Does your business need an EOR or a PEO?
by Preston on 2020-07-10
In a perfect world, you could hire remote workers without worrying about compliance and payroll across borders. In reality, the complexities of international law make it difficult for businesses to hire workers abroad.
Employers of record (EORs) and professional employment organizations (PEOs) both empower businesses to hire remote workers internationally, but the two types of organizations have several differences. Understanding those differences can be tricky, especially when many companies offer both services. Start here to learn what distinguishes an EOR from a PEO, why it matters, and how to figure out what kind of partner your business needs to hire remote talent around the world.
What is the difference between an EOR and a PEO?
Though some in the HR industry use the terms interchangeably, PEOs and EORs have a few important distinctions. PEOs mostly handle HR functions, while EORs go one step further to employ workers on behalf of their client companies.
When working with a PEO, companies continue to employ their own workers while passing responsibilities like payroll and benefits management to the PEO. In these arrangements, the PEO acts as a sort of “co-employer” to handle HR functions for the primary employer. This arrangement works well for companies that have a limited presence in an area but not enough to provide for all employee needs.
EORs handle the same HR duties as PEOs while taking on more responsibilities regarding employment and compliance. When you work with an EOR, the EOR employs workers on your behalf via a service agreement. For all practical purposes, your employees remain your employees: The EOR simply acts as the employer on paper to help you to hire employees in a country where you do not own your own legal entity.
Legally, your PEO is not included as a party in employment contracts you make with your employees. You make the terms and uphold the agreements on your own. With an EOR, this is reversed. All employment contracts stay between your employee and your EOR, with your EOR upholding all employment agreements under the law of the country where your employee works.
Which one should you choose?
Say you want to hire a talented worker in another country, like Germany or France, but you don’t have any other employees in that region or you aren’t satisfied with your current arrangement in the country. Where should you turn next?
At Remote, we offer both EOR and PEO services, so we are intimately familiar with the different challenges that companies face when hiring international workers. If you are not sure what kind of help you need to work with global talent, start by considering a few basic questions.
Do you own a legal entity in the country where the employee lives?
Local legal entities distinguish EORs from PEOs. If you do not own your own local legal entity within your target country, you cannot hire employees there unless you open an entity or partner with an EOR. This is true all over the world.
Opening legal entities can be a time-consuming and expensive process, even for large enterprises that already have presences in several countries. Unless you anticipate a major expansion into a specific country, in which case establishing a local entity might make sense for your goals, an EOR is the most logical step forward.
Businesses that do own legal entities in their target countries don’t always have the resources to meet all their employees’ needs. That’s where a PEO comes in. Acting as a co-employer, PEOs work alongside businesses to handle a variety of HR functions to ensure employees can receive their paychecks, access benefits, and manage their own employment.
In short: If you don’t own a legal entity where your prospective employee works, you need the services of an EOR. If you do own a legal entity but want someone else to manage HR for your employees in the country, you need the services of a PEO.
How many employees do you want to hire?
Most PEOs and many EORs enforce minimum employee counts. Starting local legal entities gets expensive quickly, and companies that provide these services may tell prospective client businesses that they require a minimum employee count to begin a partnership. For startups and small businesses, this barrier usually makes international hiring unreasonably expensive, forcing them to hire only local talent.
(Remote, of course, enforces no minimums for our services. If you want to hire a single employee in a single country, we’re always happy to help.)
Companies looking to hire several employees in a single country, usually by opening a local office, may meet the threshold for PEO services. This makes the most financial sense for companies that have decided to establish their own local legal entities. If you plan to hire a team of employees in a new country without an EOR, make sure at least one of your new employees can act as your local labor law expert on the ground. Otherwise, you could run into unexpected issues and penalties.
What can you already do for your employees?
Your current capabilities can tell you whether you need an EOR or PEO. In some cases, a company that does own a legal entity in a country may choose to work with an EOR because the EOR has a more complete system to manage compliance and liability.
For example, say an employee gets injured on the job. An employee working for a company using a PEO would file that claim as an employee of that company, while an employee working for a company using an EOR would file the claim as an employee of the EOR. In situations of insurance and legal liability, the EOR carries the burden.
EORs pay higher prices for insurance than PEOs, because with no employee minimums, insurance providers charge more. While most EORs pass these prices along to their customers, Remote charges a single flat rate that includes everything from insurance to payroll, no hidden fees or surprise charges, for every country we cover.
Are you hiring full-time workers or contractors?
You probably don’t want to work with a PEO if you only have a few contractors to hire. PEOs make perfect sense for businesses looking to offload the burden of HR management, but in the case of contractors (who typically require less management than full-time employees), EORs are the clear winner.
For full-time employees, it all depends on your legal status in the country of operation. Own a legal entity? A PEO provides the most cost-effective path to provide a superior experience for your employees. Don’t own a legal entity? Partner with an EOR.
Picking the right PEO or EOR for your team
Whether you use an EOR to employ your team members or a PEO to handle their benefits, don’t forget to prioritize the employee experience. Your international workers deserve to be treated like first-class citizens at your company, no matter where they live.
We can help make that happen. Remote treats your employees with the respect they deserve, starting at onboarding and continuing throughout their relationship with your company. Contact us today to learn more about our EOR and PEO services.