Employer of record vs PEO: What's the difference

Human Resources

When you're running a business, one of the most stressful tasks at hand is always going to be dealing with employees – the crucial brains and brawn behind your organization. And if you have people who work remotely, that can add another layer of complexity.

So what many founders do is turn to an employer of record (EOR) or professional employer organization (PEO). Essentially it's getting someone else – people who've been there and done that to do the heavy-lifting for you when it comes to human resources and employee management.

But here's the thing: an EOR and a PEO are not the same things. While they both may provide similar services, there are some key differences. At NoHQ, we're going to take a closer look at the two so you can make an informed decision about what's best for your business.

Let's go.

The Short Answer: EOR vs PEO

While an EOR becomes the full legal employer of your company’s employees (even in foreign countries with no registration) and assumes all HR-related responsibilities, a PEO acts like a co-employer that you share liability with and can outsource some HR-related tasks if you have an existing local entity already.

What's an employer of record?

An employer of record is a company that takes on the legal responsibility of being the official employer for your employees. This means they're the ones who will handle all the liability, hiring, payroll, benefits, and any other HR-related tasks.

Because these organizations take full responsibility, EORs allow you to employ full-time workers in other countries where you don't own a legal entity. They take care of the back-end administrative work on your behalf and ensure compliance with local regulations regarding:

  • Holidays
  • Work permits, Visa, Immigration
  • Cultural & language advice
  • Compensation
  • Benefits and welfare
  • Payroll tax
  • Severance and termination
  • Collective agreements

It's important to note that while they facilitate the paperwork for compliance, you continue to work with employees under the EOR the same way you would without. This can be a great solution if you're looking for someone to handle the nitty-gritty of employee management but don't want to go through the hassle (and expense) of setting up an in-house HR team – especially in a foreign nation or state.

What's a professional employer organization?

A professional employer organization, on the other hand, is a co-employment relationship. This means that both you and the PEO share responsibility for your employees.

If your company is looking to outsource its HR functions locally while still making some organizational decisions like daily roles and responsibilities, PEOs offer extensive employment management services like:

  • Managing employee benefits
  • Onboarding
  • Payroll
  • Legal consultation to abide by local tax & employment laws
  • Meeting local customs and industry best practice

Working with a PEO has a catch though – the legal responsibility remains with you as the employer. Usually, this means setting up a local company or registration in the jurisdiction where the employees will work. The process can be time-consuming and complex, especially for small businesses and startups.

EOR vs PEO: So which one should your company use?

The answer to this question largely depends on the size of your company, where your employees are located, and what your specific needs are. But let's first go through what each arrangement can offer you:

Why you might want an EOR

  • You don't have to create your own entity – an EOR in said state or nation will take care of all the paperwork and local regulations on your behalf.
  • You won't have any employer liability to worry about in any EOR-covered area
  • Hire foreign talent with the proper procedures, payroll, and onboarding
  • Get the employment infrastructure you need to expand globally

You'll want to be careful though: Some EORs hire your workers through third parties instead of directly. Instead of owning their own legal entities, these EORs charge extra fees on top of what their own providers charge. It's not only confusing and unpleasant for your employees, but it can get expensive for your company fast. These partner-dependent EORs have little control over costs, so their billing is inconsistent.

Why you might want a PEO

  • Expert consultation on local regulations & work culture
  • Streamlined payroll and tax preparation
  • Regulatory compliance advice and legal risk management
  • HR overheads are lower
  • Enhancing the employee experience
  • A guide to industry best practices and benchmarks
  • Focus on more productivity and growing the business

For example, if you're a small business with a few employees in one country and some foreign entities but lack the resources and know-how, working with a PEO can lift some pressure off your shoulders. If you're a large organization with employees in multiple countries, an EOR can be a great solution as it can help manage compliance for each location.

Get better at remote work operations with NoHQ

The bottom line is that there's no one-size-fits-all solution when it comes to EORs and PEOs. It really depends on what your company needs and where your employees are located. But hopefully, this guide has helped you understand the basics of each arrangement and made the decision a little bit easier for you.

Still have more questions or want to learn more about setting up a remote company? NoHQ is here to help. We're the leading resource on all things remote work, offering an ever-growing wiki of tools and tips, as well as extensive guides on how to get the most out of remote work. So whether you're just getting started or are a seasoned pro, make sure to check us out!

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