PEOs and EORs Are Not the Same Thing – Why It Matters


PEOs and EORs Are Not the Same Thing – Why It Matters

Professional employer organizations (PEOs) and employers of record (EORs) represent two types of legal entities with whom a company can enter a business relationship for HR and employment purposes. Because PEOs and EORs perform similar functions, they are often confused as being one and the same. They are not. PEOs and EORs are distinctly different in two ways that matter quite a bit.

A Co-Employment Arrangement

For starters, a PEO company is a company that offers co-employment and HR functions. In terms of the former, co-employment is an arrangement in which a company and its PEO partner are both considered employers of the same workers. The arrangement creates a division of responsibilities.

The original company still hires and maintains control over a worker’s daily tasks. It determines the employee’s salary and benefits. The company even sets the employee’s schedule. As for the PEO, its main responsibilities are handling HR functions like payroll, benefits, and tax compliance.

An Exclusive Employment Arrangement

Where a PEO provider becomes a co-employer of its client’s workers, an EOR becomes an exclusive employer. When a company enters an agreement with an EOR service provider, all that company’s employees become legal employees of the EOR. The EOR bears all legal responsibility for those employees in terms of taxes, salary and benefits, etc.

At the same time, the original employer still retains the right to control a worker’s day-to-day responsibilities. Under many EOR arrangements, client companies also retain the right to determine salaries, hourly wages, bonuses, etc.

Establishing Business Entities

From a practical standpoint, the differences between PEOs and EORs do not have much of an effect on day-to-day business decisions. But the main difference between the two types of organizations has a massive impact on how companies establish business entities.

The PEO arrangement is a co-employment arrangement. As such, PEO companies can only sign contracts with already established businesses. What does this mean practically? It means that any company wishing to work with a PEO must have an established business entity in the same jurisdiction in which they hope to hire.

If you owned a local company hoping to work with a PEO to expand to a neighboring state, your company would have to establish a legal presence in that other state. Otherwise, PEO couldn’t help you.

Things are just the opposite under an EOR arrangement. Because the EOR becomes the legal employer of its client’s workers, the client can hire in any jurisdiction in which the EOR has a presence without setting up a separate entity of its own. Practically speaking, your company could hire employees from around the world through an EOR without ever establishing additional offices.

Access to Expert HR Functions

Although PEOs and EORs differ in terms of the legal status of their employees, one thing they both tend to have in common is offering expert HR functions. BenefitMall, a Dallas general agency that also helps companies connect with PEO providers, says this is the biggest draw for small businesses.

Both EOR and PEO employment eliminate the need for a company to hire and maintain its own HR staff. More importantly, PEOs and EORs are experts in labor and tax laws. They have the knowledge and experience to help their clients remain compliant at all times.

From the employee’s perspective, there is little difference between the two arrangements. What employees do on a day-to-day basis is controlled by the company for whom they actually do the work. It doesn’t much matter whether they are co-employed through a PEO or employed exclusively by an EOR.

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