Small businesses often turn to a professional employer organization (PEOs) or an employer of record (EORs) for HR outsourcing, but which service is better for you?
- A professional employer organization (PEO) is a human resources HR company that handles your payroll, taxes, benefits, workers' compensation insurance (and sometimes risk compliance), hiring, and termination through a co-employer arrangement.
- An employer of record (EOR) is your employees' legal employer and can handle out-of-state business registration and temporary or contract hiring in addition to other HR services.
- EORs may be the best choice for small businesses that intend to stay small, whereas PEOs may better suit companies that plan to grow.
- This article is for employers trying to decide whether they should outsource their HR services to a PEO or an EOR.
When you've got a genius idea for a business, you don't want to bog down your growth with pesky administrative human resources (HR) tasks. Or maybe you want to handle growth a different way: Instead of hiring a permanent team, you rotate through cycles of temporary employees or contractors. In either scenario, you might want to outsource your HR needs to an EOR or PEO. Deciding which option you should choose ultimately rests on your plans for growth.
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What is a PEO?
A PEO is a third-party HR company that acts as your co-employer. Given the number of employees different clients of PEOs have, insurers view PEOs as large companies, which means PEOs can access better insurance plans. PEOs sponsor your health insurance, workers' compensation and other types of business insurance, giving clients better coverage at lower premiums.
Your PEO co-employment arrangement also gives the PEO responsibility for whichever HR tasks you delegate to it. The vast majority of PEO arrangements delegate payroll, benefits administration, workers' comp, taxation and compliance to the PEO. The best PEOs may also handle hiring, firing and risk management services.
A PEO arrangement can substantially impact your taxes as well, as your PEO uses its own employer identification number instead of yours to file taxes. As a result, choosing a PEO with a lower state unemployment tax rate than yours can lower your tax burden.
Although a PEO is your co-employer, you and your employees should barely feel your PEO's presence on a day-to-day basis. That's because you retain day-to-day control over tasks, scheduling, management and salaries. However, if you are concerned that a PEO may potentially overstep its bounds, choose only PEOs certified by the IRS or the Employer Services Assurance Corporation.
Key takeaway: A PEO acts as your co-employer and oversees your payroll, benefits, taxes, workers' comp, hiring and termination.
What is an employer of record?
An EOR acts as your employees' full legal employer. Under this arrangement, your employees technically sign their employment contracts with the EOR instead of your company. The EOR handles much of your employer's administrative work, but it doesn't exert control over your day-to-day affairs. You still get to decide how your company operates, how much you pay your employees and who works when.
If you hire an EOR, you may task this company with payroll, benefits, compliance, workers' comp and timekeeping. Additionally, since your EOR is legally your employees' employer, you yield all liability in employee affairs to the EOR. In workers' comp cases, or other risky situations, the EOR is the one on the line, not you.
Did you know? EORs may be convenient if you plan to expand your operations into new states. Otherwise, you would need to register in every state where you open a new location. With an EOR, however, this is not the case, except for an EOR to offer its services in any state, it must already be registered there.
PEO vs. EOR: Key differences
The key differences between PEOs and EORs fall into the below categories:
A PEO acts as your co-employer, whereas an EOR is essentially your legal substitute for employee-facing matters. While this distinction means little as far as day-to-day operations go, it can have substantial implications for liability.
Because PEOs are your co-employer, you share all risks and liabilities with them. This is why PEOs will help manage your risks, such as facility security and workplace safety. EORs, on the other hand, entirely cover your areas of risk, since they're fully responsible for, and liable to, your employees.
The structural and risk distinctions between PEOs and EORs are especially important as your company grows. The co-employer arrangement of PEOs incentivizes a long-term relationship between the PEO and its clients, meaning that the PEO acts as a partner for your team. Using a PEO favors the continuous hiring of full-time employees over independent contractors.
For companies that instead prefer to hire seasonal or temporary employees, project-specific employees, or independent contractors, EORs may be better. Since an EOR understands federal, state, and local labor laws thoroughly, you take on less risk as employees come and go. Without an EOR, someone on your staff would need to know these laws and oversee compliance – a substantial burden – instead.
A PEO is a great choice if you want a service to handle your payroll, benefits administration, taxation, workers' comp, and risk management, and you want access to higher-quality insurance with lower premiums. Through a PEO, you can offload a sizable chunk of your HR administrative work and take comfort in the knowledge that your co-employer is handling your HR tasks in a compliant and fair manner. Some experts say, however, that EORs can more easily obtain workers' comp for small businesses in nonclerical industries.
An EOR can also offer all the aforementioned services, though it often takes on fewer tasks than a PEO. Your EOR may help you hire temporary employees or independent contractors. Since the EOR acts as your legal employer, your employees are covered under the EOR's insurance. You won't pay out-of-pocket costs to cover your insurance premiums. And like PEOs, EORs are large companies that can access higher-quality plans.
Additionally, only an EOR can register your business in new locations. These registration services are huge timesavers, since, without an EOR, you must personally register your company in all states where you employ people. For corporations and LLCs, this registration process is especially tedious, which makes an EOR partnership even more valuable.
Depending on the PEO you select, you pay either a flat fee per employee per month or a percentage of your payroll per pay period. Per-employee PEO fees typically cost $150 to $200 per employee per month, with payroll percentage fees hovering around 15% of your gross wages paid. Some PEOs charge a one-time setup fee.
EORs have similar fee structures and rates, but they cost less overall than PEOs. That's because EORs fully cover your benefits and insurance plans, thereby saving you a substantial amount of money.
EORs generally handle fewer HR functions than PEOs, but the HR responsibilities they handle for companies can often be more complex than what a PEO handles.
Some PEOs do not accept microbusinesses (companies with fewer than 10 employees) as clients. EORs, though, are flexible working with small companies. Additionally, microbusinesses may prefer EORs, given the EOR's ability and experience in overseeing temporary employee or independent contractor arrangements.
We've created a table for easy side-by-side comparison of the main differences between a PEO and an EOR:
|Structure||Co-employer||Full legal employer|
|Growth||Better at supporting long-term company growth||Better for companies that are growing financially but that plan to maintain a small, permanent workforce|
|Services||More, but not as in-depth||Fewer, but more in-depth|
|Cost||High upfront and long-term costs||High upfront, lower long-term costs|
|Flexibility||Highly flexible services||Somewhat flexible services|
Which service should you choose?
If outsourcing payroll and some HR functions are important for you, you may prefer a PEO. If you're more focused on expanding into other states or hiring temporary employees (or contractors) than permanent employees, you may prefer an EOR.
Additionally, you can often save money on insurance premiums with EORs, but you may have fewer plans to choose from.
With PEOs, you'll have a more diverse set of choices. You'll also delegate fewer legal powers to a third party, thus relieving some of the potential stresses of bringing on an HR partner.