If you’re considering outsourcing HR, there are several choices you’ll have to make. The first is between two different types of third-party vendors, EORs and PEOs. There are significant differences between the two, and if you don’t understand them, it puts your company at risk. This article will set the record straight and help you make the important decision about what type of company you need.
PEO vs. EOR What’s the Difference?
A PEO is a professional employer organization. PEOs provide HR benefits to small and mid-size companies. This can include payroll and benefits, HR, tax, and regulatory compliance. According to their national organization, PEOs serve around 175,000 companies in the U.S. each year.
AN EOR is an employer of record. These organizations do all the things a PEO can do plus become the official company that hires your workers. This is a huge point of differentiation between the two types of services. An EOR is a legal employer, and they hold all of the liabilities of hiring, employing, and terminating workers. To define these services further, let’s look at specific employment categories and see how these two types of services matchup.
Employment Categories:
- Insurance—If you hire a PEO, you are on your own for insurance. An EOR holds the insurance and handles compliance and fees associated with coverage like worker’s compensation and healthcare.
- Business registration—If you’re considering expanding your workforce across the country into new states, you probably need an EOR. An EOR lets you employ workers in states where you are not even registered as a business. This is a huge benefit over a PEO because each state has wide-ranging rules around employment, and they are all different and subject to change.
- Hiring and Onboarding—A PEO can handle all of your HR functions, including hiring, onboarding, terminations, employee reviews, unemployment taxes, and administering health insurance. An EOR can do some of these things, but not all.
- Employee Classifications—This is the most significant difference between an EOR and PEO. The employer relationship service arrangement with a PEO allows the third-party organization to step in and administer HR functions. The liability for hiring still rests with your company. With an EOR, full administration and liability of the employee/employer relationship lies with the third-party organizations. A contract for employment, in this case, is between the EOR and the worker.
Think of a PEO as a co-employer and an EOR as being on an equal footing with any company that hires employees. EORs are often nationwide organizations, registered in all 50-states, which is a big benefit for smaller companies seeking to expand their workforce without the liability and hassle of state registration rules.
Is Co-Employment legally aloud outside of the USA?
Co-Employment payroll relationships have only been legally recognized by the United States as of today. In fact, through lobbying by organizations such as NAPEO, the IRS has even created a special certifications for PEOs. This has codified the legal statute of co-employment, and creates greater transparency for PEOs to demonstrate their capabilities and trustworthiness. However, co-employment is not legal in most other countries, including Canada. Many companies marketing “international PEO” services are truly just using that term for marketing purposes. Since co-employment is not legal in many other countries, these organizations just market “PEO” services, while actually operating as an EOR.
Which is Better for Your Business, an EOR, or PEO?
The answer to this question is as varied as your business needs. Here are some questions and answers that will help guide your understanding of these types of companies.
- My business needs someone to handle payroll for current employees. PEO
- I have remote workers in multiple states where my company isn’t registered. EOR
- I want to outsource all of my HR functions. PEO or EOR
- I’m interested in adding contract staffing revenue to my business model. EOR
- I’m sick of the high cost, liability, and hassle of dealing with insurance. EOR
- The country I want to hire in does NOT allow Co-employment. EOR
There are pros and cons to EORs and PEOs. Many of the functional benefits of PEOs are offered by EORs and vise-versa. However, the key differentiator is the employment relationship between the employee and the EOR/PEO. If the relationship is a co-employment relationship, then the client is taking on much more risk. Remember, co-employment is only available through PEOs, and co-employment offers many great benefits. However, if you are looking to defer more of the risks, but have the same functional benefits, then you should be looking at an EOR. Talk with FoxHire today, we are an EOR that can help.
