Understanding EOR vs PEO: Which is the Right Choice for Your Company?

As your business expands globally in 2024, you'll probably be grappling with the complexities of rules and regulations when building remote teams in different countries.

This leads many to consider a third-party partner to help navigate the intricacies of international hiring, payroll, and compliance.

An Employer of Record (EOR) and a Professional Employer Organization (PEO) were born to help you with just that.

Both EORs and PEOs serve as invaluable third-party human resources partners, streamlining HR tasks and administrative burdens so you can focus on core business operations.

But here's where it gets tricky: EORs and PEOs often appear similar, with overlapping services that can leave you scratching your head. They're also frequently miscalled or used interchangeably, adding to the confusion!

Fear not—I'm here to break it down for you.

In this article, I'll explore the differences between EOR and PEO, their unique roles, and how they can supercharge your global workforce management.

Whether you're taking your business to new international heights or fine-tuning your existing remote team structure, by the end of this discussion, you'll have the knowledge you need to make an informed decision that aligns with your business goals and operational requirements.

EOR vs PEO for Global Hiring

When exploring the options of EOR vs PEO, it's essential to understand the fundamental differences and roles each plays in managing your global workforce.

An Employer of Record (EOR) serves as the legal employer of your remote teams or international employees. They will take complete responsibility for HR functions, including:

• Onboarding employees: The EOR will provide technology and expert-approved guidance to help you draft employment contracts, conduct background checks (selected vendors), and ensure compliance with local labor laws.
• Payroll and taxes: The EOR will manage payroll processing, withholding, and remitting taxes to the appropriate authorities in the local country.
• Benefits administration: The EOR will provide and manage employee benefits such as health insurance, retirement plans, and paid time off, in accordance with local regulations.
• Compliance with local laws: The EOR will ensure that all employment practices comply with the local country's labor laws, including working hours, minimum wage, and termination procedures.
• Risk mitigation: By acting as the legal employer, the EOR will assume the legal risks associated with employing workers in a foreign country and assist your company in avoiding potential risks of employee misclassification and intellectual property violations.
• Offboarding: When an employee leaves the company, the EOR will handle the termination process, including final payments, tax filings, and any required notices.

All these functions are performed under the EOR's legal rights in the local country. In other words, you can expand your operations internationally with ease and without the need for a legal entity in each country.

This arrangement can be particularly beneficial for companies looking to expand their operations internationally without establishing a legal entity in each country.

On the other hand, a Professional Employer Organization (PEO) enters into a co-employment agreement with your company. This means you must have a legal entity to use the service.

While you maintain the primary employer responsibilities, such as day-to-day management and performance evaluation, the PEO will handle HR administration tasks and ensure compliance with local legal requirements.

As outsourced HR services, PEOs can provide more extensive support in managing remote teams, such as offering training and development programs, conducting employee engagement surveys, and providing HR consulting.

However, a PEO doesn't have the authority to become the legal employer of your workers, nor can it aid in your company's international expansion. 

Your company is ultimately responsible for employment decisions, protecting its intellectual property, watching out for permanent establishment risks, and assuming legal liability for employment-related issues.

How Much Do EOR vs PEO Cost?

Firstly, the cost of EOR services is not so little! To be specific, they charge a monthly fee of $500 to $700 per employee in each new country or 5 to 20 percent of their payroll. 

(Please note that this is just an average number for comparison. EOR services rates can actually range anywhere from a budget-friendly $199 to eye-watering thousands per employee, depending on how extensive the EOR's offerings are and their pricing structure.)

However, this upfront investment is significantly lower than the alternative of setting up a local entity (and maintaining multiple of them across different jurisdictions).

According to the cost breakdown examples of Deel, a leading mid-range EOR service provider, subsidiary registration can be ten times more expensive than a quick and straightforward employer-of-record solution.

Not to mention that setting up an entity per country per hire is not scalable at all!

By now, I believe you can get the primary value of an employer of record model.

In case a business license and other legal employment requirements are not your concerns, and you’re looking for “someone” to take on the busy works of HR services with the remote teams and local government bodies, PEO services cost $40-$160 per employee per month or 2-12% of their payroll for such support.

This makes sense because you already spend for your local entities, and it opens a hassle-free option for businesses with a stable and growing international presence.

It should be noted that, unlike EORs, PEOs often require a minimum number of employees to engage their services.

Small to medium-sized companies that lack an in-house HR department or those with limited resources to establish and oversee HR compliance in a new country can greatly benefit from a PEO's specialized team of experts and comprehensive services.

This is especially true for countries outside your area of expertise, where a PEO can provide you with invaluable peace of mind. As Eynat Guez, CEO of Papaya Global, a global PEO vendor, captured it well:

“You need REAL experts on the ground—people who live in the country and have an insider’s understanding. They know all of the country's fine details and unique demands. Think of it like people who speak a native language compared to people who learned the language later in life.” - Eynat Guez, Founder and CEO of Papaya Global

Take the employment-related administrative, legal, and compliance burdens off your plate. Then, you and your team will have more room for strategic oversight, business growth, and focus on cultural aspects—a critical factor that drives more joy at work.

Unlocking New Markets and Remote Talents: EOR vs PEO

As we've seen, EORs allow you to enter new markets swiftly and compliantly—one of the major Employers of Record benefits.

PEOs can only do the same if they operate on a global scale, called “global PEOs,” often with owned entities or established partnerships in other countries.

Nicole Sahin, founder and CEO of the pioneering EOR company Globalization Partners, shared in her Forbes article:

"Expanding internationally has become less optional and more imperative. The secret to successful international expansion doesn't need to be a secret any longer." - Nicole Sahin, founder and CEO of Globalization Partners

Human resources technology, such as recruiting software, ATS, CRM, and even AI recruiting, is finding its way to help recruiters quickly identify high-quality candidates and reduce the time to hire.

But these efforts are futile if, after finding your dream candidates, you become bogged down by bureaucratic hurdles in securing top talent in high-demand areas and getting them onboarded to start the actual work.

Whether it's capitalizing on emerging market opportunities, adapting to changes in consumer behavior, or meeting investor expectations, companies are often in a race against time.

The agility offered by an EOR enables businesses to bypass the lengthy and complex processes involved in setting up foreign subsidiaries, which can take months and consume significant resources.

EOR companies help you onboard people rapidly, often within a matter of days. Some, like Rippling or Deel, even offer near-immediate speed.

As remote work continues gaining traction, hiring and managing global talent should become less challenging for businesses, even startups and small companies.

For example, Remofirst, a cost-effective EOR service provider, aims to help SMEs by strategically keeping costs low, as shared by its founder and CEO Nurasyl Serik:

"Our approach has always been to democratize global hiring — making it affordable and accessible for companies of all sizes. We are focused on removing barriers, ensuring compliance, and offering transparent pricing. It's about providing peace of mind to our clients, knowing they can expand their teams globally without unnecessary complexity or cost." - Nurasyl Serik, co-founder and CEO of Remofirst

Worker Misclassification Risks

Another critical aspect differentiating EOR and PEO services is how they help companies navigate the complexities of managing a diverse workforce, particularly in light of the growing gig economy and the associated risks of worker misclassification.

The rise of the gig economy has led many companies to leverage a mix of full-time employees and independent contractors, attracted by the flexibility, cost-efficiency, and specialized skills that contractors offer. 

However, blurring lines between these two categories can create significant challenges.

Misclassifying workers, whether intentionally or inadvertently, can result in serious consequences. 

If you run a business in the US, you might be familiar with the Fair Labor Standards Act (FLSA), which establishes guidelines for employee classification, ensuring that workers receive the appropriate compensation, benefits, and protections based on their status.

Violating these regulations can lead to costly legal penalties, damage to a company's reputation, and even worse, disruption of business operations, as evidenced by high-profile cases involving giants like Apple, FedEx, and Uber.

It's important to note that even within the US, worker classification laws vary by state. For example, California's Assembly Bill 5 (AB5) has introduced stricter criteria for classifying workers as independent contractors, with a particular focus on the gig economy. 

This implies that even if a company has properly classified its workers in the past, changes in legislation and the evolution of work arrangements can create new compliance risks.

When expanding internationally, navigating worker classification becomes even more complex, as each country has its own unique labor laws and regulations.

EOR services provide a two-pronged approach to ensuring proper worker classification. 

First, they offer legal consultation and guidance to help companies navigate the complexities of local labor laws and regulations. 

Second, many EORs (like those in my 2024 Best Employer of Record Services collection) incorporate built-in tools within their platforms that allow you to self-assess and double-check worker classifications before finalizing employment contracts.

By ensuring compliance with local laws and regulations right from the beginning and being available on demand, an EOR helps companies avoid the pitfalls of misclassification when hiring and managing global teams, protecting both your company and the employees. (Your people deserve all the best perks!)

And remember, misclassification cases can easily escalate into “class action” lawsuits. If just one unhappy employee raises a dispute, it can trigger investigations that expand to include others in the same classification, magnifying the legal and financial risks for your company.

Choosing Between EOR and PEO

Deciding between EOR and PEO hinges on several critical factors that align with your business's operational needs and strategic objectives. 

Here's a breakdown to guide your decision-making process:

Key Decision Factors

1. Company Footprint: If your company lacks a legal presence in a target country and needs to hire employees, an EOR is indispensable as it allows you to hire quickly without establishing a local entity. Conversely, a PEO might be more suitable and cost less if you already have a legal entity in a country and wish to outsource employment responsibilities.
2. Type of Employment and Liability Preferences: EORs are ideal for managing temporary, seasonal, or project-specific workers as they assume all employment risks and liabilities. This is particularly beneficial if you aim to minimize legal exposure. On the other hand, PEOs share these liabilities and are better suited for businesses with a stable, full-time workforce.
3. Long-Term Cost Implications: While both EOR and PEO models offer HR solutions, their cost-effectiveness varies depending on your business model. EORs generally present a more cost-effective solution for international expansion by eliminating the need for local entities, whereas PEOs can be cost-saving in countries where you already have an established presence and a small team there.

Strategic Considerations

• Flexibility in Employment Structure: EORs provide significant flexibility by managing HR functions across different jurisdictions without the need for a local corporate structure, meaning you can use EOR to hire a single person in Canada and another one in France. This is crucial for businesses looking to tap into global talent pools without substantial upfront investment.
• Control Over HR Functions: PEOs and EORs mainly tackle legal aspects in local environments, such as payroll, taxes, and compliance. Cultural nuances and day-to-day employee management still fall under your purview. However, partnering with a PEO offers more flexibility, as you can create and enforce HR policies that align with your company's culture and requirements, including hiring, salaries, performance management, and terminations. Some PEOs even offer end-to-end talent services, covering recruiting, training, employee engagement, and performance management, providing you with better assistance in remote team management. 

Operational and Compliance Impact

• Ease of Market Entry: EORs dramatically simplify the process of entering new markets, making them ideal for businesses looking to expand globally in a short timeframe.
• Compliance and Risk Management: Advanced solutions offered by both EORs and PEOs can alert companies to compliance violations, ensuring adherence to local employment laws. But they differ in risk management. EORs absorb most of the compliance-related risks and can safeguard you from common pitfalls like employee misclassification and loss of intellectual property and invention rights.

If you are considering an EOR, make sure to check out my comparison guide on the Best Employer of Record Services in 2024 (key features and pricing details)

Frequently Asked Questions: EOR vs PEO for Global Hiring

What are the key differences between EOR and PEO?

An EOR serves as the legal employer for your international workers, handling payroll, taxes, benefits, and local compliance. A PEO enters into a co-employment agreement with your company, sharing certain employer responsibilities. 

Both offer global employment services. However, an EOR is better suited for hiring employees in countries where you don't have a legal entity, while a PEO is ideal if you already have a presence and want to outsource HR functions.

Is a PEO more cost-efficient than an EOR for global employment? 

The cost efficiency of PEO vs EOR depends on your specific needs. 

If you have a legal entity and a stable workforce in a country, a PEO may be more cost-effective for employment outsourcing and managing global payroll. 

However, if you're expanding into new markets without a legal presence, an EOR is often more cost-efficient, as it eliminates the need to establish foreign subsidiaries.

Do I lose control over my employees when working with a PEO? 

No, when partnering with a professional employer organization, you can still maintain control over your employees' day-to-day activities, work assignments, and performance management. 

The PEO will handle HR administrative tasks, such as payroll services, tax deductions, and benefits administration, while you retain control over your company's hiring practices, salary payment decisions, and employee experience.

If my employees need visas and work permits, which global employment model can help: EOR or PEO? 

If your employees require visas and work permits, an Employer of Record is the best choice for your global employment needs. 

As part of their comprehensive services, EORs can sponsor visas and work permits for your international hires, navigating the complexities of immigration laws to ensure your employees have the necessary documentation to work legally in their respective countries. 

This is a significant advantage of using an EOR, as they can take on the responsibility of visa and work permit sponsorship, saving you time and resources. 

Check out my discussion on the comprehensive EOR Meaning guide for more use cases of an employer of record.

Meanwhile, PEO generally does not sponsor work visas. They typically assume that the employees are already authorized to work in the country where you have a legal presence. And they will only provide employment services for legal residents of that country.

Wrapping it Up

EOR and PEO models offer distinct advantages for managing your global workforce. There's no one-size-fits-all winner, but all boils down to your company's unique global expansion needs.

If you're eager to conquer new markets without the hassle of setting up legal entities, an EOR is your trusty sidekick with their well-versed expertise and hands-on experience. They've got your back on legal matters, compliant global hiring, and risk management.

But if you've already planted roots and just need a boost in HR prowess, a PEO is your go-to partner. They'll share the load and keep you in control.

Consider factors like company footprint, employment type, liability preferences, and long-term costs when making your decision.

Then, the most-fit partner will help you crush your global ambitions and keep your team happy!