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 both services, helping you choose the right one for your business.
An “employer of record” and a “professional employer organization” (PEO) are similar in that they both provide employment services to companies, but there are some key differences between the two.
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.
In summary, an “employer of record” (EOR) primarily focuses on handling the legal and administrative responsibilities of being an employer, while a PEO provides a broader range of employment-related services, including human resource 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.
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.
What do EOR services look like in real time?
- 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 you use an EOR, your staff members are—legally speaking—employees of the EOR instead of your company. The EOR sends their paychecks, maintains employment contracts and administers benefits.
- 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 (PEOs) teams up with your company to provide HR-related services (like a payroll management system, for instance), sharing the burden of operational functions, liabilities and compliance monitoring.
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 PEO vs EOR
Third-party employment might not sound sensical at first—why would you want your employees to work for an EOR or PEO instead of working for your company directly?
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 – Both EORs and PEOs offer streamlined HR services that can cut overhead costs without sacrificing functionality or 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.
Choosing the Right Resource for Your Company
PEO vs. EOR—which should your company choose when levelling up its HR functions?
Professional employer organizations are perfect for companies that:
- Only hire domestically
- Want additional support for HR functions
- Seek increased automation potential
- Desire co-employment over complete third-party employment
But for companies hiring abroad, choosing an employer of record over a professional employer organization is likely the best choice.
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.
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.
When you’re ready to play on the world stage, choose Playroll for all of your international HR needs.