Employer of Record or PEO? What’s The Difference In The USA?
What is the Difference Between a PEO and Employer of Record (EOR) in the USA?
The terms EOR and PEO are often used interchangeably in HR as both services can act as an extension of your company and help you expand locally and/or internationally. However, it is important to distinguish the difference between a PEO and EOR as choosing the wrong option for your business can put you at legal risk.
This blog will break down what each term means and what partnering with an EOR or PEO in the USA means for your business.
What is an EOR?
What is an EOR?
An Employer of Record in the USA bears the liability of your employment arrangement and takes on administrative back-office tasks such as payroll, benefits, terminations, and onboardings offered to your workers. If you use an EOR provider in the US, they are the legal provider and employ your chosen workers on your behalf, managing all the responsibilities that coincide with employing staff.
EOR Services – How does an Employer of Record work in the USA?
In the USA, an Employer of Record functions as a partner organisation that manages the administrative aspects of employment on behalf of your company. Here's how it typically works:
Contractor Onboarding
Once engaged, the EOR takes responsibility for onboarding new hires. This process includes completing necessary paperwork such as tax forms, and other documentation required by local regulations.
Employment Management
The EOR manages payroll processing, benefits administration, and compliance with federal, state, and local labor laws.
HR Support
Employees may turn to the EOR for HR-related inquiries, such as questions about benefits, leave policies, or workplace issues. The EOR acts as a point of contact for these matters, relieving the client company of these responsibilities.
Risk Mitigation
By outsourcing employment-related tasks to an EOR, the client company mitigates the risk of non-compliance with labor laws and regulations. The EOR ensures that all employment practices align with relevant legal requirements, reducing the potential for legal liabilities.
Termination and Offboarding
When necessary, the EOR facilitates the termination and offboarding process for employees, ensuring compliance with relevant employment laws and regulations.
Overall, using an Employer of Record in the USA simplifies the complexities of managing a workforce which enables client companies to focus on their core business activities while ensuring legal compliance and effective HR support for their employees.
What is a PEO?
A PEO (Professional Employer Organisation) is an outsourcing firm that provides co-employment solutions. You enter a ‘co-employment’ relationship with the provider, and they help you manage administrative back-office tasks similar to above, however, employment liability and responsibilities still fall on your organization.
So, What is the Difference Between a PEO and EOR?
Workers are classified differently
One of the main distinctions between PEO and EOR services is the employment relationship. When you partner with an EOR provider they employ and take on the legal responsibility, administrating all the tiresome back-office tasks, so you don’t have to.
If you enter a PEO service arrangement, you still are legally responsible for employing your worker and instead enter a co-employment relationship. Unlike an EOR, who takes on all the administrative HR tasks, they instead work with you to help you manage payroll-related tasks and certain HR functions.
Responsibility for business registration
If you are expanding your business and need a physical entity, it is important to choose the right service based on your business needs. If you want to expand your business globally and don’t have the need or resources for a physical entity, choose an EOR.
An EOR enables you to hire workers in other countries/states without having to register a physical entity which can be a huge bonus, allowing you to save office set-up costs, time, and effort.
An EOR already has a registered business in the country/state you’re interested in and manages your workers under an EOR agreement. If you are expanding your business internationally and use a PEO, you are still required to register an entity in your desired location in order to do business.
Flexibility
Utilising an EOR in the USA allows companies to scale their workforce quickly and efficiently without the administrative burden of hiring and managing employees directly. This flexibility is especially valuable for businesses entering new markets or experiencing fluctuating staffing needs. This flexibility is particularly advantageous due to the common practice of ‘at-will’ employment in the USA.
The minimum number of workers required to start your business differs
If you want to start expanding your business and decide to enter a co-employment agreement with a PEO, you must be ready to place a minimum of five to ten workers. Whereas, if you partner with an EOR, you can get up and running straight away with sometimes only one or two workers. Therefore, if you are hoping to gradually expand your business an EOR is usually the right solution for you.
Insurance plans are included with an EOR, not with a PEO
If you choose to use a PEO, insurance is generally paid in addition to the usual PEO service costs. Insurance can be one of the largest hidden costs involved when working with a PEO. Insurance coverage is included with your service when you partner with an EOR. This means your employees are covered for a range of scenarios such as damages and workplace-related injuries, meaning you don’t have to worry!
How does the cost of partnering with an EOR compare to using a PEO over the long term?
Regarding the cost comparison, partnering with an EOR might initially seem more expensive due to its comprehensive service offering, including taking on employment liabilities and providing insurance coverage.
However, this upfront cost can potentially save businesses from future expenses associated with employment liabilities, legal compliance issues, and the setup and maintenance of international offices. While a PEO might appear cost-effective initially, the additional costs for insurance and the potential for hidden fees can accumulate over time. The long-term financial implications largely depend on the business's specific needs, such as the scope of HR services required, the need for international expansion, and the desired level of control over HR processes.
Difference Between a PEO and EOR in the USA [Infographic]
To help aid understanding on the matter, we have put together an infographic that breaks down the differences in engaging workers in the US via a EOR, PEO or by employing in-house.
![Difference Between a PEO and EOR in the USA [Infographic]](https://images.squarespace-cdn.com/content/v1/5df75b994c1bf307fe492432/1605208145743-EQUM07REZEHAXFODA3G0/In+house+vs+PEO+vs+EOR++%282%29.png)
Which is Better For My Business, a PEO or an EOR?
For businesses aiming to expand into the USA, navigating the complexities of local labor laws, cultural differences, and establishing a local presence in a new market can be daunting. The choice between an EOR and a PEO significantly impacts how these challenges are addressed.
Compliance with Local Labor Laws
The USA has a complex and varied legal landscape, with federal, state, and local laws governing employment. An EOR helps ensure compliance with these myriad of laws on behalf of the business. This includes adhering to minimum wage laws, overtime regulations, and ensuring all employment practices meet local standards.
Navigating Cultural Differences
A US EOR, with its local expertise, can guide businesses in adopting appropriate employment practices that resonate with the local workforce. This can include insights into typical working hours, holidays, professional communication styles, and benefits expectations.
Establishing a Local Presence
Since the EOR already operates within the USA, businesses can hire employees without setting up a legal entity themselves. This is particularly advantageous for companies looking to test the market without committing to the high costs and administrative burdens of establishing a subsidiary or branch office.
In contrast, while a PEO also provides support for HR functions and compliance, the co-employment model means the client company retains more legal responsibility and requires having an established entity in the USA.
Choose a PEO to Outsource HR Functions Long-term
If you want to expand and outsource a variety of your HR functions and need long-term help, a PEO may be for you.
Choose an EOR to Start Your US Business Expansion Plans Immediately
If you want to start your business expansion plans immediately or are experiencing increased business demands, an EOR is for you.
Partnering with an EOR accelerates the onboarding process, compliantly employing your workers on your behalf, and dealing with all the back-office processes so you can focus on your daily operations.
Additionally, if you wish to expand globally and don’t want to go through the implications and differing employment laws that come with setting up a physical entity in a different country, choose an EOR.
Find out from an Expert whether EOR is the right fit for Your Business
If you are still unsure which service best fits your business needs, get in touch and we will happily talk you through the differences between an EOR and PEO in the US to help you decide which is best for you based on your business goals!
Disclaimer: All information written here is for general informational purposes only and is not intended to be a substitute for professional and/or legal services.