PEO explained

Employer of Record vs PEO: What Is the Difference?

If you are expanding your team across borders, you have probably come across two terms that sound almost identical: Employer of Record (EOR) and Professional Employer Organisation (PEO). They both help with hiring and HR, so it is easy to assume they do the same thing. They do not.

The difference matters, especially if you are hiring in the UK. Choosing the wrong model can leave you exposed to compliance risk, unexpected costs, or worse, an employment structure that does not actually work for your situation.

This guide breaks down exactly how EORs and PEOs differ, when to use each one, and what that means for your business.

What is the difference between an Employer of Record and a PEO?

An Employer of Record (EOR) is the sole legal employer of your workers in a country where you do not have your own entity. It handles payroll, tax, benefits, and compliance with local employment law. Your company manages the employee's day-to-day work, but the EOR is the one HMRC sees as the employer.

A Professional Employer Organisation (PEO) enters into a co-employment arrangement with your company. Both the PEO and your company are considered employers, and responsibilities are shared. Crucially, in most cases you need your own local legal entity to use a PEO.

The practical difference is straightforward: an EOR lets you hire without setting up a local company. A PEO helps you manage HR once you already have one.

What is an Employer of Record?

An Employer of Record is a third-party organisation that becomes the legal employer of your workers in a specific country. In the UK, this means the EOR issues the employment contract, operates PAYE and National Insurance, manages pension auto-enrolment, and ensures compliance with UK employment law.

Your company, meanwhile, retains full control over the employee's day-to-day work. You decide what they do, how their performance is measured, and what projects they work on. The EOR does not get involved in management.

Think of it as a split: the EOR is the legal employer, and your company is the managing employer. The employee works for you, but the EOR handles the paperwork, payroll, and legal compliance. It is a model that has been used since the 1960s, originally in the United States to help companies employ people across state lines. Today, it is used globally.

The whole process can be completed in a matter of days, which is one of the main advantages of the EOR model.

What is a Professional Employer Organisation (PEO)?

A Professional Employer Organisation provides HR services to businesses through a co-employment model. The PEO becomes the employer of record for tax and benefits purposes, while your company remains the employer for day-to-day management.

In a PEO arrangement, the PEO typically handles payroll, benefits administration, HR compliance, and workers' compensation. Your company handles hiring, management, and the actual work the employee does.

The key thing to understand is that a PEO does not employ people on your behalf in the way an EOR does. Instead, it shares the employer responsibilities with you. This is why you usually need your own legal entity in the country where the PEO operates.

PEOs are most common in the United States, where they originated to help small businesses access better benefits and manage HR compliance across multiple states. In the UK, the PEO model is less established, and most businesses that need HR outsourcing either use an EOR or engage a managed payroll provider.

Cost: EOR vs PEO

The cost structures of EORs and PEOs are different, and it is worth understanding what you are paying for.

EOR costs are typically a fixed monthly fee per employee, ranging from £300 to £700 in the UK. This usually covers the employment contract, PAYE and National Insurance, pension auto-enrolment, statutory benefits, and payroll reporting. There are no upfront setup costs.

PEO costs are usually either a flat monthly fee per employee or a percentage of payroll (typically 2% to 12% of gross wages). However, you also need to factor in the cost of setting up and maintaining your own local entity, which can run into thousands of pounds.

For companies hiring internationally without a local entity, an EOR is almost always more cost-effective. The PEO model only makes financial sense when you already have a local entity and are looking to outsource HR administration.

When to choose an EOR

An EOR is the right choice in several scenarios:

You are hiring in a country where you do not have a local entity. This is the most common use case. If you want to employ someone in the UK but do not have a UK company, an EOR is the fastest and simplest solution.

You are testing a new market. If you are not sure whether the UK market is right for your business, an EOR lets you hire a small team without the commitment and cost of setting up a subsidiary.

You are hiring a small team. For teams of one to 15 employees, the setup and ongoing costs of a legal entity are usually disproportionate. An EOR provides a more cost-effective solution.

You need to hire quickly. An EOR can have someone employed within days. Setting up a legal entity takes four to eight weeks.

You want to minimise compliance risk. Because the EOR is the legal employer, it carries the compliance liability. If you are unfamiliar with UK employment law, this provides significant protection.

If you are considering an EOR for UK hiring, you can learn more about how EOR works in the United Kingdom.

When to choose a PEO

A PEO makes sense in a narrower set of circumstances:

You already have a local entity. If you have already set up a subsidiary in the UK (or another country), a PEO can help you manage HR, payroll, and benefits without building an in-house HR function.

You are looking for domestic HR outsourcing. In the US, where the PEO model is well established, businesses use PEOs to access better health insurance plans, manage multi-state compliance, and reduce HR admin.

You want to retain more direct control over employment contracts. With a PEO, the employment contract is between the employee and your company. This gives you more flexibility to make changes without going through a third party.

It is worth noting that the PEO model is much less common in the UK than in the US. Most UK businesses that need HR outsourcing either use an EOR or engage a specialist payroll provider.

Can you use both an EOR and a PEO?

Yes, and some businesses do. A company might use an EOR to hire in countries where it does not have a local entity, and a PEO to manage employees in countries where it does. This is sometimes called a "hybrid approach" and it makes sense for companies that are expanding internationally but already have a presence in some markets.

The key is to make sure the two models work together. If you are using an EOR in the UK and a PEO in the US, you need to ensure that employee data, payroll, and reporting are consistent across both.

EOR vs PEO vs ASO: what is the difference?

You may also come across the term ASO, or Administrative Services Organisation. An ASO is similar to a PEO, but without the co-employment arrangement. Your company remains the sole employer, and the ASO provides administrative services like payroll processing and benefits administration.

The main difference between a PEO and an ASO is employment status. With a PEO, the PEO is the employer of record for tax purposes. With an ASO, your company remains the employer of record. This means you retain full liability for compliance and employment law.

ASOs are most common in the United States and are rarely used in the UK. If you are hiring in the UK, the choice is usually between an EOR (if you do not have a local entity) and handling employment yourself (if you do).

EOR vs PEO for UK businesses

For UK businesses, the EOR vs PEO question is usually about outbound hiring, employing people in other countries from your UK base.

If you are a UK company hiring in the US, for example, you might use a PEO if you have already set up a US subsidiary. If you are hiring in Germany, France, or Australia without a local entity, you would use an EOR.

For international companies hiring into the UK, the answer is simpler. The PEO model is not well established in the UK, so an EOR is almost always the right choice if you do not have a UK entity. If you do have a UK entity, you would typically manage employment directly or use a managed payroll provider.

The UK's employment law framework, governed by the Employment Rights Act 1996, the Equality Act 2010, and various other statutes, is detailed and frequently updated. An EOR with UK expertise can help you navigate these requirements without needing to build in-house knowledge.