PEO or Employer of Record – What’s the Difference?

PEO or Employer of Record – What’s the Difference?

Mar 07, 2023

Workwell News

Here in the UK, the term Employer of Record and PEO (Professional Employment Organisation) are used interchangeably. They essentially mean the same thing – an organisation which is the legal employer of a worker, taking care of every aspect of compliance including payroll, taxes, statutory benefits and employment contracts.

Not only does using an EOR allow your business to access talent across the world, if necessary, but it provides a compliant, cost-effective, and efficient way to do so by simplifying time-consuming and complex employment processes.

How does it work?

There are 3 parties involved in an EoR/PEO relationship:

  • the end hirer
  • the employee
  • the EoR/PEO service provider, such as Workwell.

 

EoR is where an end client or indeed agency appoints us as their Employer of Record. The end client or agency agrees on what employment solutions can be used – traditional umbrella or PEO.

The PEO option allows the gross payment to go to the worker with a payslip that does not include employment costs and margin (Umbrella), removing any possible confusion/challenge from contractors about these costs. These employment costs are charged separately to the end client – all the contractor sees is gross to net pay with employee deductions.

The end hirer engages the services of the employee, allocating work tasks and managing performance, whilst we, as the appointed UK EoR, take care of the employment compliance obligations.

Simply put, an EOR becomes the legal employer for their client’s global talent. For example, if your business based in North America wants to hire someone in the UK, an EoR could employ them on your behalf. Equally, if you run a UK business and want to hire remote workers in Germany or elsewhere in Europe, an EoR could perform the same function.

This type of agreement allows your business to experience one of the main benefits of an EoR— they take on the responsibility of complying with local employment laws for their clients. On paper, the EoR is the employer of your chosen talent, but your business still maintains control over the relationship with the talent and their work.

EoRs ensure compliance with local regulations regarding:

  • Compensation
  • Holidays
  • Benefits and welfare
  • Severance and termination
  • Payroll tax

 

In practice, it’s a really simple way for hirers to get the talent they need without the responsibility of employment or the risk of compliance management, particularly for those who do not regularly use recruitment agencies and/or where digital talent procurement platforms are used instead.

Why use EoR/PEO?

An EoR can be used at any time for contract and permanent workforces and is the entity that takes care of everything to do with the mechanics of employment – from producing a contract of employment at the start of the engagement through to processing payroll each month and ensuring taxes are filed correctly and on time. The EoR will also offer HR and compliance support ongoing.

In the UK, PEOs are predominantly adopted to support end hirers and agencies with engagement, employment and payment services. But they also provide significant employee benefits and these may exceed those that can be provided by small or medium-sized end hirers.

Payment through a UK PEO is under PAYE, in common with Umbrella, but without the confusion associated with umbrella payslips. Furthermore, there is no margin deducted from payments made to the worker.

 

Risk management

The EoR/PEO model addresses a number of risks presented by UK tax law, including:

  • Criminal Finance Act – this places responsibility (with criminal sanctions) on the end user and every part of the supply chain to ensure tax is paid correctly and is not avoided.
  • IR35 – HMRC claims for incorrect worker status can now be levied all the way up the supply chain.
  • Lack of industry regulation – bodies such as the FCSA help to ensure supply chain compliance but are inadequate for ruling out CFA or other risks.
Creating efficiencies

The EoR takes care of every piece of information relating to the cost and payment of workers, from time capture and approval to invoicing, so removes duplication and inefficiency which traditionally arises when a number parties are involved in workforce engagement.

Transparency in the supply chain

It also brings greater transparency to your labour supply chain.

All too often, end users of flexible contract labour do not have visibility of how or where their workforce is ultimately engaged and paid.

There can be a myriad of recruitment agency suppliers who themselves use a myriad of Umbrella companies and it can be difficult to know which workers are associated with which suppliers and, indeed, how much of a worker’s pay is eventually received by the worker.

This lack of clarity and transparency presents a significant compliance risk because it’s even harder to check that all suppliers are operating compliantly which means it’s hard to get a clear picture of your compliance risk.

Because much of the tax compliance responsibility, risk and liability now ultimately sits with end hirers, it’s an issue that must be addressed.

End hirer benefits

EoR means your organisation can outsource the management of the legal and financial implications of hiring workers, enabling you to focus on your goals rather than employment obligations. Importantly, it means you can compete on a more even playing field because the majority of other major economies are already using a form of EoR.

  • Transparency & visibility – all your workers are employed or engaged by one trusted entity, which can provide audit assurance regularly and simply to prove compliance with UK tax rules and (e.g. paid via the PAYE system, into UK bank accounts)
  • Reputation and wellbeing – you can demonstrate they know where and how all of their contingent workers are engaged and how much pay they are receiving.
  • Access the best talent – rates are transparent and amounts received by the worker are clear and agreed up-front
  • One system – managers responsible for hiring workers have access to our end-to-end job scheduling and approval system, making the engagement of workers across your business easy and transparent. One system is easier to audit. Plus, there is only one main flow of information and funds between the end user and employer of record and one invoice, simplifying the process dramatically.
  • Cost neutral – there is no additional cost associated with using an EoR/PEO model.

Benefits for recruitment businesses

Where recruitment businesses are involved, they too benefit as this model reduces risk and liability, produces cost efficiencies, and improves cash flow amongst other things (more later).

  • Risk & liability – visibility of how and where the worker is engaged and paid means agencies can be sure that there will be no financial or criminal liability building up in the supply chain as a result of non-compliant tax and employment practices.
  • Quality supply chain – avoids dealing with poor Umbrella companies. Plus, you can access better talent because rates are transparent and amounts received by the worker are clear and agreed up-front.
  • Efficient – you can outsource non-value added processes – no need for a pay & bill function saving time and money. Enhances your organisation’s speed from placement to conversion to cash and removes the need for the agency to take on a funding arrangement (e.g. invoice discount/factoring facility). It also removes the need for certain insurances, further reducing costs.
  • Cost neutral – there is no additional cost associated with using an EoR/PEO model.
  • Reputation & customer support – you can demonstrate you know where and how all of your contingent workers are engaged and how much pay they are receiving. This reduces headaches and mitigates risk for your customers, and allows you to bring more value to the partnership through your professional standards and expertise.

 

Benefits for workers

And it’s beneficial to workers because their payslip mirrors that of a traditional employee as opposed to Umbrella workers whose payslips include items that can on occasion cause confusion, like Umbrella margins.

  • Consistent treatment across your entire contingent or remote workforce
  • Additional employee benefits
  • Improved employee engagement as people would have a sense of belonging to one entity with one common communication channel for engagement

 

International workforces

The model becomes even more beneficial if an end hirer or recruitment business is operating overseas where the employment and tax rules can be difficult to navigate.

Our service

Our EoR model comprises every aspect of support you will need, from onboarding to holiday management, expense processing and compliant contracts.

Find out more about our workforce engagement solutions or contact a member of our expert team.

 

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