It can be challenging to manage a cross-border workforce, especially when the HR team in the home country is unfamiliar with another country’s regulatory compliance framework. Companies will often need to work with an expert partner, such as an employer of record (EOR) or professional employer organization (PEO), in order to successfully manage the HR needs of workers abroad and avoid operational headaches and compliance pitfalls.
On the surface, an EOR and a PEO may appear to carry out the same functions. There is some overlap but there are several key distinctions that may make it more beneficial to work with one versus the other, depending on a company’s operational needs and global expansion goals.
The following are three key considerations for identifying whether an EOR or a PEO is the right solution for your company.
1. Understand the fundamental differences
It is helpful to think of a PEO as an outsourced HR department to a degree. It handles responsibilities like contracts, terminations, taxes and many day-to-day HR tasks such as payroll. However, there are limitations and additional liabilities that come with a PEO that can limit its applications in global hiring and payroll management.
A key differentiator is that, unlike an EOR, a PEO does not employ the talent on behalf of the hiring company. Instead, a PEO model creates a co-employment relationship. Thus, full liability still falls on the client as opposed to the PEO. So, if anything goes wrong or any fines are levied, the buck will be passed to the hiring company.
Likewise, since the hiring company is a co-employer, the PEO model does not eliminate the need for the client to establish a legal entity in a country they wish to employ talent full-time.
Comparing global hiring models
|Eliminates the need for the hiring company to set up a legal entity in-country||No||Yes|
|Talent is employed on behalf of the hiring company||No||Yes|
|Reduces the hiring company’s legal liabilities in-country||No||Yes|
2. Long term goals are a deciding factor
A company’s global footprint will play a key role in how they hire and manage a global workforce. There are generally two options available if a company wishes to employ full-time workers where it does not already have a legal entity.
First, the company can choose to establish a legal entity so they may enter a co-employment relationship with a PEO. Alternatively, they can hire workers through an EOR if it does not make sense to go through the bureaucratic hurdles of establishing an entity.
Establishing a legal entity can be a time-consuming and expensive process, even for large multinational companies (MNCs) that already have a presence in several countries. If you’re setting up in a heavily regulated country like China, for example, it can take six months or more before the entity is operational and able to administer payroll. You may also discover that, after setting up an entity in Shanghai, you want to hire in Beijing instead. Hiring in other provinces can be difficult to do, even with a legal entity already set up elsewhere in China.
Worker headcounts also matter when weighing an EOR against a PEO. Depending on the headcount, the EOR may be the more economic solution or it might make more sense to set up a legal entity and use a PEO. There is no set headcount number or universal formula for determining this threshold. Instead, it will depend on a variety of case-by-case factors, such as the operations of the company, the industry and workers’ salaries.
A legal entity in the targeted country might be a worthwhile investment if a company expects a major ongoing expansion there in the long term. It’s also helpful to keep in mind that the EOR arrangement is sometimes implemented as an interim solution while a company goes through the process of setting up a legal entity.
3. An all-in-one EOR can provide additional HR functions
Companies often lean toward working with a PEO because they want to outsource HR functions instead of charging the home country HR team with the arduous task of administering cross-border payroll and HR management. This is a valid approach, but they may not realize a lot of EORs can provide the same HR services a PEO does in addition to employing the workers.
Some EORs also handle tax registration for workers, payroll processing, statutory benefits, voluntary benefits, equipment procurement, employment contracts, terminations, renewals, visa support, compliance management and more.
An all-in-one EOR partner – by taking on these key processes as you grow your team in new countries – can help to streamline your global talent strategy, mitigate compliance risks and bolster your business expansion goals.