PEO vs EOR - What is the difference?

When looking for a way to build a global team, organizations often come across two different acronyms: EOR and PEO. Employer of Record (EOR) and Professional Employer Organization (PEO) are two common solutions for employment outsourcing which are often (wrongly) used interchangeably.

There are some fundamental differences between EOR and PEO. Let’s look at these differences in more detail to work out what sets them apart.

We have already talked about Employer of Record services and Professional Employer Organizations in great length in previous chapters of the Lano Employment Academy. Here is a quick recap of what services both employment solutions entail.

Professional Employer Organization (PEO)

A Professional Employer Organization, or PEO, is a company that provides HR services such as payroll, tax, and compliance management to companies that wish to outsource these business functions. Usually, PEOs partner with small to medium-sized corporations and also assist in their recruiting and onboarding process.

Main services generally provided by PEOs include:

• Employee benefits

• Tax management

• Payroll processing

• Compliance support

• HR administration

• Employee training and onboarding

• Recruiting and hiring

• Employment contracts

• Other HR-related tasks (e. g. complaint management or dismissals)

• Co-employment, i. e. sharing employment liabilities with the official employer 

Read more about PEO solutions: What are Professional Employer Organizations and what do they do? 

Employer of Record (EOR)

Employer of Record (EOR) providers offer full employment outsourcing services to companies that want to hire international talent without having to worry about compliance and without setting up legal entities in every new location. They have their own entity in the country where they operate and use this legal entity to hire employees on behalf of their clients. This is especially helpful for companies that want to enter a new market without the legal hassle of global employment.

Main services generally provided by an EOR include:

• Employee benefit management

• Payroll processing

• Compliance

• Provision of a compliant employment contract

• Administration

• Acting as legal employer for new employees

• Arranging visa and work permits

• Acting as the interface between employees and government authorities

• Providing legal advice concerning notice periods, termination rules, severance pay and more

Read more about EOR solutions: What is an Employer of Record?

Similarities between PEO and EOR

PEO and EOR services have many similarities—otherwise, they probably wouldn’t be confused so often. The main aspects they have in common include: 

• Both PEOs and EORs are in the business of providing HR services to other businesses.

• Both types of employment solutions are specialized in ensuring compliance with regulatory norms regarding payroll, employment, and taxes.

• In both cases, services include aspects such as payroll, HR management, benefits management, onboarding, and payroll tax administration.

• The main motivation behind working with a PEO or an EOR is to free up resources to focus on core business activities and to avoid compliance issues due to lack of knowledge regarding employment rules.

Under both arrangements, the client business remains what could be called the “managing employer”, meaning that the organization holds the exclusive decision-making power regarding compensation, projects, workload, and more.

So, if there are so many similarities between EOR and PEO, where do the two solutions differ? Here are the main differences businesses should be aware of. 

Need for a legal entity

The fundamental difference between a PEO and an EOR is that the latter allows expanding organizations to hire talent in new geographies without having to set up a local legal entity. This is made possible through the fact that the employment is registered under the legal entity of the EOR provider.

A PEO service, however, requires the client business to have a legal entity. With EOR services, the opposite is the case. Organizations that have an operational legal entity in a foreign market cannot use an EOR service to hire local employees, but must use their own entity instead.

Co-employment vs. proper employment outsourcing

Another crucial difference between EOR and PEO is the legal relationship between the employee and the service provider. When hiring international employees through an EOR, the Employer of Record becomes the employee’s official employer in the eyes of the law. The employment contract is hence concluded directly between the EOR and the employee.

When using a PEO, however, the organization contracting the PEO services remains the employee’s legal employer, since the PEO only takes on the role of a co-employer. This also means that the legal liabilities resulting from the employment are shared between the PEO and the client business. In an EOR arrangement, however, the Employer of Record assumes all legal liabilities. 

Payments to employees

Global payments often represent a real challenge for expanding businesses, which is why it’s always an advantage to have a global employment solution that can also cover payments to employees based in different countries. As the legal employer, the EOR is responsible for paying the employee’s salary, benefits, bonuses, and more. 

With PEO services, salary payments can be a little tricky. Since some countries require payments to be issued by the legal employer directly, the PEO might not be authorized to pay the employee on the client business’s behalf in these cases.  

When choosing between EOR and PEO, expanding businesses need to carefully analyze their current situation and future plans. Since the crucial difference between PEO and EOR is that one solution requires the business to have its own legal entity and the other doesn’t, this is also the decisive factor to consider:

• Existing local legal entity: a PEO service is the go-to option

• No existing local legal entity: an EOR solution is the go-to option

• Local legal entity planned: EOR can be used as an interim solution to cover the time until the legal entity is fully operational

Also read in the Lano Employment Academy: Why and when to use an Employer of Record?