Many global companies are actively outsourcing their operations to other countries with lower cost of operations. It is a common practice that allows businesses to expand beyond borders and globalize their business landscape.
Outsourcing makes it easier for business owners to run their empires. However, it’s important to note that there are a lot of things business owners need to consider when they go global or tap into international markets. One of these things is whether they should go for PEO (Professional Employer Organization) or EOR (Employer of Record).
How do these two differ? Let’s break down the difference between PEO vs EOR.
A PEO is a type of organization that would go into a joint employment relationship with a company or employer, leasing them a workforce or taking care of administrative work for them. Essentially, this means that companies get to outsource the tasks and responsibilities of their human resource department to the PEO. These responsibilities include dealing with employment taxes, employee compensation, payroll administration, and workers’ benefits.
Naturally, PEO acts as the official employer of their clients’ employees. Therefore, their clients get to report their profits under the PEO’s Employer Identification Number (EIN). It also means that the employee liability would go to the PEO.
Employer of Record or EOR is a third-party firm that assumes the role of the full legal employer of their client’s (or the employer’s) employees. They are tasked with employer-related responsibilities in place of their client. An EOR also takes on HR responsibilities, which include onboarding, paying, and managing the supported workforce. The client, on the other hand, needs to just control and maintain their daily operations.
According to Business Insights, the Employer of Record market size is expected to grow from 4299.1Million in 2021 to USD 6604.4 Million by 2028. Needless to say, many foreign investors prefer to deal with EOR service providers because they could legally communicate with the workforce despite international borders without needing to build a local entity and without risking a violation of the laws of their selected country.
There are several things to consider when comparing PEO and EOR: Structure, risk, scale, scope, and cost.
As discussed, EOR is considered as a full employer while a PEO acts as a co-employer with their clients when running operations. If a company goes into a partnership with a PEO, it could still have the authority over decisions relating to human resources.
If they opt to enter an agreement with an EOR instead, they would not have this authority or power to make decisions for the workforce’s HR needs; rather they would entrust the EOR to make the decisions for them.
When it comes to employment risks, it’s important to note that a business owner may be more exposed to liabilities if they go with a PEO partnership. Since they are a co-employer of the hired workforce, they must assume half the responsibility for the workers or the organization. The PEO would just have to help manage workplace risks to avoid any possible issues.
On the other hand, EORs assume all responsibilities and risks because they are the actual employers of the global workforce. Business owners, who choose to go with EORs, could suffer fewer risks considerably.
Companies that don’t need a large workforce might find EOR preferable compared to PEO. EORs also provide more flexibility because they do not need to comply with employee minimums, which means they could just hire a single temporary employee in a certain country or region.
However, if a company finds more value in outsourcing work to more employees, they should partner with a PEO. Generally, PEOs have to comply with hiring a minimum number of workers. They would also have to get full-time instead of a temporary workforce. As a result, they provide a lasting operation that business owners can take advantage of.
In a PEO partnership, a company owns an entity locally. This means that the company has human resources services in these locations. They are also considered the employer of their employees together with the PEO, and therefore, they must take note of local labor laws to remain in compliance.
All of this does not need to happen with an EOR partner because they should be taking over all of these responsibilities. In the eyes of the law, they are the employer of the workforce.
Initially, business owners would be paying a similar amount to partner with either a PEO or an EOR. This is in terms of long-term and up-front costs. Both organizations would charge a monthly fee per percentage of the monthly payroll or per employee.
However, going with a PEO might end up costing more because they often have a one-time introductory charge to start operations. They also expect companies to shoulder worker benefits and insurance. With EOR, the EOR service provider manages all employment-related costs, and will provide the company with a consolidated invoice.
Now that the differences between the two have been discussed, there are the questions you must answer as a business owner so that you can make the right choice.
Remember that the only way for your business to partner with PEOs is when they own a legal entity in the state or country where they plan to hire a workforce. Hence, if they prefer to hire full-time workers, they must consider opening their own legal entity in the local scene.
If they choose not to, their other option is to partner with EORs instead. EORs allow companies to outsource work to them without the complications of owning a legal entity.
It’s important to know how many workers you plan to outsource work to because this information would give you an idea of whether to select EOR or PEO.
As discussed, most of the time, PEOs have a minimum employee count to consider. Companies looking to hire a large workforce would be better off with a PEO. On the other hand, if you are only looking to hire a few workers, you could go with an EOR instead.
At the end of the day, only business owners can decide whether they should go for PEO or EOR. They know their own stipulations when it comes to outsourcing–whether they need to hire a large workforce, how much cost they’re willing to pay, how much risk they are willing to shoulder, among others.
For those who are considering outsourcing and want to know which type of organization would best suit their needs, take everything that was discussed here into account.
If you have decided to go for EOR, you can talk to us to discuss your requirements. We’re ready to answer all your questions. Email us at [email protected] and see how we can help.