with local employment laws and regulations.

However, there’s one crucial difference between an employer of record vs. PEO services—PEOs are co-employers for your organisation. How does this compare to EOR?

• Establishing entities abroad – PEOs cannot serve as a primary legal employer for staff working abroad. Businesses hiring internationally must establish legal entities in their employees’ home countries if they choose to use a professional employer organization. 

• Shared liabilities – When companies work with a PEO, they retain legal responsibility for regulatory compliance, labour laws, tax payments, licensing and insurance. EORs, by contrast, assume all of these responsibilities for a business without sharing the burden.

• HR tasks – PEOs and EORs generally offer the same HR services—automated payroll, tax functions and new employee onboarding, to name a few. They both offer businesses access to HR management platforms and expert advice. 

Benefits of Employer of Record vs. PEO

At first, the concept of third-party employment might seem puzzling—why opt for employees to work under an EOR or PEO rather than directly for your company? Delving into the realm of Employer of Record vs. PEO sheds light on this

Employing staff with the help of an EOR or PEO can positively impact your business. Let’s explore a few advantages of both:

• Reduced or shared liability – Both entities significantly reduce the liability for businesses to remain in compliance with domestic and international laws. Instead of going it alone, companies have help from seasoned compliance experts.

• Increased HR efficiency – In the context of Employer of Record vs. PEO, both provide optimized HR services, trimming overhead expenses while maintaining top-notch functionality and quality." 

• Access to valuable tools – PEOs and EORs have the capital to develop and maintain large-scale software solutions. Businesses that work with these entities reduce their liabilities and HR workload and reap the benefits of automation. 

However, EORs can provide a significant advantage for companies hiring globally—instead of establishing legal entities abroad, your company only has to operate one arm of the business. 

Related Source: 7 Benefits of Using an Employer of Record Service

EOR vs. PEO: Choosing the Right Resource for Your Company

PEO vs. EOR—which should your company choose when levelling up its HR functions? 

Professional Employer Organizations (PEOs) offer an optimal solution for companies with the following criteria:

1. Domestic Focus: If your workforce is primarily based within your home country, a PEO seamlessly streamlines HR processes while bolstering your local team.
2. Enhanced HR Support: Companies seeking to fortify HR functions benefit from the comprehensive expertise that PEOs bring. From recruitment to payroll, they complement your framework.
3. Automation Goals: PEOs align with modernization efforts by integrating advanced automation tools. This enables streamlined tasks and heightened efficiency.
4. Co-Employment Preference: Choosing co-employment over complete third-party employment aligns with PEO offerings. They share HR responsibilities while you retain a strategic role.

However, in the context of global expansion, an Employer of Record (EOR) takes the forefront. Evaluating your company's trajectory, consider the merits of both Employer of Record vs. PEO pathways to align with your unique growth story.

Think about how many cogs turn in the machine of your business—you run multiple departments, perform numerous regulatory compliance functions and do your best to make a profit. If you have to create a legal entity in another country, you essentially double your workload, not to mention your overhead.

Remember to choose the resource that’s right for the future of your company. If you plan to hire internationally at some point, you should strongly consider taking the EOR route. If you’re comfortable sticking to a domestic operation, a PEO might suffice. 

Curious to see how Playroll can fit your company's needs? Try our free demo and explore the EOR and PEO solutions we offer. It's all about finding the right fit for your HR journey. Get started today!

Tackle Global Hiring with Playroll

Employer of record vs. PEO considerations can be daunting, especially for businesses with global talent mobility aspirations. While businesses of all ages, phases and scales stand to benefit from additional HR support, choosing the right option requires careful planning.

For international employers—or domestic brands with plans to expand abroad—an EOR like Playroll can streamline your HR and global compliance functions, thus optimizing profits, reducing overhead and ensuring above-board operations at all times. 

Businesses that choose Playroll have access to the two best tools in our arsenal: our expert HR and international compliance team and our state-of-the-art, all-in-one software. Our platform is powerful, offering financial planning for future staffing investments, streamlined employee onboarding, payroll and tax functions and so much more.