The debate on what approach to use when outsourcing Human Resources (HR) is somewhat contentious, especially when it’s Employer of Record vs. PEO. This debate gets even more complicated when remote work intersects with the employment relationship.
According to an Owl Labs study, 16% of companies globally are fully remote. Furthermore, at least 4.7 million people in the United States work remotely for half the time. Therefore, there’s no doubt that the issue of how to choose the right HR outsourcing approach will continuously become more important.
We are going to explore these two HR practices and their respective suitability for remote teams, but first, let’s define each of them.
What is Employer of Record (EOR)?
An EOR is an organization that takes care of all activities related to employers, such as hiring, onboarding, payroll, benefits administration, and other HR-oriented tasks on behalf of another company. Like the name says, an EOR is the entity viewed as the legal employer and is liable for hiring, managing, and terminating workers.
What is a Professional Employer Organization (PEO)?
A PEO is an organization that provides another business with an assortment of HR services such as tax filings, payroll processing, regulatory compliance and many more, allowing the internal HR department to focus on other crucial responsibilities that are better executed internally.
Key Differences Between an Employer of Record and a Professional Employer Organization
Firstly, with PEOs, you have to handle insurance by yourself. On the other hand, an EOR will hold the insurance while also dealing with the compliance demands and fees of coverage, such as healthcare and worker’s compensation.
Secondly, an EOR is more flexible when it comes to multi-state operations as compared to a PEO. Of course, different states and of course countries have varying employment laws and regulations on whom you can employ, where they must live, how many people you’ll use, your business registration status, the nature of the contract, i.e., hours worked, remuneration, deductions, and more.
So, since an EOR usually has legal entities in each place they operate in, it can hire and employ workers in as many states as it is registered, irrespective of whether the client company is registered in all those states.
Effectively, an EOR takes on total liability regarding HR functions. Meanwhile, to use a PEO, you should be registered in the states where you intend to have that organization hire workers from, or do the necessary paperwork to do so from your base of operations.
Thirdly, PEO services are more dedicated to co-employing full-time/permanent workers. In contrast, an EOR often provides various options, allowing you to have full-time, part-time, seasonal, freelance, and other types of workers on board.
How Is a PEO Similar to an Employer of Record?
For starters, both an EOR and a PEO can handle the bulk of typical HR functions. They also have experts in local labor law, which means they can ensure compliance regardless of where you operate and hire people.
Both can pool talent together to get better group rates from the relevant providers regarding health insurance and other employee benefits packages.
Which Is Better for a Remote Workforce: EOR or PEO?
Before you pick one of these options, you need to ascertain the attributes of the remote workforce you are trying to build. For example, is it one that’s entirely made up of full-time employees or a mix of full-time employees, contractors, and freelancers?
Similarly, are all your workers going to be from one area or scattered across the nation/globe? Is your business already established or just starting? Do you intend to have your own insurance coverage regime or copy a common one out there? Will you be paying unemployment tax?
The goal is to select an approach, not just because it has numerous advantages but also because you can reap those benefits without countering the merits of a remote team. Let’s see how an EOR and PEO fare in a remote setting:
- An EOR may be better for building a remote team, primarily because it will give you more room to work with an international team spanning different geographical locations.
- An EOR will also make it easier for you to combine workers on different contract types such as part-time, seasonal, full-time, freelance, and more. People who work from home are more likely to value flexibility, so you need an HR outsourcing option that doesn’t take it away.
- For new business owners building remote teams, choosing an EOR can help them sidestep the lengthy bureaucracy and costs of registering a company in various states. Furthermore, they won’t have to worry about the legal responsibility that may arise from employees being disgruntled with their employment contracts.
- EOR service providers are also more conversant with the regulations related to employment of people in a specific locality. This is beneficial beyond basic legal reasons since they will be better equipped to offer compensation packages that are competitive by local standards.
Much as an EOR may sound like the better option, especially from a risk management perspective, there are still a few characteristics of remote workforces that make a PEO favorable too:
- Remote workforces often come with increased management challenges, especially with efforts like live collaboration and cybersecurity. An organization may have to revise, enforce and continuously refine their communication and security policies.
- This is why the co-employment arrangement with a PEO could be pretty helpful, particularly in passing on new rules and procedures to the remote workforce.
- In many cases, it can be harder to instill a company culture in a remote team. It takes some elaborate team bonding exercises, amongst other tactics, to keep everyone motivated and on the same page.
A PEO allows a business to maintain considerable control over the workforce, simplifying team bonding, productivity and motivation.
Basically, when trying to do brief check-ins, gather individual employee grievances, conduct coaching, mobilize team members for some fun and collaborative activities, and more, there are less steps involved.
Service providers like Paychex enable you to connect with employees in real time, with robust request submission and training features on their platform. They also offer more solutions in the realm of performance management and learning management.
Others like Justworks offer shift scheduling and automated reminders, both of which can come in handy when organizing team building activities. It’s easier to identify convenient times and have every concerned party receive a notification.
Other Factors to Consider When Choosing Between EOR and PEO
For small businesses using a remote workforce, particularly in new markets, an EOR may be the better option for agility. However, as you cast your net wider for recruits across the globe, ensure that you choose an HR outsourcing option that doesn’t involve other excessive layers of third-party providers and independent contractors.
Go with an organization that has people in the area you want to recruit from and let this be clearly demanded in the service agreement. This will help you avoid unforeseen confusion over which legal entity is accountable should things ever go wrong.
It also helps to get a sense of the culture at the HR outsourcing firms you consider. If the option available barely has any team members working remotely, they might not know that much about hiring and retaining remote workers.
This is particularly crucial in HR functions like preparing offers, interviewing and shortlisting, onboarding, and others that shape the perception of a recruit regarding the employer’s principles. An HR outsourcing option that doesn’t believe in or practice a similar set of values than the ones you treasure may not be the best fit for you.
Additionally, go with a service provider that offers a seamless experience, specifically regarding the tools used. The premier firms in this space typically have a software platform to deliver an experience where the outsourced functions are neatly taken out of your hands, while you still maintain the required visibility.
It helps to have a tool that harmonizes the execution of HR tasks, increases efficiency and facilitates accountability efforts in the most user-friendly manner. HR outsourcing is supposed to make a business easier to run. You don’t want to breed new impediments in handling the relationship with an EOR or PEO.
All-in-all, HR outsourcing is only growing stronger and if you want to know more about which players can meet your business needs, check out this SelectSoftware buyer guide which explores the best employer of record services in the market today.