PEO or EOR: What’s Best for You?

  By Judy Collins  |    Tuesday May 28, 2024

Category: Expert Advice, Productivity


Recruiters can be faced with the choice of working with an Employer of Record (EOR) or a Professional Employer Organization (PEO). Both choices can help with the responsibilities that arise when an organization becomes an employer. These responsibilities include on-boarding, time collection, payroll processing, payroll funding, withholding of taxes, insurance requirements, benefits administration (ACA compliance), and other HR functions. This article is written to highlight the responsibilities of both the EOR and PEO. Neither a PEO nor an EOR is a staffing agency. Both types of organizations work with staffing and recruiting professionals to save them time and money.

Employer of Record (EOR)

An EOR is a back-office provider which assumes the full responsibility for workers placed on assignment with a client company. The EOR becomes the legal employer of record for workers placed on the behalf of a staffing and recruiting firm. All state and federal reports will go under the EOR’s Employers’ Identification Number (EIN). Once the chosen worker is ready to start a job assignment the EOR begins the onboarding process, including collecting the new employees I9, tax information (W9), enrolling in benefits programs when required, completing background checks and pre-employment drug screens when necessary, administrating the sexual harassment training according to state laws, and setting up the timesheet approval process. 

The worker will be covered under the EOR’s workers’ compensation policy and unemployment account. Other responsibilities of an EOR include withholding taxes, paying employer matching taxes and issuing an annual W2 to the employee. The EOR manages the workers’ comp and unemployment claims, benefits including healthcare mandates, and all state and federal requirements. The staffing and recruiting firm sets the pay and bill amount, the job title, the start date, the state the employee will be working in, and who will be the responsible party for invoicing. An EOR will calculate the recruiter profit before the employee onboarding begins. Recruiter profit can either be paid upon invoicing or when payment is made from the client company. The EOR can include payroll funding if requested.

Most EOR’s can handle one or more persons working in the continental USA. If the employee is working international, this would have to be approved before the assignment starts. Recruiters can use an EOR to save time onboarding, collecting time, processing payroll, invoicing, collecting payment, following missed payments, or having to reissue invoices, and tax reporting. An EOR will make sure the recruiter is compliant with all state and federal payday laws. An EOR can be used selectively by the recruiter, depending on the circumstance and the Workers’ Comp Class Code.

Professional Employer Organization (PEO)

A PEO serves as an outsourcing firm for small and mid-size businesses. An organization can work with a PEO by outsourcing different services that are needed. A PEO signs a co-employment agreement with their clients. The PEO and the client have shared responsibilities. Cost and risks can be mitigated by the partnership. Businesses save money by minimizing their HR and accounting departments. When partnering with a PEO, they can negotiate better rates for workers’ compensation and benefit packages for the employee by bundling these services in a preset package.

PEO clients can customize their plans with different a la carte features. PEO clients work closely together to build the service package that your small business needs. Through co-employment the PEO becomes the EOR for tax purposes and becomes responsible for withholding taxes, paying unemployment taxes, and covering workers’ compensation. A PEO covers all of the organizations’ employees. A PEO has special definitions and rules related to Federal tax treatments under the US Congress Internal Revenue Code. 

PEO services can include HR consulting and managing HR functions including safety training and developing employee handbooks, overseeing risk and safety compliances, onboarding and terminations, payroll, and workers’ compensation and unemployment reporting and claims. Benefit plans can include retirement accounts (401-K), employee disability and life insurance, retirement, and transportation reimbursement. The PEO can help provide as little or as much assistance as needed.

A recruiting firm with five or more employees can qualify to work with a PEO. The PEO then works as the EOR for both internal employees and any contractors on assignment. This arrangement relieves the recruiting firm owner of responsibility of being the employer of their HR, Accounting, and recruiting staff. This feature is especially attractive to small to mid-sized recruiting firms employing five or more people with different departments and different locations. The PEO’s partner continues to have control and direction of employees’ day-to-day functions. The PEO charges an “administrative fee” which is in addition to normal employer costs such as FICA, Medicare, and unemployment insurance.

The EOR and PEO each has a special application in the marketplace. They can both help save time and money so companies can focus on their core objectives. Call me if you would like to discuss which of these options will be best for you! 

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