EOR vs PEO vs direct contractor management: Which model fits your team?

If you're hiring internationally or managing a distributed team, you've likely encountered three different models: EOR (Employer of Record), PEO (Professional Employer Organization), and direct contractor management. They sound similar but solve different problems, serve different situations, and cost very differently.

Understanding which model fits your situation helps you avoid overpaying for infrastructure you don't need and choose the approach that actually works for your team.

What each model actually does

An Employer of Record (EOR) becomes the legal employer of your workers in countries where you don't have a legal business entity. You hire through the EOR, they process payroll, handle tax withholding, provide local benefits, and manage employment compliance. You manage the day-to-day work. The EOR assumes the legal employment relationship and its associated risks.

A Professional Employer Organization (PEO) is a co-employment arrangement. You must already have a legal entity in the country. You and the PEO share employer responsibilities—you're both legally responsible for the worker. The PEO handles HR administration, payroll processing, and benefits, but you remain the legal employer. PEOs are typically used domestically, especially in the U.S.

Direct contractor management means you engage independent contractors directly. You pay them via payment platforms like Wise, PayPal, or Payoneer. You manage contracts, track milestones and invoices, and handle documentation yourself. There's no co-employment relationship and no middleman.

These models are fundamentally different because they create different legal relationships.

Side-by-side comparison

The key differences matter for cost, compliance, and flexibility:

A legal entity is required for PEOs (you need to be registered in the country), but not for EORs or direct contractor management. The employer is the EOR in an EOR arrangement, co-shared in a PEO, and no one in direct contractor management (contractors are self-employed).

EORs work best for full-time employees abroad where you don't have an entity. PEOs work best for domestic employees where you want to outsource HR. Direct contractor management works best for independent contractors who work for multiple clients.

Cost differs dramatically. EORs run $49-99 per employee per month. PEOs run $50-150 per employee per month. Direct contractor management costs $99/month flat for up to 25 contractors—regardless of how many you're managing.

Payroll handling: EORs process payroll for you. PEOs process payroll for you. Direct contractor management means you send payments directly from your own account (Wise, PayPal, etc.).

Benefits: EORs provide locally-mandated benefits for employees. PEOs provide access to a benefits pool and can negotiate better rates. Contractors handle their own benefits—it's their responsibility.

Tax withholding: EORs withhold and remit taxes automatically. PEOs withhold and remit. Contractors handle their own tax compliance.

Control: EORs and PEOs both give you high control over day-to-day work direction. Direct contractor management gives you medium control—contractors set their own schedule and methods.

Compliance risk: EORs assume most employment risk. PEOs share the risk with you. Direct contractor management puts compliance responsibility on you to ensure proper classification.

Setup: EORs typically take 1-2 weeks. PEOs take 2-4 weeks. Direct contractor management is same-day.

Flexibility: EORs lock you into contracts (usually 12 months). PEOs use annual contracts (medium flexibility). Direct contractor management is pay-as-you-go (high flexibility).

When to use each model

Use an EOR when: You're hiring full-time employees in countries where you don't have a legal entity. You need to provide benefits (health insurance, paid time off, retirement). You need to withhold and remit taxes. You want the person to be a true employee with legal protections. You're willing to pay $49-99/month per employee for this service.

Example: You want to hire a full-time software engineer in Germany but don't have a German subsidiary. An EOR makes sense.

Use a PEO when: You already have a legal entity in the country. You want to outsource HR administration, payroll, and benefits. You're hiring domestic employees (typically U.S.-based). You want access to better benefits rates through a larger employer pool. You're willing to share employer responsibilities.

Example: You have 15 employees in your U.S. office and want to outsource payroll and benefits administration to focus on your business.

Use direct contractor management when: You're working with independent contractors, not employees. Contractors work for multiple clients, not just you. Contractors set their own schedule and use their own tools. You pay per project or milestone, not salary. You want to avoid per-person monthly fees. You want to pay directly via Wise, PayPal, or Payoneer.

Example: You need 8 contractors across different countries for a 6-month project. Direct management costs $99/month total. An EOR would cost $392-792/month for the same workers.

Real-world hybrid approaches

Most growing companies use a combination of models:

Core team + project contractors: Use an EOR for 3-5 full-time core employees in key markets, then use direct contractor management for 10-20 project-based contractors. This gives you stable core capacity while maintaining flexibility for project work.

Test before committing: Start with contractors to test a new market or role. If the work justifies it and you want to convert them to full-time, then engage an EOR. This avoids EOR fees while you're validating whether the market works.

Domestic employees + international contractors: Use a PEO for U.S.-based employees to get better benefits rates and outsource HR complexity, then use direct contractor management for international talent. This avoids the cost and complexity of international EORs for contractors who don't need them.

Common classification mistakes

Mistake 1: Using an EOR for contractors. If you're working with true independent contractors, an EOR is the wrong tool. You pay $49-99/month per person for employee infrastructure—payroll processing, benefits administration, tax withholding—that contractors don't need. This costs thousands per year unnecessarily. Use direct contractor management instead if they're actually contractors.

Mistake 2: Misclassifying employees as contractors. This goes the other direction. If you're setting someone's schedule, providing equipment, requiring exclusive work, and paying a steady salary—they're an employee regardless of what you call them. Misclassifying creates legal risk, back taxes, and penalties. Use an EOR or PEO if you're hiring employees.

Mistake 3: Choosing a PEO when you don't have an entity. PEOs require you to have a legal business entity in the country. If you don't, PEO won't work. You need either an EOR (they create the employment relationship) or direct contractor management (no entity required).

Mistake 4: Not considering total cost. EORs and PEOs charge per-person fees that compound. For 10 contractors, you could be paying $5,000-10,000/year in fees alone. Direct contractor management costs $99/month flat for up to 25 contractors. The difference is substantial if you're actually working with contractors.

How to determine contractor vs employee status

The distinction matters legally and financially. Courts look at factors including control (who sets schedule and methods), exclusivity (do they work for multiple clients?), tools and equipment (whose equipment do they use?), and payment structure (salary vs project-based).

If someone works for multiple clients, sets their own hours, uses their own equipment, and invoices you for deliverables—they're likely a contractor. If you set their schedule, provide equipment, require exclusive work, and pay them a salary—they're likely an employee.

When in doubt, consult with an employment lawyer. Misclassification is expensive to fix later.

Frequently asked questions

Can I switch from an EOR to direct contractor management?

Only if the workers are truly independent contractors. If they're employees (which the EOR was treating them as), you can't simply switch to contractor management. You'd need to either keep the EOR, set up your own entity in the country, or terminate the employment relationship. If you're unsure about classification, check our guide on leaving an EOR.

What's the practical difference between PEO co-employment and EOR employment?

With a PEO, you and the PEO are both legally responsible. You share the liability. With an EOR, the EOR is the sole legal employer, and you're the client purchasing a service. This means the EOR assumes more legal risk but also typically has more control. For you, PEO means slightly more compliance responsibility on your shoulders.

How do PEO benefits actually work?

PEOs negotiate benefits like health insurance and retirement plans with providers based on their large employee pool. You get access to better rates and coverage than you could negotiate alone. The PEO administers the benefits, handles enrollment, and manages claims. You contribute to the cost, typically sharing premiums with employees.

Can I use contractor management software with an EOR or PEO?

Contractor management software is designed for independent contractors, not employees. If you're using an EOR or PEO for employees, you don't need contractor management software for those workers. But if you have a mixed team (some employees via EOR/PEO, some contractors), you can manage the contractors separately with contractor management software while using the EOR/PEO for employees.

What if I have workers in multiple countries with different classifications?

Many companies do this. You might use an EOR for full-time employees in one country, a PEO for domestic employees, and direct contractor management for international contractors. Each model handles its specific use case. Your finance and HR systems need to track them separately, but it's operationally manageable.

How much does it cost to switch models?

Switching from one model to another has costs. If you're leaving an EOR, you might owe termination fees or forfeit prepaid amounts. If you're switching contractors from EOR to direct management, you need to handle separation properly, issue final tax forms, and onboard them directly. Plan for 2-4 weeks of transition time.

Making the decision

The right model depends on whether you're hiring employees or contractors, whether you need local entity registration, and how many people you're managing.

If you're hiring full-time employees internationally without local entities, use an EOR. If you're hiring domestic employees and already have an entity, use a PEO. If you're working with independent contractors who work for multiple clients, use direct contractor management.

The financial difference matters. An EOR or PEO for 10 contractors costs $5,000-15,000/year. Direct contractor management costs $1,200/year. That's $3,800-13,800 in annual savings if you're actually working with contractors.

The key is honest classification. Are these people actually employees or contractors? If you're uncertain, get legal advice. The wrong classification is more expensive to fix later than getting it right upfront.