The landscape of business in the USA has evolved significantly, leading to the rise of staffing solutions like Professional Employer Organizations (PEOs) and Employers of Record (EoR). While both models provide essential services that help businesses manage their workforce, they do so in distinct ways that cater to different needs. The main difference between PEO vs. EOR is that a PEO acts as a co-employer, while an EOR is the legal employer of an organization's distributed workforce.
In this article, we will explain in detail what is a PEO professional employer organization, how it operates, and how it differs from an EoR. By the end, you'll have a comprehensive understanding of these two scaling solutions.
What is a Professional Employer Organization (PEO) and How Does It Work?
Running a small business involves many responsibilities—payroll, employee benefits, taxes, compliance with various regulations, and many more. These tasks can be overwhelming and distracting, but the main focus might be scaling the business or breaking out to foreign markets. This is where a PEO can provide valuable support.
A PEO, a professional employment organization, acts as a co-employer, sharing the burden of many administrative tasks with a client company, and is often associated with human resources outsourcing. Co-employer assists with processing payroll, managing benefits, ensuring tax compliance, and even offering legal and financial guidance.
This type of service is usually used for hiring within the USA when new employees are needed in a different city or for a short period of time. This model is not associated with offshore teams or outstaffing. For this purpose, American companies use full-circle global staffing companies that use the EoR model. Is that what you were looking for? Learn more here.
How Does a PEO Work?
When engaged with a PEO, the process typically works as follows:
Business gets into a co-employment relationship with the PEO, where both parties share employer responsibilities.
The PEO:
takes over payroll duties, ensuring employees are paid accurately and on time.
manages benefits like workers' compensation insurance and retirement plans.
assists in obtaining an Employer Identification Number (EIN), which is crucial for processing payroll and taxes.
provides guidance and ensures the business adheres to all relevant labor laws and regulations.
The parent company remains involved in the decision-making process and must navigate the contractual obligations that come with this partnership.
In other words, while a PEO can lighten the administrative load, the ultimate responsibility still lies with the parent company.
On the contrary, an EoR service carries a more comprehensive function, taking on greater responsibility for compliance and legal issues, potentially offering a more hands-off solution.
Core Services Provided by a PEO and EoR
Both models can indeed take some of the most time-consuming tasks involved in running a company. From managing payroll to ensuring tax compliance, PEO and EoR provide essential services that help streamline operations and reduce the administrative burden. These include:
Payroll processing Payroll is not just about cutting checks; it involves thorough attention to detail, adherence to varying regulations, and accurate tax reporting. A PEO professional employer organization streamlines this process by taking full responsibility for this part.
Human resources Both take care of important HR tasks like employee onboarding, benefits administration, resolving workplace conflicts, and managing employee performance. Having a dedicated onsite people partner who is committed to responding to basic queries from offshore employees is a must. This helps a lot in building trust and harmonizing the working atmosphere.
Tax compliance
Navigating the complex world of tax regulations is a challenge for any business. PEO or EoR partner ensures compliance with all relevant tax laws, handling payroll taxes, unemployment taxes, and other employment-related charges.
The PEO Co-Employment Relationship Explained
The co-employment relationship is a foundational concept of how a PEO operates. In a co-employment arrangement, both the client company and the PEO share employer responsibilities for the employees. This means that while the client company retains control over day-to-day operations and decisions, the co-employer handles many administrative and compliance-related tasks. This dual role can be advantageous but also requires careful consideration of the implications.
The client company directs employees' work, sets their tasks, and manages their performance. Meanwhile, the co-employer takes care of payroll processing, benefits administration (team-buildings, online and offline learning sessions, etc), and ensuring compliance with employment laws.
Both the PEO and the client company are considered employers of the workforce. This shared responsibility means that while the PEO handles compliance and legal obligations, the business is still involved in critical decisions and remains responsible for certain liabilities.
While the co-employment model offers significant benefits, it’s not without its challenges. The shared responsibilities and potential for overlapping roles require clear agreements and strong communication between the company and the PEO.
Pros and Cons of Partnering with a Professional Employer Organization
If questioning why use a PEO, what the benefits of a PEO are, and what the possible drawbacks that the business might face are, explore the core of the pros and cons that this scaling model offers.
Benefits of PEO Partnership
The more the business scales, the more demanding it becomes to handle the operational details that come with growth. This model can make a difference, let’s see how:
Cost Savings
According to McBassi & Company, the annual return on investment (cost savings alone) from using a PEO is 27.2%. By outsourcing HR functions to a PEO, companies can cut down on HR costs: salaries, onboardings, health benefits, payroll processing, and retirement plans. Those services are provided at a lower cost or included in the contractual fee, eliminating the need for expensive in-house systems and staff.
Risk Mitigation
Apart from regulatory compliance assistance, that partner helps with Employee Misclassification, Employment Practices Liability (wrongful termination, discrimination, and harassment claims), Data Security, and Workplace Safety. They all can be presented as a separate service addition or included in the main contract.
Potential Drawbacks of Working with a PEO.
While this model can bring many advantages, it’s essential to weigh the potential downsides as well. Understanding these challenges will help determine if a PEO is truly the right fit for the company. Here are some key factors to consider when deciding whether to work with this model or not:
Contractual Obligations
While a PEO can handle many tasks, the co-employment model still means shared legal responsibility for certain obligations. This includes signing contracts and sharing liability for employment-related issues.
This shared liability is a key aspect of the co-employment model and should be fully understood before entering into an agreement. For example, if an issue arises regarding wage and hour compliance, both parties could face legal scrutiny.
Unlike an Employer of Record (EoR), which assumes full responsibility for employment matters, a PEO partnership requires continued involvement of the parent company in these areas. This can sometimes limit the flexibility in making quick changes or decisions
The key takeaway for business owners: PEO will NOT take responsibility for administrative issues off your hands. Businesses are on almost equal footing with a PEO partner but just receive most HR outsourcing services without any extra effort. This model may be a good fit for local scaling of small startups. International expansion may be more difficult with PEO, and EoR service might present better opportunities in such cases.
Employee Perception
Introducing a PEO partnership can sometimes lead to confusion among employees. In a co-employment arrangement, employees may view it as an additional layer of management. They may not fully understand the role of the outsourcing partner. This can sometimes lead to a sense of distance between employees and the primary employer. Clear communication is essential to ensure that employees understand how the partnership will influence their day-to-day experience.
To avoid such an impact and build a truly dedicated and loyal team, consider turning to a full-cycle staffing company, where the employer's brand has already been built and has a real active corporate life and team-building events. SD Solutions is a global scaling partner providing staffing services in an end-to-end package. Find out more about our client’s stories.
The effectiveness of this model depends on several factors, including the size of the business, the level of responsibility in-house managers are willing to take for the offshore branch, and whether a co-employment contract is the best model for future plans. If these factors raise concerns, an Employer of Record (EoR) solution might be more suitable.
Professional Employer Organization vs. Employer of Record
Having a clear understanding of the difference between PEO and EoR is key to making the best choice. Both Professional Employer Organizations (PEO) and Employers of Record (EoR) offer great support in managing the workforce, but they each work a little differently, depending on individual business needs. Finding the right fit can help streamline operations, reduce risks, and support the company’s growth just the right way. Let’s take a closer look at how these two options differ and what they each have to offer.
Aspect | PEO (Professional Employer Organization) | EoR (Employer of Record) |
Definition and Roles | Co-employment relationship; responsibilities are shared between the client and PEO. | EoR acts as the legal employer; full responsibility for employment-related tasks. |
Legal and Compliance Responsibilities | Client shares legal responsibilities with the PEO. | EoR assumes full legal responsibility, reducing risks for the client by up to 70%. |
Payroll and Benefits Administration | PEO manages payroll and benefits under a shared responsibility framework. | EoR takes full control of payroll and benefits, reducing administrative workload. |
Client Relationship and Co-Employment | Requires clear communication and defined roles due to shared responsibilities. | Simplified relationship: EoR is the sole employer, reducing the client’s legal exposure |
Geographic Flexibility and Global Reach | Typically operates within specific regions; may have limitations in global expansion. | Suited for global expansion, handling compliance and employment globally |
Cost Considerations | Cost varies based on services and workforce size; Typical savings on benefits can range from 10-15% | Generally higher costs, but offers a comprehensive, low-risk solution with potential compliance cost savings of 20-30%. |
If you're looking for a way to expand the in-house team without the extra costs and complexities of setting up a legal entity directly, consider hiring through an Employer of Record (EoR) service. An EoR allows one to tap into global talent while ensuring full compliance with local labor laws. By acting as the legal employer on your behalf, SD Solutions handles payroll, taxes, benefits, and all employment-related legalities, leaving our clients free to focus on growing their business.
Frequently Asked Questions: PEO vs EoR
Is a PEO the same as an EoR?
No, a PEO and an EoR are not the same, although they both provide workforce management solutions. A PEO enters into a co-employment relationship with the business, sharing responsibilities for payroll, benefits, and compliance. In contrast, an EoR becomes the legal employer of the workforce, taking on full responsibility for compliance, payroll, and other HR tasks, while parent company managers focus on managing day-to-day operations.
Should I choose EoR or PEO if...
