Differences Between Employer of Record Companies and Professional Employer Organizations

Both employer of record (EOR) companies and professional employer organizations (PEOs) provide human resource solutions that extend to hiring, onboarding, and employee benefits.

Businesses consult these entities when looking for solutions to match their human resource needs.

Although both models offer robust and solid human resource solutions, they have varied approaches to achieving related objectives.

Read on to understand the key differences between employer of record companies and professional employer organizations.

So, let’s cut right to the chase…

The difference between employer of record companies and professional employer organizations lies in which one legally employs the people who work for you, because the latter requires businesses to enter a co-employment relationship.

In contrast, employer of record companies are legal entities that require employees to sign contracts with them and not your own business.

With that said, here are some other differences between the two:

International compliance and other legal responsibilities

An employer of record company refers to a third-party company that assumes legal responsibilities associated with hiring and paying employees.

Successfully setting up an entity in a foreign market comes with numerous challenges, some of which are influenced by labour laws and regulations in that market.

You can check out our more detailed article that dissects how employer of record companies work for additional information.

Because of this, employer of record firms help businesses hire employees while adhering to all the laws in that region.

Employer of record companies become the primary employers of your employees on paper, but you still maintain control, responsibilities, and the day-to-day operations.

On a separate note, compliance is unbelievably complicated.

Nevertheless, employer of record companies do a much better job of taking care of all legal compliance documents, not to mention payroll processing, benefits, employment contracts, and administration.

Professional employer organizations, on the other hand, require you to first have the proper business registration before hiring non-local employees.

Most importantly, they require you to handle all the legal compliance, meaning you’ll need to familiarize yourself with employment laws and prepare regulatory compliance documents yourself.

Staff hiring

Employer of record companies provide hiring solutions to your employment needs.

Although employees sign contracts with such entities, the span of control remains in your court as you get to delegate employee duties, responsibilities, and the day-to-day activities.

Conversely, professional employer organizations function as outsourced human resource departments with certain limitations in the way of employment, such as hiring and offering contracts.

They handle most of the human resource functions such as employee onboarding, contract termination, employee reviews, and other day-to-day human resource tasks.

 Minimum employee requirement

A professional employer organization provides human resources, payroll, benefits, and employee compensation management.

They also oversee most human resource functions, such as benefits administration and employee risk management.

However, you must enter into a co-employment relationship to allow professional employer organizations to perform their duties.

This human resource business operates as a co-employer, meaning you retain control over the operational activities of the business while the professional employer organization serves as the employer for legal purposes.

Most professional employer organizations impose a minimum number of employees and prefer working with sizable companies to ensure that the co-employment venture is profitable.

This is usually a non-factor for larger businesses, but one that small businesses must consider.

On the other hand, employer of record companies don’t have a minimum employee requirement as they tend to be larger organizations operating worldwide regardless of their area of operations.

This means it’s easier for them to serve small to medium-sized organizations.

Additionally, employer of record firms offer more flexible services.

Conclusion

When looking at these two human resource solution providers, you must consider one that meets your long-term needs.

Both of them are similar but also principally different.

And quite unfortunately, it’s hard to choose which one is better as it ultimately boils down to your overall needs.

With that said, consider professional employer organizations when you want to replace your human resource department but still want to have some level of control over their operations.

On the flip side, consider employer of record services when you are looking to employ a workforce and need help with legal compliance.