Employee leasing services in the United States began to flourish in the 1970s and 80s as companies found that this type of employment allowed them to adhere to state and federal employment laws and taxes without the expense of an internal HR team. This practice led to the creation of the Employer of Record (EOR) and Professional Employer Organization (PEO) models.
Both EORs and PEOs are employment solutions, but they offer dramatically different services based on an employer’s goals. Organizations that want to offload some HR responsibilities in a specific area within the U.S. can use a PEO to help share the tasks such as payroll and benefits. Employers looking to expand internationally can partner with an EOR, which will bear the brunt of compliance with each new country’s local employment laws and the risk that comes with it.
A PEO can assist a company within the U.S. and ease the burdens of HR work, but to expand internationally, an EOR is a necessity. EORs do more than simply handle HR outsourcing and help companies employ overseas by removing the barriers to international expansion through its worldwide network of local entities.
What is an EOR?
The EOR manages the legal, HR, tax and local compliance responsibilities of your employees in any country where you lack a legal entity. An EOR is a great option for any company with global ambitions, as it accelerates the process of employing in other countries in a more cost-effective way than creating and managing multiple local entities.
An EOR can onboard, manage and pay staff on your behalf. Consider it the legal employer while you, the client, retain the role of managing employer. For example, if an organization needs to hire a team across various European countries, they simply provide the EOR with information about who and where, as well as the remuneration details. The EOR then navigates the local laws and handles all the paperwork for onboarding the employees. This frees the organization of the cost, time and distraction of bureaucracy. More importantly, it allows them to focus on growing their business.
How does an EOR work?
When a company partners with an EOR, they enter into an agreement that allows the EOR to legally employ the staff through its own local entity. The EOR is responsible for handling HR support to guide both the employee and client through the expansion process, whether it’s a six-month assignment or a permanent position.
As the legal employer, the EOR takes full liability for the employees and minimizes any risk to the client. It ensures full compliance in every country where the company hires employees. The client is free to focus entirely on the daily management of these employees.
What is a PEO?
The PEO undertakes some HR tasks. A PEO facilitates and manages part of a company’s HR processes including payroll and benefits such as healthcare, dental and vision. It can even include hiring and training staff.
This is helpful to some small- and medium-sized businesses, as it means they don’t need a designated HR team to support their employees. It also allows a company to offer benefits such as a pension or 401k, or health and dental plan options that may not be available without the use of a PEO service. This is possible because a PEO can aggregate the employees of their companies, affording them greater negotiation and purchasing power with pension and insurance providers. These savings are then, in part, passed on to their clients.
How does a PEO work?
Once a company has decided to work with a PEO, they sign a co-employment agreement. In this arrangement, known as a co-employment relationship, they contractually allocate and share the employer’s responsibilities and liabilities. This legally ensures that while the PEO will facilitate part of their HR requirements, it only assumes some of the risks.
What is the difference between an EOR and a PEO?
An EOR is suitable for any business planning to expand its operations and employ people overseas in a fully compliant and rapid manner. An EOR is a direct employment model, which takes on the risk while the client organization runs the day-to-day operations. This is a key difference between an EOR and a PEO.
Advantages and disadvantages of EOR:
Pros | Cons |
|---|
Facilitate the global expansion of a company visa compliant placement of employees in countries where the company is not incorporated | Cannot guarantee that an application for a visa will be approved |
Assists with the onboarding of local employees | |
Remit wages and withholdings for employees across the globe | |
Reports, collects and deposits employment taxes to local, state, & federal authorities | |
Businesses seeking to offload some HR duties for employees located in the same country where their business is registered are more aligned with a PEO. A PEO is a co-employment model that shares the risk with the client, who runs the day-to-day operations.
Advantages and disadvantages of PEO:
Pros | Cons |
|---|
Facilitates remittance of wages and withholdings of worksite employees | Cannot facilitate global employees in countries where the client company isn’t already incorporated |
Reports, collects and deposits employment taxes to local, state, & federal authorities | Shared liability may lead to disputes over legal exposures and risk |
Supports employees through various benefit schemes | Acts as a service provider for HR-related tasks, rather than a partner in a company's global expansion strategy |
| Leverages third-party vendors to handle various payroll administration and tax responsibilities |
Should I use an EOR or a PEO?
Several factors come into play when deciding to use an EOR or a PEO. Each state has its own governing law and tax rates in the U.S., where PEOs are used the most. Using a PEO is easy when all employees are in a single state, but as a company expands into other states, it becomes challenging. The business may need to register in every state where it wishes to employ staff.
PEOs are considered a good choice in the U.S. for multi-state employment. While the client would still share the risk of hiring across states, the PEO can ensure compliance with all individual tax and labor laws. An EOR’s entities are legal and operational in each country it operates in and adheres to each country’s own local tax and labor laws. If you want to move employees globally, a PEO cannot easily manage co-employment in other countries, e.g., France or Brazil. An EOR, with its separate in-country entities, can focus directly on the labor laws of each country, while the client focuses on building the business.
How can Atlas Technology Solutions help?
Expanding into new markets requires three key elements: time, cost and expertise. The complexities of global, regional and local compliance require a trusted partner, such as an EOR, to break down the barriers to global expansion and drive successful revenue growth.
As an EOR with entities in more than 160 countries, Atlas can handle your international HR and payroll, local tax and compliance, benefits administration, visa and mobility needs. We empower you to dedicate your time to growing your business and brand.
