PEO vs EOR: What are the Differences and Which is Right for You?
Compare PEOs and EORs, two types of third-party payroll and HR providers that can help you manage remote teams, to check the best fit for your business.
Published on December 21, 2022
PEO vs. EOR ⚖️Say you’re moving from New York to LA. You have two options: hire a moving company to bring your stuff to California, or pay for a U-Haul that you’ll drive with all of your stuff. One option isn’t inherently better than the other. You might prefer driving if you’re bringing a few valuables, or you might opt for the moving company if road trips aren’t your thing. The two choices are just different. Finding an employment partner is a similar dilemma. You can choose between two types of third-party providers — a professional employer organization (PEO) or an employer of record (EOR) — to outsource your HR tasks. Like U-Hauls and moving companies, EORs and PEOs have distinct strengths and use cases. Your choice depends on your business needs, like whether you need help with compliance and how big your budget is.This post will walk you through the key differences between an EOR vs. PEO, and the factors you need to consider when picking the best third-party HR provider for your company.
What is a PEO? 💭A professional employer organization (PEO) serves as a co-employer, partnering with your business to divide and conquer your HR responsibilities. When you work with a PEO, you maintain full ownership of your HR operations. PEOs can essentially serve as your HR department by handling tedious admin HR tasks — like collecting your hiring paperwork and automating payroll processing. PEOs also offer and manage various cost-effective employee benefits, like low-cost health insurance and PEO-sponsored retirement plans. With a PEO, you hire your employees directly under your company. Because your company is the designated employer, your employees must live in an area where your company — not the PEO — can legally hire them. That means you must have a business registration in the states or a local entity in the foreign countries where you want to hire employees.
What is an EOR (Employer of Record)? 🤔An employer of record (EOR) becomes the legal employer for your workers, assuming all responsibilities and compliance risks on your behalf. Without an EOR, you would have to hire international workers as contractors — which could open you up to misclassification risks and penalties — or set up a local entity to hire them as employees. EORs have their own foreign subsidiaries or serve as intermediaries for legal entities in other countries. This feature enables EORs to help employers hire and pay employees worldwide — without spending extra time and money registering their business in other states or establishing their own local entities. Pilot's EOR services offer many of the same HR services that PEOs do, such as benefits administration, onboarding and offboarding, payroll processing, tax filing, and much more.
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Employer of Record vs PEO: 5 Key Differences 🆚Both PEOs and EORs operate as your employment partners. They take care of your HR and payroll responsibilities, so you and your team members can focus on strategic HR initiatives (like sourcing talented, diverse candidates). However, PEOs and EORs fundamentally differ regarding what kinds of businesses and employees they serve best. Here’s a summary of the main differences between an EOR vs PEO:
|Employer of Record (EOR)||Professional Employer Organization (PEO)|
|Acts as the legal employer||Acts as your company’s co-employer|
|Assumes all legal responsibilities and risks for you||Shares legal responsibilities and risks with you, or offloads them to you|
|Doesn’t require you to establish a local entity to hire internationally||Requires you to establish a local entity before hiring internationally|
|Generally costs less in the long term||Often costs more in the long term, due to paying for insurance and setting up local entities|
|Can hire just one employee in a locale||Requires you to hire a certain minimum number of employees, usually at least five in one locale|
ComplianceCompliance is a hassle. You have to understand the local laws and tax obligations in states and countries where your employees live, and ensure that your company abides by them. Even one mistake, like contractor misclassification, could cost you big time. Since an EOR is your employees’ legal employer, it assumes all risks and manages legal compliance on your behalf. Your EOR stays on top of local labor laws and tax regulations that you’d otherwise need to research yourself. A PEO, on the other hand, splits responsibilities and risks with you but doesn’t assume all of them because of your co-employment relationship. In other words, a PEO can advise you on labor law regulations to help keep your business compliant, but you’re still legally responsible for keeping the company compliant with relevant employment laws and tax liabilities.Takeaway: PEOs are best for HR teams that are comfortable assuming liability for compliance risks. EORs are best for HR teams that don't want to handle risk management or compliance (especially international compliance).
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HR servicesPEOs and EORs can fulfill similar HR functions but with slightly different scopes. Some EORs don't offer as many HR services or cost-savings from being part of a large group health insurance plan as PEOs. But there are others — like Pilot — that offer just as many HR functions (if not more!), including:
Type of workersEORs and PEOs fundamentally cater to different kinds of workforces.First off, PEOs have employee minimums — like requiring your company to have at least five employees in the same country. For a company trying to hire just one worker in Spain, a PEO wouldn’t be able to help. An EOR doesn’t have these employee minimum requirements. They can help you hire as many team members as you want.A PEO is a better choice for a company with workers who are all located in the same country or state and are all full-time. An EOR is the better partner for companies that hire a mix of workers across multiple states and countries.Takeaway: EORs are better for companies with a mix of team members in different areas, especially international workers, and want to expand hiring across locations. PEOs are better for companies that are looking to outsource HR needs for an already established workforce of full-time employees.
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Business registrations or local entitiesCompanies that offer remote work open themselves to a wide range of talented professionals across the globe. But if you work with a PEO, you'll need to do quite a bit of work to hire out-of-state and international employees. A PEO requires you to register your business in each state and establish local entities in countries where your employees live. While registering your company in another state isn’t too difficult, it’s often time-consuming and expensive to set up a legal entity in another country. It makes sense for a large enterprise like Google to set up foreign subsidiaries as it expands into new markets. But for a small business without the same resources or business case? Working with an EOR is a much cheaper and faster way to hire foreign employees. In contrast, EORs eliminate the hassle, time, and money required to set your business up to hire in multiple states and countries. That’s because an EOR already holds business registrations in different states and owns or works with entities in foreign countries. No contractor compliance concerns and no delays, sunk costs, or risks in setting up a local entity — find, hire and pay your employees legitimately, wherever they may be.Takeaway: If you want to hire full-time employees in another country without establishing a local entity, you need an EOR. If you already have a local entity but want to outsource HR services for employees in that country, you want a PEO.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
CostsPEOs and EORs generally have similar pricing: either a flat fee per employee per month or a percentage of employee payroll per pay period. There may also be administrative fees, onboarding costs, or contract termination fees. PEOs often charge an upfront setup fee to establish service. That’s not the case with Pilot’s EOR services: our transparent pricing structure includes zero set-up fees and no hidden costs. A PEO also requires you to pay for and provide your own general liability insurance and workers' compensation coverage. An EOR factors those costs into its pricing since it needs to maintain proper insurance coverage as your workers’ legal employer. Takeaway: EORs usually have fewer upfront costs and more manageable costs overall.
Pilot: The best global EOR on the market 🏅There are plenty of EORs and PEOs you can work with, but Pilot is different from all the rest.Pilot is the global EOR for US-based small businesses and growing companies looking for a seamless way to hire and pay workers in over 100 countries. We unify international payroll, benefits, and compliance into one hiring and payment solution, and we support hiring and paying both employees and contractors worldwide. Our team of experts applies their extensive country-specific HR expertise on your behalf, keeping you compliant and offering insight into local best practices without needing to lift a finger. So go ahead and assemble your dream team — whether that consists of employees, independent contractors, or a mixture of the two. No matter where they live, Pilot helps you hire and pay them equitably and on time. You deserve the peace of mind that comes from outsourcing your human resources to pure professionals — we’ve got you covered. Need to see it to believe it? Book a 1:1 demo with us today — or watch a video overview of our platform — to see why Pilot is the top international EOR of choice for businesses looking to scale international hiring quick
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