Like any professional, a skilled HR leader needs to be well equipped and should be well versed with the characteristics of the tools at their disposal.
PEO (Professional Employer Organisation) and EOR (Employer-of-Record) are often used interchangeably in HR as a service that helps companies to expand locally and/or internationally. This loose use of the terms “PEO” and “EOR” is especially common in Asia, where companies will reference this sort of service to secondment, employment outsourcing, dispatch employment and more.
However, it is crucial for HR professionals to have a clear understanding of the key characteristics of each service offering, as there are differences that would affect the business regarding operations, risk management and business liabilities. The truth is, not every tool in your arsenal will help you achieve your goal, so it’s important for companies to know the key differences and to know what’s available in the market as tools to help them expand their business.
While on the surface both PEO and EOR seems to be a solution used to take on headcount for a company, the way they do it is quite different and they each take on different levels of legal responsibilities. To help you better understand the differences between PEO and EOR, we’ve summarised the key differences here in this article.
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How are the employees classified under PEO vs. EOR?
The crucial distinction between a PEO and EOR arrangement relates to the employer relationship. In a PEO service arrangement, the PEO vendor would enter into a ‘co-employment‘ relationship with the organisation and becomes part of the organisation’s HR arm, managing administrative activities such as payroll, onboarding, terminations, employee reviews, benefits, administrative services etc. In essence, the employment liability and responsibilities would still largely rest with the organisation.
An EOR service, on the other hand, takes on full administration and liability of the employment arrangement for the organisation. Here, the EOR vendor employs the staff and manages all responsibilities as a legal employer, while seconding them back to the organisation
Handling of employment contract
PEO: While the PEO may help with the handling of the contract, the contract itself is between the employee and the client.
EOR: As implied by the term ‘Employer-of-Record’, in the case of EOR, the employment contract is between the employee and the EOR vendor. Details of the employment, however, can and are usually mandated through the service agreement between the EOR and the client.
Who bears the responsibility for business registration?
When it comes to business expansion, aside from recruiting more headcount, companies can expand their geographic presence as well. Since PEOs are seen as co-employers, organisations looking to expand geographically through PEO, are still required to set up and register an entity in the location of business.
An EOR, on the other hand, would already have a registered business in the country of interest. This means organisations can hire employees in other countries, without having to register an entity, so long as the employees are managed under an EOR arrangement.
What is the minimum quota when acquiring a PEO or EOR service?
PEO services will usually have a price floor in order to secure their earnings. Generally speaking, PEOs will place a minimum of five to ten employees to ensure that there are enough people before entering into a co-employment agreement with the organisation.
EORs are quite different in this perspective, as they are typically ready to work with smaller numbers (as little as one or two), making it a great solution for organisations looking to start small in expansion plans.
Is the insurance filed under the company, or the PEO or EOR agency and how is it affected?
For insurance to be covered by a PEO, it needs to be opted in by the company and paid for in addition to the PEO service costs and outside of the mandatory requirements. However, an advantage PEOs have over EORs is that they will usually have access to cheaper insurance plans due to tie-ins with insurance companies. This is made possible as PEOs typically deal with larger headcounts, giving them a closer relationship with insurance companies and allowing them to negotiate for better insurance deals.
By contrast, the insurance plans will cost more for EORs, but will be listed as part of the general service package, as EORs are legally obliged to provide insurance coverage and workers compensation for employees under their wing.
Selecting the service to meet HR needs
The bottom line is that, as a seasoned HR professional, what you need to know is the pain point that you are trying to address and what workforce strategy you are trying to achieve.
PEO and EOR are quite different qualitatively and are solutions to two very different needs. The best way to think about the two is as follows. PEOs are for companies looking to enhance their HR function with external help. In this sense it is a solution directed towards the company’s HR function and is more long term.
EOR is a solution for companies that want to expand quickly, a flexible way to get talent onboard, be it through bringing in contingent workforce to help with the current business’ demands, or through expanding geographically without the hassle of setting up a physical entity in another country.
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Links International is a leading payroll outsourcing provider across Asia Pacific and supports payroll in over 15 countries. If you’re interested to explore the idea of payroll outsourcing, EOR, or Visa application please do not hesitate to contact us.