Employer of Record vs PEO: Which model fits your hiring needs?

Employer of Record (EOR) and Professional Employer Organization (PEO) are both outsourced employment solutions, but they serve different needs and operate under fundamentally different models. Understanding the distinction helps you choose the right approach for your business.

The core difference is structural. An EOR becomes the legal employer of workers in countries where you have no legal entity. A PEO co-employs your existing staff where you already have an entity. EORs enable international expansion without incorporation. PEOs optimize HR and benefits for domestic teams. Both models outsource employment administration, but the legal relationship, cost structure, and use cases differ significantly.

Key differences side by side

Legal employer: With an EOR, the EOR is the legal employer. With a PEO, both you and the PEO are employers (co-employment).

Entity required: EOR requires no entity—that's the point. PEO requires you to already have a legal entity.

Primary use case: EOR is for international expansion without incorporation. PEO is for domestic HR optimization.

Typical cost: EOR costs $49-99 per employee per month plus local employment expenses. PEO costs $40-200 per employee per month depending on services.

Benefits provided: EOR provides local statutory benefits (what the country requires). PEO negotiates enhanced group benefits through their larger risk pool.

Control level: EOR gives you less control because the EOR is the legal employer. PEO gives you more control because you remain the primary employer.

Compliance responsibility: EOR handles most compliance because they're the employer. PEO shares compliance responsibility with you.

When an EOR makes sense

EORs are designed for international expansion. You want to hire employees in countries where you have no legal entity. Setting up a subsidiary is expensive ($10,000-50,000) and slow (3-12 months). An EOR lets you hire immediately without incorporation.

The EOR becomes the legal employer. They handle employment contracts compliant with local law, process payroll in the local currency, withhold local taxes, provide statutory benefits (mandatory in that country), and ensure compliance with local labor law. You manage the employee's day-to-day work, set their compensation, and direct their activities. But the EOR owns the employment relationship.

Classic EOR scenario: a U.S. startup wants to hire a developer in Germany. They don't have a German entity and don't want to spend money and time setting one up. They use an EOR to employ the developer legally in Germany while maintaining operational control over their work.

EORs work well for testing new markets with 1-5 employees, hiring specialized talent in specific countries, or maintaining a distributed team without managing multiple legal entities. They're less cost-effective for large teams (20+ employees in one country) where setting up a local entity becomes financially sensible.

When a PEO makes sense

PEOs are designed for domestic HR optimization. You already have a legal entity and employees, but you want better benefits, reduced HR workload, or compliance support. The PEO co-employs your staff, sharing employment responsibilities.

You remain the primary employer. You make all hiring decisions, firing decisions, compensation decisions, and manage day-to-day work. The PEO handles payroll processing, benefits administration, workers' compensation management, and HR compliance. They provide access to enterprise-grade benefits through their larger risk pool—health insurance, 401(k), dental, vision, and other benefits at rates a small company couldn't negotiate independently.

Classic PEO scenario: a 30-person U.S. company wants to offer better health insurance and reduce HR overhead. The owner is spending too much time on payroll and compliance. They partner with a PEO, which co-employs their staff and provides access to Fortune 500-level benefits at lower rates than they could negotiate alone. The owner focuses on business operations; the PEO handles HR.

PEOs work well for small to mid-sized businesses (10-500 employees) that want to compete on benefits, offload HR administration, or ensure compliance without building a full HR department. They're less suitable for international hiring or companies that want complete control over HR processes.

Ownership and control: A critical distinction

The ownership structure differs significantly. With an EOR, the EOR is the legal employer. They sign the employment contract, appear on payslips, and are responsible for employment law compliance. You have operational control—you direct the work—but limited legal authority.

With a PEO, you remain the primary employer. The PEO is a co-employer, sharing certain responsibilities but not replacing you. You make all employment decisions—hiring, firing, compensation, promotions, performance management. The PEO handles administrative tasks in the background.

This distinction matters for company culture and employee relationships. EOR employees may feel more distant from your company because they're legally employed by a third party. A developer employed by an EOR in Germany is employed by the EOR, not by your company. PEO employees remain your employees, with the PEO operating behind the scenes managing HR administration.

Understanding cost differences

EOR pricing typically ranges from $49-99 per employee per month, plus local employment costs (salary, taxes, mandatory benefits). For a $60,000 per year employee, expect total costs of $70,000-80,000 annually, including EOR fees and local employment expenses.

PEO pricing ranges from $40-200 per employee per month, depending on services, company size, and benefits packages. Some PEOs charge percentage-based fees (2-12% of payroll). For a 30-person company with $2M annual payroll, expect $40,000-240,000 annually in PEO fees depending on the PEO and services selected.

The cost comparison depends on your specific situation. For international hiring, EORs are cheaper than entity setup for small teams (1-10 employees). For domestic teams, PEOs can reduce total HR costs by providing better benefits rates through scale and eliminating the need for full-time HR staff.

Compliance and liability: Who bears responsibility

With an EOR, compliance responsibility sits primarily with the EOR. They're the legal employer, so they must ensure employment contracts, payroll processing, tax withholding, and benefits comply with local law. You're responsible for operational compliance (workplace safety, non-discrimination in hiring), but employment law compliance is the EOR's job.

With a PEO, compliance is shared. The PEO handles payroll tax compliance, benefits administration, workers' compensation management, and maintains HR compliance documentation. You remain responsible for employment practices, workplace safety, non-discrimination policies, and proper management of the employment relationship. Both parties share liability because it's a co-employment relationship.

This distinction matters for risk management. EORs provide more complete compliance coverage because they own the employment relationship and have legal responsibility. PEOs provide support, expertise, and take on certain compliance burdens, but they don't eliminate your compliance responsibilities.

Using both models together

Many growing companies use both models simultaneously. Use EORs for international employees in countries where you have no entity. Use a PEO for domestic employees where you do have an entity. This hybrid approach optimizes both costs and compliance.

Example: a 50-person U.S. company uses a PEO for their domestic staff, giving them better benefits and reducing HR overhead. They also use an EOR to hire 3 employees in Europe and 2 in Asia. The PEO provides better benefits for the U.S. team. The EOR enables international hiring without setting up multiple entities.

Another strategy: start with an EOR for international expansion, then transition to a local entity once you have 10-20 employees in a country. The EOR provides speed and flexibility for testing new markets. The local entity provides cost savings and full control for established operations.

The contractor alternative

Before committing to EOR or PEO, honestly evaluate whether you need employees at all. For many roles, independent contractors provide similar value with less complexity and lower cost.

Contractors don't require EORs or PEOs. You engage them directly, pay via Wise, PayPal, or Payoneer, and avoid employment overhead. For project-based work, specialized skills, flexible capacity, or international work, contractors often make more business sense than employees.

The tradeoff is control and commitment. Contractors work independently, set their own hours, and may work for multiple clients. Employees provide more integration, loyalty, and control. Choose based on the nature of the work and your need for control and commitment.

Frequently asked questions

Can I switch from EOR to PEO?

Not directly. If you want to move from EOR to PEO, you first need to establish a legal entity in the country where the employee is located. Then you can transfer employees from the EOR to your entity and engage a PEO for co-employment (if domestic) or manage them directly. This process takes time and has administrative costs.

Which model is faster to set up?

EORs are typically faster (1-2 weeks) because they don't require entity setup. PEOs also move quickly (2-4 weeks) but require you to already have a legal entity in place.

Do employees know they're employed by an EOR or PEO?

Yes. EOR employees receive employment contracts and payslips from the EOR, so they know they're legally employed by the EOR. PEO employees see the PEO on certain documents (like benefits paperwork) but remain primarily employed by you. The distinction is clear to employees.

Can I use multiple EORs or PEOs?

Yes. Many companies use different EORs for different countries (EOR A for Germany, EOR B for Australia). Some use different PEOs for different employee groups or locations. This adds complexity in terms of managing multiple vendor relationships and systems, but it can optimize costs and services for your specific needs.

What if I have 1-2 employees in a country? Is EOR still worth it?

Yes, EOR is still worth it for 1-2 employees because setting up a local entity costs $10,000-50,000 minimum. The EOR fee of $49-99 per month is much cheaper than incorporation. For 1-2 employees, EOR is the only practical option.

Can I switch PEOs if I'm unhappy?

Yes, but it's disruptive. You'll need to migrate payroll data, re-enroll employees in benefits, and transfer records. Employees may experience gaps in benefits or changes to their benefits. Most PEO contracts require 30-90 days notice before termination. Plan carefully if you want to switch.

Making the decision

Ask yourself these questions:

Are you hiring internationally or domestically? (International suggests EOR, domestic suggests PEO.)

Do you have a legal entity in the country where you're hiring? (No entity suggests EOR, yes suggests PEO.)

How many employees do you plan to hire in this location? (1-10 suggests EOR, 10+ domestic suggests PEO.)

How much do you value control over employment decisions? (Want full control suggests PEO, willing to share suggests EOR.)

What's your budget for employment administration? (Calculate total costs including all fees and overhead.)

Are these full-time permanent roles or project-based? (Permanent suggests EOR/PEO, project-based suggests contractors.)

Based on your answers, the appropriate model will likely be clear.

The bottom line

EORs and PEOs solve different problems. EORs enable international hiring without entity setup. PEOs optimize HR and benefits for domestic teams. Neither is inherently better—the right choice depends on your specific situation.

Use an EOR if you're hiring internationally and don't have a local legal entity. Use a PEO if you have a domestic entity and want better benefits, reduced HR overhead, or compliance support. Use both if you have international and domestic teams. Consider contractors if the work is project-based or you need flexibility.

The key is matching the model to your actual needs. Don't default to EOR or PEO because they're popular. Understand what you're trying to accomplish, evaluate the real tradeoffs, and choose the simplest solution that meets your requirements.