What is a PEO, and how is it different from an EOR?

PEOs are mainly a US model. The IRS describes PEOs as handling payroll administration and tax reporting responsibilities for their business clients, usually for a fee based on payroll costs. Under co-employment, the PEO takes on employer duties such as payroll and tax filing, while the client company directs the work, sets pay and decides who to hire and dismiss. Small and mid-sized businesses use PEOs mainly to access group benefits, payroll and compliance support they could not run as efficiently on their own.

Since the Tax Increase Prevention Act of 2014, the IRS has run a voluntary certification programme for PEOs. A certified professional employer organization (CPEO) is one that has applied and been certified by the IRS as meeting the programme’s requirements, so clients can check a provider’s status before signing.

An employer of record (EOR) goes further. An EOR becomes the full legal employer of workers on the client’s behalf, signs their employment contracts, runs payroll and handles local employment law compliance, while the client directs their day-to-day work. EORs are most often used to hire in a country where the client has no legal entity of its own: a UK start-up hiring its first engineer in India or Canada, for example. Because the client remains a co-employer, a PEO arrangement assumes the client already employs people through its own company in that country.

The practical choice: use a PEO to outsource HR administration for staff in a country where you already have an entity, and an EOR to employ people in a country where you do not, at least until the headcount there justifies setting up an entity. Check what each provider covers, who carries which employment liabilities and how contracts transfer if you later bring staff in-house. This is general information, not legal advice.

Also called: professional employer organisation, co-employment, EOR, employer of record, CPEO.