EOR vs. PEO: The best choice for your global growth
Expanding your business globally presents numerous challenges—managing compliance, handling payroll, and onboarding international talent being just a few. For companies exploring global growth, two key models are available: Global Employer of Record (EOR) and Professional Employer Organization (PEO). But how do you determine which one fits your business? It depends on your specific goals, size, and the markets you’re entering.
In this guide, we’ll explore the critical differences between an EOR and a PEO, dive into real-world scenarios, and help you make an informed choice tailored to your growth needs.
What is a Professional Employer Organisation (PEO)?
A PEO partners with companies to provide HR services such as payroll, benefits administration, and compliance. The relationship operates on a co-employment model, meaning that while the PEO manages HR functions, your company retains legal responsibility as the employer. As per a report, the PEO industry's market size is all set to surpass $158.99 billion by 2031, expanding at a CAGR of 10.9%.
PEOs are especially useful for businesses that already have a legal entity in the country and are looking to outsource HR operations. However, PEOs generally work within specific countries, limiting flexibility if you’re expanding into multiple new regions.
Example: A mid-sized tech company based in the UK may use a PEO to outsource its HR functions within Europe. While the PEO manages payroll and benefits, the company is still legally responsible for the employees.
Related Resource: Employer of Record vs Staffing Agency article.
The advantages of PEOs
In HR outsourcing, Professional Employer Organizations (PEOs) have emerged as a popular choice for many businesses.
Their comprehensive services and shared responsibility model offer a unique blend of benefits.
A Professional Employer Organization (PEO) provides several benefits:
- Comprehensive HR Services: PEOs offer various HR services, including payroll processing, benefits administration, and compliance management.
- Shared Responsibilities: PEOs share employment responsibilities with the client, allowing businesses to maintain control over their workforce.
- Scalability: PEOs can quickly scale their services to match the growth of your business.
- Access to Expertise: PEOs have experts in various HR disciplines, providing businesses with access to knowledge and skills that may not be available in-house.
- Cost Savings: PEOs can offer cost-effective solutions for benefits administration and other HR services by pooling resources from multiple clients.
The limitations of PEOs
While PEOs are a boon for many businesses, they come with their own set of challenges. Businesses must be aware of these limitations to make an informed decision.
However, there are some limitations to consider with PEOs:
- Legal Entity Requirement: PEOs require the client business to have a legal entity, which may only be feasible for some companies.
- Shared Liability: In a PEO arrangement, the legal liabilities from employment are transferred between the PEO and the client business.
- Less Control: While PEOs share responsibilities, they also share control, which may only be ideal for some businesses.
- Cost: PEO services can be expensive, especially for small businesses.
- Dependent on Business Size: PEOs work best for small to medium-sized businesses. Larger organizations may find a PEO's services less tailored to their needs.
What is an Employer of Record (EOR)?
An EOR takes on full legal responsibility for your employees, acting as the official employer in the country of operation. This is particularly valuable when you want to expand into new markets without the need to set up a legal entity. The EOR handles payroll, compliance, benefits, and taxes, while you retain control over day-to-day operations. The EOR market is growing rapidly. It's projected to grow at a CAGR of 6.8% from 2023 to 2029, reaching $6604.4 million.
Pro Tip: EORs are ideal for businesses looking to scale quickly and compliantly across borders, particularly for those expanding into multiple countries where they lack a legal presence.
The advantages of EOR
Companies constantly seek ways to gain a competitive advantage in the cutthroat global business environment. An EOR brings several advantages to the table:
- Global Talent Acquisition: EORs empower businesses to recruit talent globally without establishing a local legal entity.
- Compliance Management: EORs ensure compliance with local labour laws, tax regulations, and compliance measures, reducing the risk of non-compliance.
- Payroll Management: EORs manage all aspects of payroll, including wage distribution, tax deductions, and benefits administration.
- Risk Mitigation: As the official employer, the EOR takes on all employment-related risks, offering a safety net for the client company.
- Streamlined Operations: By handling HR and payroll, EORs allow businesses to focus on their core operations.
With some EOR services providers, you also benefit from a combination of fast onboarding with human touch and competitive pricing, ensuring a seamless and cost-effective experience. Have a chat with us to find out more - Talk to us.
The limitations of EOR
While EORs offer many benefits, it's important to consider certain limitations when opting for their services.
Here are some considerations when using an EOR:
- Limited Control: As the EOR assumes the role of the legal employer, businesses may have limited control over certain aspects of employee management.
- Dependency: Businesses may become reliant on the EOR for critical functions, which could pose a problem if the EOR fails to meet expectations.
- Cost: EOR services come with a price tag that must be considered in the overall HR budget.
- Cultural Differences: Many EORs rely on computer-automated onboarding, which may not fully grasp the unique cultural nuances of your business. This could affect employee engagement and satisfaction
- Legal Entity Restrictions: Businesses with an existing legal entity in a foreign market cannot use an EOR service to hire local employees.
EOR vs. PEO: The key differences
1. Legal responsibility
• PEO: Your business remains the legal employer, and the PEO provides HR support. You must have a legal entity in the country to use a PEO.
• EOR: The EOR is the full legal employer, eliminating the need for a local entity. You avoid legal exposure, while the EOR manages all employment-related compliance.
For more details: Read more about the ease of staying compliant whilst hiring globally in our casestudies.
2. Global Flexibility
PEOs are excellent for handling domestic HR needs or in countries where your business is already established. However, if you’re expanding into multiple countries, managing multiple PEO relationships can be complex.
In contrast, an EOR allows you to hire in multiple regions without the need for legal entities in each country. This gives businesses entering new markets unparalleled flexibility.
Example: A US-based startup looking to enter five European countries can use an EOR to manage hiring and compliance without needing a legal entity in each country.
Related Resource: Check out our Guides and insights for detailed advice on navigating the global hiring landscape.
3. Compliance and risk management
One of the major differences between an EOR and a PEO is how they handle compliance. A PEO provides guidance but does not assume full legal responsibility, which leaves your business open to legal risks in the event of non-compliance.
An EOR assumes full legal responsibility for compliance, ensuring that local regulations, labour laws, and tax filings are met in each country. This significantly reduces risk, especially when navigating complex international labour laws.
Related Resource: Learn how to avoid employee misclassification and other compliance risks with our Employee misclassification blog.
4. Costs and scalability
PEOs tend to charge a percentage of payroll or flat fees based on the services provided, and their costs are often lower than EORs. However, businesses still need to bear the costs of setting up and maintaining a local legal entity, which can add up over time.
An EOR, while often more expensive upfront due to the comprehensive services provided, eliminates the need for a legal entity, streamlining long-term operational costs, particularly for scaling globally.
Pro Tip: Companies that expand into 5+ countries with an EOR model see a 50% reduction in administrative overhead compared to those using PEOs with local entities. Speak to our team today to see what's the best option for you.
The right option for your business - When should you choose an EOR or a PEO?
Scenario 1: A Growing Startup Expanding Globally
Use an EOR: A tech startup based in the US wants to hire talent in Spain, Portugal, and France. By using an EOR, the company can onboard employees quickly without worrying about local legal complexities or setting up multiple entities. The EOR handles payroll, compliance, and taxes, allowing the startup to focus on its core growth strategies.
Scenario 2: A Mid-Sized Business Expanding Regionally
Use a PEO: A mid-sized business already operating in the US and Canada wants to outsource HR tasks within these countries. Since the company already has legal entities, it can benefit from using a PEO to manage payroll, benefits, and compliance, while maintaining control over its employees.
Related Resource: Discover how other businesses have successfully moved to global hiring via an EOR arrangement over PEO on our moving to Teamed page.
Elevating your HR strategy with us
Whether an EOR or a PEO is the right choice depends on your global growth strategy and the complexities of the markets you’re entering. If you’re expanding into multiple countries or need to hire quickly without setting up legal entities, an EOR offers the flexibility, compliance, and risk management needed. On the other hand, a PEO is ideal for companies that already have a legal presence and are looking to streamline HR functions within specific regions.
fI your business is looking to expand globally without the hassle of setting up legal entities in every new location, an Employer of Record (EOR) could be the ideal solution. With Teamed, you can leverage our global EOR solution to hire, onboard, and manage your international workforce with ease and confidence. Elevate your HR strategy with Teamed and take your business to new heights.
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