Most small and mid-sized businesses handle all of their back-office support needs internally because they are unaware or unfamiliar with the available outsourcing options. If you are considering outsourcing functions like back-office, payroll, billing, insurance coverages, employee benefits, and the like, you’ve likely encountered the dilemma of choosing between a PEO and an EOR solution. We consistently advise our clients on understanding the nuances of these options as they serve different purposes and suit varying business objectives.
Since most business owners have handled these functions internally for many years if not forever, deciding to outsource these processes is critical. The business owner and|or their leadership team must start by evaluating how they plan to grow their business. What is the long-term strategy of how the business will be structured, operated, and staffed?
What is a PEO and EOR?
PEO is an acronym for Professional Employer Organization. A service designed to help small companies offer high-quality benefits to their employees, outsource the payroll processing functions, including tax obligations and reporting, manage HR functions, and maintain compliance in today’s workplace. When a PEO option fits, it is an excellent way for a small company to compete for talent and offer significant company benefits such as health care and 401K retirement plans typically not affordable to do on their own – especially if the company operates in multiple states.
There are over 2,500 PEOs (Professional Employer Organizations) in the United States as of 2023, so you have many choices. PEOs provide services to approximately 3 million worksite employees and work with over 150,000 client companies, so it is a proven solution to consider.
In comparison – EOR is an acronym for Employer of Record, and this back-office solution supports the recruiting and staffing industry. When you think of a staffing firm placing an employee on assignment at one of their client’s facilities – the staffing firm is the employer of that candidate in the eyes of the IRS – not their client company. An Employer of Record Solution provides a legal way to support the growth of the recruiting and staffing firm by taking on full liability and responsibility for the employee on assignment. The EOR service firm supports the functions of payroll, payroll funding, billing, and collections. As well as provide the appropriate liability insurance coverages for the people working at the end-client company’s facilities since they are the employer in the eyes of the IRS – not the staffing firm.
This type of outsourced approach is much more flexible than a PEO, and through the years, an EOR option has proven beneficial to support multiple staffing applications for companies to implement directly.
- An accounting firm that experiences a seasonal bump in workload can use the EOR option to create an internal project staffing program for a seasonal period and not put the employee on their company’s payroll.
- A consulting firm employs EOR to support special short-term client projects when the company does its recruiting but wants to avoid putting the employees hired on their payroll due to the short-term time frame of a given project.
- Nonprofits hire specialists or subject matter experts to support a major grant opportunity, and it is more appropriate to keep an arms-length relationship with the individual(s) during the grant timeframe rather than put them on the non-profit’s payroll. This is where an EOR option might be very appropriate.
- Interim Management / Leadership brought in for mergers and acquisitions would be a fit for EOR options because they are not meant to be traditional W2 employees.
- A tech startup with 30 employees switched to a PEO arrangement, enabling them to offer competitive benefits and attract high-caliber professionals, fueling their growth.
More to Think About
There are several other factors that help determine which solution would be best for you and every business owner should weigh the financial, legal and cultural implications of choosing one or the other. Here is some food for thought.
- Financial Implications: While PEOs often require a substantial fee, they allow access to premium benefits at a more affordable cost due to their pooled resources. EORs might seem cost-effective but consider potential service fees and the impact on employee eligibility for certain company benefits.
- Legal Compliance: Both PEOs and EORs ensure legal compliance, but the degree varies. PEOs co-share employment responsibilities which means the company still has legal liability exposures, while EORs fully assume legal and compliance obligations, reducing your company’s direct liabilities.
- Cultural Implications: Opting for a PEO allows you to maintain your company culture, as you retain control over daily management. EORs, suitable for specific projects or temporary staff expansion, might have minimal impact on long-term company culture.
PEOs and EORs are not one-size-fits-all solutions. Businesses should consider their long-term goals, financial capacity, and operational needs before making a decision.
As a business owner, you know how crucial it is to have efficient and effective solutions to support and manage your workforce – especially when it affects your people’s compensation. With the array of options available, it can be challenging to determine which solution best suits your company’s needs – and there may be times when both could be suitable. Both PEOs and EORs offer strategic advantages. Your choice depends on your business model, growth plans, and operational priorities. It’s essential to consider every angle before making this pivotal decision.
Ready to explore further? Contact me for a deeper dive into what PEO or EOR could mean for your business. Schedule a consultation today by emailing me at email@example.com.
As a bonus, here are some example Case Studies with results. These embellished case studies provide concrete results and statistics to demonstrate the efficacy of PEOs and EORs in addressing specific business challenges. By seeing the tangible benefits, business owners can better understand the potential impact these options might have on their operations.
Case Study 1: Tech Startup Leverages PEO for Growth
A burgeoning tech startup, “TechRise,” faced challenges in attracting and retaining skilled professionals due to its inability to offer competitive benefits. After partnering with a PEO, TechRise gained access to a wider range of high-quality employee benefits typically available only at larger corporations. As a result:
- Employee turnover within the first year of the PEO partnership reduced by 25%.
- TechRise reported a 40% improvement in job application rates for open positions, citing enhanced benefits as a key attractor.
- The company saved on healthcare premiums and other benefits-related costs by approximately 20%, thanks to the PEO’s bargaining power.
- The HR department reported a 30% reduction in administrative workload, allowing more focus on strategic growth initiatives.
This strategic move enabled TechRise to establish itself as a desirable place to work, directly influencing its market competitiveness for high quality talent and position the company for growth.
Case Study 2: Consulting Firm Utilizes EOR for Flexible Project Staffing
“ConsultUs,” a specialized consulting firm, frequently undertook large, short-term projects requiring rapid staffing upsurges. Traditional hiring processes posed logistical challenges, delaying project commencement and completion. By engaging with an EOR, ConsultUs experienced several tangible benefits:
- The firm managed to onboard 50+ specialists within three weeks for a high-stakes project, a process that previously took up to two months.
- ConsultUs reported a 15% cost saving on the administrative aspects of employee management, as the EOR streamlined payroll, liability insurance, and compliance.
- The EOR model’s flexibility facilitated a 35% faster project turnaround time, significantly increasing client satisfaction.
- Risks associated with compliance and employee litigation decreased by 20%, as the EOR absorbed these legal responsibilities.
About Brad Stevens: Brad Stevens founded Level-C Solutions in 2009, specializing in optimizing companies’ growth and efficiency through innovative staffing solutions. With a philosophy that quality talent is accessible with the right strategy, he focuses on the crucial role of solving people problems in business success. His expertise lies in strategic planning, third-party staffing, and comprehensive back-office solutions, contributing significantly to companies’ revenue and profitability enhancements. Stevens also collaborates with Signature and Amazech Solutions, extending his acumen to diverse domains like IT staffing and business development. He employs a unique owner’s advocate approach, ensuring quality from the initial stages of any business endeavor. Overall, Stevens is a seasoned executive, combining multifarious skills to guide businesses through growth-oriented transformations.
About Level-C Solutions: The only thing certain is CHANGE. At Level-C Solutions we help guide business owners and leaders with P&L responsibility on ways to solve difficult challenging people problems in a cost-effective manner with very good results. By working with and representing multiple recruiting, staffing, and human capital options– we have the right tools available to engage the talent you need at the time you need it.
President & CEO