If your company has never worked with either type of service, you may be wondering a bit about the basics, what type of companies work best with each service and the logistics of either structure for your company.
The core function of both Professional Employer Organization (PEO) and Employer of Record (EOR) is similar. They are both a third-party organization that helps companies they work with to manage distributed workforces.
Each style of organization goes about this function in a slightly different way. Let’s get familiar with the basic structures behind each type of organization, learn which businesses they benefit the most and outline the associated risks for both EOR and PEO services.
By understanding the differences and benefits of both an EOR and a PEO, you can make the most informed choice for your employment outsourcing service. Help grow your company compliantly while remaining in the driver’s seat when it comes to running day-to-day company operations.
What is a Legal Employer of Record (EOR)?
An Employer of Record is a global employer that helps with all employment-related services and hires on behalf of another company. As a third-party entity, EORs hires employees on behalf of another company as an employer by proxy. EOR services include taking on the company's human resources responsibilities including hiring international employees, contracts, payroll, insurance, banking, and meeting tax requirements. EORs allow the client company to employ and pay hires abroad compliantly without having to set up new offices or legal entities in those other countries.
When it comes to HR functions, EORs help you:
- Hire and onboard local talent in other regions
- Perform payroll duties
- Manage unemployment claims made by global employees
- Track and withhold payroll taxes
- Administer benefits to your distributed workforce
What is a Professional Employer Organization (PEO)? A Professional Employer Organization is a co-employer for companies, not a full legal employer by proxy. PEOs offer outsourced HR services including:
- Operating payroll
- Filing taxes
- Legal and regulatory compliance
- Assembling benefits packages
PEO services are considered partner companies for your organization, not legal employers themselves. Although they can be a tremendous help in streamlining your company’s HR functions and remaining legally compliant with local employment laws. You will still be responsible for managing more of the day-to-day business operations at your company.
If you like managing your day-to-day operations and are less than enthusiastic about the intrusion of another company in how you run your business, a PEO will likely be more hands-off, to keep you feeling happily responsible for managing your direct team. PEO services also require you to register your business as a legal entity in any region where you are looking to hire talent.
Risk Management
Trusting an outside company to help oversee your core HR functions is certainly not without risk. While you likely have company policies, rules and regulations for getting things done internally, working with a new company to outsource, speed up or perform compliance checks on your hiring efforts can come with a host of new responsibilities and risks that you should prepare your business for.
Employer of Record Risks Management
Because an Employer of Record acts as your full legal employer, an EOR company assumes all legal risks for your company relating to the implementation of its designated services.
This is especially helpful when it comes to managing the complexities of employment-related regulations and compliance. Here are ways in which an EOR can assist with risk management:
Local Legal Compliance
EORs are experts in local labor laws and regulations, ensuring that your employees are properly classified, compensated, and provided with the required benefits. They stay up-to-date with changes in labor laws, tax codes, and employment regulations, reducing the risk of legal penalties or fines due to non-compliance.
Tax Laws and Compliance
EORs handle payroll taxes, social security contributions, and other tax-related matters, ensuring that your organization complies with tax laws. They minimize the risk of tax-related penalties or audits by accurately calculating and remitting taxes on behalf of your employees.
Employment Contracts and Documentation
EORs also manage employment contracts, offer letters, and other documentation related to hiring and onboarding. They ensure that your legal documents are legally sound and are written in a way that protects both the employer and the employee. Properly documented employment relationships can reduce the risk of disputes or legal challenges.
Risk Mitigation in International Expansion
If your organization is expanding internationally, EORs can help mitigate the risks associated with entering new markets by handling compliance with foreign labor laws, employment contracts, and payroll in foreign currencies. They can also manage the complexities of cultural and language differences, thus reducing communication risks.
HR Administration and Employee Relations
EORs often provide HR support, including handling employee relations, grievances, and terminations. They can help manage these sensitive business functions while following legal procedures to minimize potential risks.
With proper HR support, you can reduce the likelihood of wrongful termination or discrimination claims.
Benefit Administration
EORs may manage employee benefits, such as health insurance, retirement plans, and leave policies. This ensures that benefits are administered correctly and in compliance with relevant laws, reducing the risk of benefit-related disputes.
Workers' Compensation and Insurance
Like a PEO, EORs typically provide workers' compensation coverage, which helps protect both the employee and employer in case of workplace injuries. They can also offer additional insurance coverage to address other potential risks associated with employment.
Payroll Accuracy
EORs handle payroll processing, reducing the risk of errors in pay calculations, tax withholdings, and deductions.
Accurate payroll helps maintain employee trust and minimizes the risk of wage-related disputes or legal claims.
Time and Cost Savings
By outsourcing these responsibilities to an EOR, businesses can free up their internal resources to focus on core operations, reducing the risk of internal resource strain or burnout.
An Employer of Record can help businesses manage and mitigate risks associated with employment-related matters by ensuring compliance with laws and regulations, providing HR support, and handling various administrative tasks. This allows organizations to focus on their core activities while minimizing legal, financial, and operational risks related to employment.
What is Professional Employment Organization:
PEOs have a slightly different type of involvement when it comes to managing company risks, but many of the duties they can assist with overlap with those offered through an Employer of Record.
PEOs offer businesses:
Workers’ Compensation Insurance
This is one of the best-known benefits of a PEO service. If a business has more than one employee, it is required to hold worker’s compensation insurance to cover employees who become sick or injured while at work.
Worker compensation insurance is allocated to compensate a percentage of an employee’s lost wages and any lost medical expenses. As an employer, it also protects you from employee lawsuits related to onsite injuries or illness.
Safety Training
PEOs often help oversee safety programs for accident prevention at work. As a key player on your company’s outsourced HR team, PEOs can play a major role in devising and implementing efficient workplace safety regulations that will help keep your team members free from work-related injuries.
Hiring and Dismissals
As part of your risk management strategy, PEOs can help you avoid the costs, both to company culture and financial of a bad hire.
It is generally far more expensive to hire a new employee and onboard them instead of re-training existing employees in your organization, so a PEO can help you structure your hiring criteria to help you avoid making costly hiring errors.
Employer of Record Tax Implications
PEO partnerships can have a major impact on your company’s tax situation.
Because a PEO relationship is a co-employment one, allowing PEOs to not fully take legal responsibility, PEOs use their own Employer Identification Numbers (EIN).
PEOs use their own EIN to file their taxes and as a result, are subject to separate tax requirements from your company.
An EOR, on the other hand, actually files taxes acting as your company through an EIN associated with your company directly.
One consideration is that you might need to register for tax purposes in the area where you hire from under the PEO structure. An Employer of Record actually serves this purpose itself, and your company isn’t required to be registered as an entity in the state to do this.
PEO vs EOR
There are a few key considerations you should make before you decide between an EOR and a PEO service. These include:
Price
Think about whether you are looking to make a long or short-term investment in the growth of your company. PEO and EORs generally charge either a flat rate or a percentage cut of monthly payroll per employee.
EORs typically have better value for the cost over time, while PEOs can be the best solution if you are looking for a rapid push in hiring. While you may be shocked at the up-front costs, it’s important to think about your decision holistically and analyze the long-term value your chosen service will bring your company.
Services Offered
What specific package is the company you are looking at offering? Each EOR or PEO is different and what works for another company may not work for you. That being said, it is helpful to conduct your own market research before making a choice.
Identify similarly-sized organizations that underwent the same expansion trajectory you hope to make and learn about their experiences. Did those companies choose EOR or PEO services? Why did they make the decisions they did?
Analyzing other examples of how these services have been used in the past may help you come to a decision. With many new EOR and PEO services emerging, especially during the global remote hiring push during COVID-19, making sure you accurately vet your EOR or PEO service is essential to ensuring a positive outcome for your company.
Company Expansion
Take a look at your company’s interests in terms of expansion, both locally and globally over the next months or years. Come up with a realistic plan of how quickly you would like to grow and what regions your company is planning on expanding in.
If you are mainly concerned with outsourcing your payroll or other elements of your payroll strategy and taking on permanent employees, a PEO service is likely the best fit for you.
However, if you are looking for a company to take full legal responsibility as the employer of your workers and want to take on more independent contractors, freelancers or part-time workers, an Employer of Record may be the service that would make the most sense with your organizational direction.
Take some time to weigh the pros and cons. You can also reach out to EOR and PEO services to book a demo and get more insight on their policies and specifics.
Book a demo with Borderless today and find out why this is the EOR your business needs.
How Can Borderless Help?
Whether you decide to use an EOR or a PEO, Borderless is here to help you grow, hire and operate while remaining compliant with local laws and fulfilling all employer responsibilities.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
