Employer of Record (EOR) or Professional Employer Organization (PEO): A Critical distinction

In a previous blog, we explained the difference between a Payroll/Employer of Record solution and a service provided by a Professional Employer Organization (PEO).

As the COVID pandemic continues to create extreme economic and social uncertainty, both services can increase an organization’s agility, enabling business leaders to outsource payroll and/or HR functions to a third party, enabling lower costs, reduced paperwork, and increased efficiency, as well as better retirement, healthcare, and workers’ compensation packages for their employees.

  • A PEO combines the employees of several companies, becoming the legal and tax-related employer for the employees of all client companies. Using this economy of scale, the PEO can negotiate more expansive and less expensive benefits, workers’ comp, and unemployment insurance rates while offering efficient administrative services. 
  • Employer of Record (EOR) is an alternative payroll solution for companies whose workforce includes large numbers of contingent (a.k.a. temporary) workers. The EOR employs the workers sourced by the customer for the duration of the worker’s engagement, managing all obligations and compliance requirements during that time. An EOR offers all the same services of a PEO, assuming all administrative back-office responsibilities, such as payroll, benefits, onboardings, and terminations.

But there is a critical difference:

  • A PEO partners with your business to provide payroll processing, benefits, tax filing, etc. This is known as co-employment and the client company holds all related liabilities and responsibilities.
  • The EOR becomes a full legal employer of the payrolled contingent worker. The contract for employment is between the EOR and the worker. Because the EOR is the legal employer, they hold all worker-related liabilities and responsibilities. This is often the preferred method for a company looking to add employees as an ‘expense’ rather than additional headcount or in rapid growth.

What are the implications of co-employer vs. full legal employer?

  1. Insurance: when engaging a PEO the customer carries its own insurance or elects to pay coverage under the PEO plan. However, with EOR services, the employees are covered under the EOR’s insurance and the EOR maintains compliance with all regulations regarding, workers comp, healthcare, mandatory benefits and more.
  2. Authorization to Conduct Business: When outsourcing to a PEO the customer must register its business in every state in which it has employees. An EOR, on the other hand, registers in every state they employ in.
  3. Required Levels of Agility: PEOs are designed for small companies that need to enhance their HR functions. The “typical” PEO client has 18 employees. In contrast, by payrolling contingent workers EOR solutions enable companies to scale quickly, keeping employees as an expense rather than headcount, while mitigating risk.

nextSource has successfully been delivering Payroll/Employer of Record solutions to businesses and universities for more than two decades. To learn more about the nuances of engaging an EOR, Contact us.

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