When talking with UK and EU venture-backed tech companies about US expansion we are often asked about the differences between using an Employer of Record (EOR) or using a Professional Employer Organization (PEO) in the US market so we thought publishing a blog on this topic may be a helpful resource.

Back when I was on the original launch team at ADP for their PEO product, TotalSource, the terms PEO and EOR we used interchangeably. Today, while there are certainly some similarities, EORs and PEOs have some important distinctions that are critical to understand when considering which type of HR provider to use in support of your US expansion plans. Let’s dig into the details.

What is an Employer of Record (EOR)?

The EOR acts as the legal employer of the company’s US-based employees. This means that the EOR handles all employment-related tasks, including payroll, benefits, taxes, and compliance. The EOR has full responsibility for ensuring that employment laws are followed, which can reduce legal risks for the expanding company. The person hired to represent your company in the US market is technically employed by the EOR.

Benefits of Using an EOR for US Expansion

• No Need to Establish a US Company – To hire an employ in the US you have traditionally had to create a fully functioning US company. This would mean not only creating a legal entity, but it would also require several additional steps including setting up a US bank account, securing state tax ID and withholding numbers, setting up US accounting operations, and filing US Federal and State tax returns. Using an EOR allows companies to avoid the time and costs associated with setting up a fully functioning US company and still hire people in the US market.

• Speed in Hiring – Once your company is signed up with an EOR you can begin hiring immediately. The ability to immediately hire can be quite advantageous when experienced talent in your industry suddenly becomes available to join your company in the US.

• Minimal Compliance Risks – Since the EOR is the employer in the US they assume almost all the compliance risks at the state and federal level related to managing employees.

• No Commitment – An EOR provides an easier exit strategy if the US market doesn’t work out, as there’s no need to wind down a legal entity. The company can simply terminate the agreement with the EOR.

• No Employee Minimums – EORs do not typically have any minimum requirements for a certain number of employees to use their service. Having only 1 employee with an EOR is typically OK.

 

Potential Downsides of Using an EOR

• Not Your Employees – People hired through an EOR legally work for the EOR, not your company. This means it wouldn’t be appropriate for these people to sign legal contracts or agreements on behalf of your company. These people may not be eligible for your company’s Employee Stock Option Plan (ESOP).

• Permanent Establishment (PE) Risk – Permanent Establishment Risk refers to the possibility that a foreign company may be deemed to have a sufficient presence in the U.S., leading to U.S. tax obligations. Routine sales activities or significant decision-making by U.S.-based employees could increase the risk of PE being established.

• Still Not a U.S. Company – Hiring a salesperson through an EOR may provide your company with a presence in the US market but it won’t reduce any potential friction in the buying or procurement process from customers who want to contract with a US legal entity or aren’t accustomed to contracting with or paying a foreign vendor.

• Costs – Using an EOR can be quite expensive. In addition to the employee benefits and taxes, companies using an EOR can expect to pay admins fees ranging from $500 – $1000 or more per employee per month.

 

What is a Professional Employer Organization (PEO)?

The PEO is a co-employer. The company remains the legal employer, but the PEO shares certain responsibilities, primarily handling HR functions like payroll, benefits, and compliance. The company retains more control over employment decisions and operations, but also retains more legal responsibility. The PEO assists with compliance but does not take full responsibility.

Benefits of Using a PEO for US Expansion

• US Operating Company – To work with a PEO your company will have to create a US fully functioning US company including setting up a legal entity, banking, and accounting operations. The benefit of having a fully operational US company is that it will make it much more seamless to conduct business and grow revenue in the US market.

• Direct Employer Status – With a PEO, the company remains the direct employer of its US employees. This allows for greater control over HR decisions, company culture, and employee management. PEOs also allow for seamless integration with the company’s existing HR and operational processes, which can lead to a more cohesive management structure.

• Costs – PEOs also charge a monthly administrative but are generally more cost effective than EORs. In addition to the employee benefits, worker’s compensation insurance, and taxes, companies using a PEO can expect to pay admins fees ranging from $100 – $200 per employee per month.

• Enhanced Benefits & HR Support – PEOs typically offer a broader range of HR services, including HR consulting and recruiting services. PEOs also typically have access to large group benefits plans, which can provide better rates and a wider range of benefits options than what might be available through an EOR. Enhanced benefits can help attract and retain top talent.

 

Potential Downsides of Using a PEO

• US Operating Company Required – To work with a PEO your company will have to create a US fully functioning US company including setting up a legal entity, banking, and accounting operations. Creating a fully functioning US company can be an expensive and time-consuming process.

• Speed in Hiring – Since working with a PEO requires having a fully operational US company, you won’t be able to hire any US employees until you have created a US legal entity plus setup US banking and accounting operations.

• Benefits Underwriting Risk – PEOs have historically taken the same approach to underwriting health insurance coverage as the US health insurance companies by reviewing the overall demographics of the employees who work for the client company. However, PEOs are now assessing the health of individual employees and refusing to provide their services to companies they determine to be a high-risk health group.

• Employee Minimums – Most PEOs require a minimum number of employees, 5 employee minimums are common. Employee minimums can be problematic for UK and EU companies expanding to the US since no new companies start with 5 employees the first day the open their office in the US.

 

Conclusion

Choosing between an EOR and a PEO depends on specific needs, such as the speed of entry, cost considerations, and long-term plans in the US. An EOR might be more suitable for companies seeking a rapid, low-risk entry, while a PEO is better for those aiming for a sustained, scalable presence.

We typically see our clients using an EOR to make a quick hire or two in the US then creating a full US operating company and moving over to a PEO for their long-term HR and benefits needs.

If you have questions regarding EORs and PEOs or other US expansion related topics, you should book a meeting with the team that knows more about executing the entire end-to-end US expansion process than anyone else on the planet. We are always happy to talk!