What’s the Difference Between a PEO and an Employer of Record?

What is a PEO?

A PEO is a third-party HR company that acts as your co-employer. Given the number of employees PEOs have on their books (thanks to so many different clients), insurers view PEOs as large companies. That means smaller companies can access better insurance plans through PEOs than through an insurance broker. PEOs sponsor your health insurance, workers’ compensation and other types of business insurance, giving clients better coverage at lower premiums.

[Read Related: Exempt vs. Nonexempt Employees]

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 PEO services 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 located in a state 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 a PEO service certified by the IRS or the Employer Services Assurance Corporation (ESAC).

What is an EOR?

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.

PEO vs. EOR: Key differences

Although both offer solid solutions for outsourcing HR functions, PEOs and EORs operate very differently. When it comes to structure, growth support, services offered, cost and flexibility, each is unique. Below, we’ve created a table for easy side-by-side comparison of the main differences between a PEO and an EOR:

Structure

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. Meanwhile, EORs entirely cover your areas of risk since they’re fully responsible for and liable to your employees.

Growth

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.

Services

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 obtain workers’ comp more easily for small businesses in nonclerical industries.

An EOR can also offer all the aforementioned services, although 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. As with 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 limited liability companies, this registration process is especially tedious, which makes an EOR partnership even more valuable.

Cost

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.

Flexibility

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. However, EORs 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.

PEO or EOR: 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.

[Read Related: PEO vs. ASO]

Additionally, you can often save money on insurance premiums with EORs but you may have fewer plans from which to choose. 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.

The best PEO providers

 If you’ve decided a PEO is the best solution for your business, we’ve outlined four of our top picks for PEO partners below.

Rippling

If you’re looking for a PEO that can support a growing business, Rippling is a great option. Geared for growth, Rippling allows clients to hire and onboard remote employees in any state. If your business is looking to add new locations, Rippling can handle local tax registration and ensure compliance with local labor laws and state-specific minimum wage standards. 

Like other PEOs, Rippling can offer SMBs access to enterprise-level benefits for less money. Rippling can administer benefits for your team including medical, dental and vision insurance, retirement savings plans, commuter benefits and tax-advantaged savings accounts ― health savings accounts (HSAs) and flexible spending accounts (FSAs). 

Rippling also offers a suite of employee self-service tools for training and development. Clients can access pre-built training courses or develop their own new hire training program depending on their employees’ unique needs. Rippling charges a fixed-rate administrative fee, but prospective customers should note they’ll need to contact the company directly for custom pricing. 

Learn more about the service’s features, perks and drawbacks in our detailed Rippling PEO review.

Insperity

With an A+ rating from the Better Business Bureau, Insperity offers an effective PEO solution with service bundles and a la carte offerings. Insperity’s suite of features includes risk management, payroll processing, benefits administration and workplace training. 

Insperity has a team of experts to help supervisors remain in compliance with local regulations and the service goes above and beyond to alert clients to any changes in local employment laws that could pose future compliance issues. Insperity can also provide compliance training for supervisors and help companies update their written policies to ensure seamless implementation. 

The service offers benefits including medical, dental and vision insurance, an FSA, an HSA, life and disability insurance, an employee assistance program and 401(k) plans. Employees will also be able to access their benefits with an intuitive self-service platform via the web or mobile app. Microbusinesses should be aware that the service doesn’t work with companies that employ fewer than five people. 

Learn more about the service’s features, perks and drawbacks in our detailed Insperity PEO review.

Papaya Global

Papaya Global offers its comprehensive benefits administration, payroll and compliance features in more than 160 countries. With country-specific compliance experts, Papaya Global makes it easy for companies that are expanding internationally. 

We liked the service’s intuitive onboarding process, which allows new hires to fill out paperwork, select benefits, set up direct deposit and complete other onboarding tasks from a centralized, easy-to-use platform, no matter where they’re located. Local experts will ensure that contracts and documents are in compliance with all applicable employment laws. 

Papaya Global also offers robust data and reporting tools for employers, who can access HR administration information via an intuitive interface. Prospective customers should note that Papaya Global is more expensive than other PEOs we reviewed, although the pricing is transparent and available online. Because of the complexity surrounding international regulations, it can take up to three months for clients to get fully set up on the platform. 

Learn more about the service’s features, perks and drawbacks in our detailed Papaya Global PEO review.

AlphaStaff

Accredited by the ESAC and tailored to small businesses and franchises, AlphaStaff allows access to Fortune 500-level benefits for SMBs. Beyond benefits administration, AlphaStaff’s features include payroll, applicant tracking and recruiting support. 

We liked AlphaStaff’s built-in applicant tracking platform, AlphaStaff Hiring, which features screening questions, assessments and an intuitive data layout to help hiring managers identify the right candidate for the job. For clients who need more robust hiring support, AlphaStaff offers a team of recruiting experts who can help with everything from job descriptions and candidate screening to compliance guidance. The recruiting service includes a 90-day guarantee, so if a new hire leaves or is terminated within 90 days, AlphaStaff will replace them at no cost to the employer. 

Learn more about the service’s features, perks and drawbacks at our detailed AlphaStaff PEO review.

Choosing an HR partner that grows with your company

Partnering with a PEO or an EOR can position your company for the future by reliably managing your HR tasks. When choosing between a PEO and an EOR, you’ll need to evaluate your company’s short-term needs and long-term plans. If you’re looking to hire temporary or contract workers and expand your physical footprint into different states, an EOR will save you time and money. If you’re looking for an HR partner who can reliably handle day-to-day tasks like benefits administration and payroll and you expect to grow your permanent workforce in the future, a PEO might be the best option for you. Ultimately, your plan for growth will determine which model is best for your company.