Legal

EOR vs. PEO: What's the difference, and which is better for distributed teams?

Understand which option is best for you.
January 17, 2022
Oyster Team
EOR vs. PEO: What's the difference, and which is better for distributed teams?

Hiring distributed workers in countries where you don’t normally do business means accessing diverse, highly qualified talent pools. It also means dealing with unfamiliar and complicated labor and employment laws and regulatory requirements. Failing to make the right payroll deductions, obtain the right types of insurance, or apply for the right certifications, can lead to expensive and time-consuming investigations, fines, or lawsuits.

In order to manage this type of risk, many business leaders use an Employer of Record (EOR) or a Professional Employer Organization (PEO).

While industry experts use these terms interchangeably, there are quite a few differences between an EOR and a PEO.

Start here to learn what’s the difference and which is better for your distributed workforce. Let’s get to it!

What’s the difference between a PEO and EOR?

Graphic that says "What's the difference between a PEO and an EOR?"

Think of a PEO as a service provider. One you hire to handle your administrative, human resource (HR) needs when looking to hire workers in multiple states or countries. They provide you with the following types of services:

  • Benefit plan administration
  • Payroll processing
  • Tax filing

However, to work with a PEO, your company must:

  • be registered to do business in every state or country in which you’re using a PEO; and
  • remain liable for all employees in that jurisdiction.

Simply put, PEOs are outsourced HR departments. They specialize in managing HR-related tasks, while you continue to manage the day-to-day activities of your employees.

An EOR, on the other hand, is a business that becomes the full legal employer of your worker.

An EOR handles all the HR functions you get with a PEO and more. An EOR will assume responsibility for hiring and employment contracts, handling day-to-day HR tasks, and managing business and insurance requirements. With an EOR, you don’t need to have a business entity in the country where you’ll be engaging full-time workers.

EOR vs. PEO: When it comes to hiring

This is what an EOR would do

The EOR acts as the legal employer, hiring the worker to perform services to your company. That means the EOR will enter into an employment agreement with the worker.

The EOR also takes on all their administrative responsibilities such as:

  • Onboarding
  • Payroll
  • Benefits
  • Terminations

The EOR and the company, you, enter into a service agreement. The service agreement is binding for as long as your company needs the services of the workers.

This is what a PEO would do

A PEO is an extension of your business. More like your co-employer. You’ll still enter into an employment agreement with your employee and be liable for compliance with applicable employment laws and insurance requirements.

However, the PEO will deliver most of the other administrative HR services you’ll get with an EOR. Such as:

  • Tax filing
  • Benefits administration
  • Payroll processing
  • Health insurance

EOR vs. PEO: When it comes to the minimum number of workers 

This is what an EOR would do

Most EORs don’t require you to have a minimum worker requirement. One, five, ten, bring them on!

This can be helpful for startups and small businesses, especially if they’re looking to expand into new markets and build momentum before scaling the workforce.

This is what a PEO would do

PEOs often require that businesses have a minimum employee count—usually five to ten employees. This can be prohibitive for smaller companies who don’t have the runway for that sort of expense.

EOR vs. PEO: When it comes to benefits

This is what an EOR would do

EORs provide health insurance, General Liability, Workers’ Compensation, and any other form of insurance required in the country where your workers are located. This is one less thing to worry about and means more time to work on growing your business. You also get competitive rates due to their size—they can often negotiate great rates because they buy the insurance services in bulk from providers.

This is what a PEO would do

A PEO also offers its co-employees health insurance, Worker’s Compensation and other benefits. Some PEOs also offer benefits packages that come with perks such as fitness plans, mental health checks and more. They also manage the whole process — from planning, policy renewal, to health insurance administration.

EOR vs. PEO: When it comes to compliance 

This is what an EOR would do

An EOR handles all the administrative paperwork and hassle that come with engaging workers in a country where you don’t normally do business. You don’t have to bother about poring through legal minutiae or worry if employment contracts, workers' compensations, and bonuses are compliant with local labor laws. Having a partner handle all these sensitive compliance-heavy processes makes your life much easier.

This is what a PEO would do

Hiring via a PEO means you remain the joint employer and need to ensure all employment contracts and other details are compliant. Unlike an EOR, you enter a co-employment relationship with a PEO. This arrangement allows you to retain control over your employees and your business while the PEO handles employee services such as payroll and benefits. 

EOR vs. PEO: When it comes to business registration

This is what an EOR would do

With an EOR, you don’t need to set up a legal entity in every country where you plan to engage workers. Setting up a legal entity can be an expensive, time-consuming, and laborious process. The EOR already has a legal entity set up in the country you’re expanding into and uses that entity to hire and manage your workforce.

This is what a PEO would do

If you’re working with a PEO, you can only hire in locations where you have a registered business entity. A PEO is more of an HR services provider.

In the end, which is better for distributed teams?

Your choice often comes down to your HR needs at each point in time.

Are you looking to outsource your HR function while retaining some form of control? You probably need a PEO. Are you looking to completely outsource the HR function so you can focus on other parts of the business? Hire an EOR.

Or you can consider a third option. Like an EOR, Oyster facilitates cross-border employment on behalf of your company but with the added benefit of being fully automated, self-serve, and free to start. In addition to compliant, local contracts, Oyster manages payroll and benefits for your team around the world, empowering you to engage the best talent, regardless of their location.

As you can see, selecting the right service isn’t so clear-cut. You’ll need to assess your talent strategy, business, and expansion goals before deciding which option is best for you.

Have questions about the different types of EOR operating models? We break it down in this blog post.

Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop and take care of a thriving global workforce. It lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world with reliable, compliant payroll, and great local benefits and perks.

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