As organizations consider the best way to manage their human capital, they are increasingly confronted with whether to utilize a professional employer organization (PEO) or an administrative services organization (ASO). PEOs and ASOs share some similarities but offer distinctly different HR solutions, making it a crucial decision for organizations.
The differences between PEO and ASO services can mean the difference between propelling an organization forward or leading it down a costly and time-consuming road. That makes it essential for small businesses and larger companies to understand what sets PEOs and ASOs apart before deciding which to use.
This article will examine what makes up a PEO vs. ASO, what services each provides, and the potential cost differences. By taking the time to understand both options, your organization can make an informed decision that works best for its unique needs. So let's dive in!
What Is a PEO?
A professional employer organization (PEO) provides small and mid-sized companies with human resources and payroll services. PEOs work with the client company, and occasionally its established HR department, to manage their employees, allowing them to focus on their core business activities. PEOs provide administrative HR tasks such as payroll administration, employee benefits, and tax filing, as well as employer-related services, such as employee recruitment and training, compensation plans, unemployment claims, and employee relations.
The key difference between a PEO and ASO and other employment service providers is that the PEO is the employer of record. Meaning that while the client company maintains control over day-to-day operations, the PEO takes on legal responsibility for its employees and HR needs. The client company has less exposure to risk and liability associated with employment matters. Below is a more detailed account of the distinguishing features of a PEO.
A Co-Employer Relationship
PEOs are typically structured as co-employment service agreements in which the PEO is considered a “co-employer” of the client’s workforce. Under this arrangement, the PEO is the employer of record, so while the client company retains control over its employees, the PEO is responsible for providing HR services such as payroll tax processing and compliance. Though the client company is still responsible for its employees, it benefits from leveraging the expertise and resources of the PEO.
Access to Better Insurance
PEOs typically have access to various insurance options, such as workers’ compensation, employment practices liability insurance (EPLI), and health insurance. This can benefit the client company, especially if it lacks the resources to purchase insurance independently or is looking for better coverage or improved pricing. With a PEO, the client company can access more comprehensive insurance and benefits packages at lower costs than it could obtain alone.
PEOs can also advise and guide in selecting the best insurance for their client’s needs, helping them choose policies that provide the best coverage and regulatory compliance with state and federal laws. Finally, PEOs can help to ensure that the client’s insurance policies are up to date by regularly monitoring them for changes in the regulations or markets.
Flexible Employee Benefits
Employee benefits are a crucial component of any successful organization. PEOs can provide their clients with flexible employee benefits, such as 401(k) plans, health and dental benefits, vacation, and sick leave. A PEO can tailor these employee benefits to meet the needs of each client company and its workforce.
Clients can save time and money by leveraging the resources of the PEO to manage employee benefits. These benefits are typically more cost-effective for the client company than if it had to purchase them independently.
In addition, PEOs can assist in managing and administering these benefits, helping to ensure that all employees are receiving proper coverage. This can help save administrative costs and time.
What Is an ASO?
An administrative services organization (ASO) is a company that provides administrative services like payroll, human resources, and benefits. Unlike PEOs, ASOs do not assume legal responsibility for the client’s employees. Instead, the client company is solely responsible for its workforce. This means it retains complete control over its employees and can decide the level of HR outsourcing (HRO) required. Moreover, even though an ASO may handle payroll taxes and insurance administration tasks, it does so under the client company’s tax ID, not its own or a shared one.
Cost-Saving Option
The primary benefit of utilizing an ASO service provider is cost savings. Since ASOs do not take on any legal responsibilities for their clients, they typically charge a lower fee per employee than PEOs. And since ASOs do not assume employer responsibilities, the client company can select the services it needs and only pay for those. For example, if a client company does not need help with employee training or recruitment due to in-house capability, it can save money by declining these offerings.
It doesn’t Provide Benefits or Insurance
Unlike PEOs, ASOs do not provide any employee benefits or insurance. It is up to the client company to purchase and administer these programs as needed. The client company must negotiate with insurance providers and benefits vendors, manage employee program eligibility, and ensure that benefits comply with applicable laws. This can be time-consuming and costly, but it allows the client company to retain complete control over its benefits plan.
Oversees Administrative Tasks
An ASO’s primary services are administrative in nature. This includes payroll processing, tax filing and compliance, and employee record-keeping. An ASO provides expert guidance on these tasks and works as part of the company’s management team to ensure that all paperwork is completed accurately and on time. Furthermore, an ASO can help streamline administrative functions and processes and ensure the client company complies with applicable state and federal laws.
PEO & ASO Key Differences
The defining differences between PEO and ASO models boil down to core HR administration services, risk management, and employer of record. Let's take a side-by-side look at how each of these factors sets PEOs and ASOs apart:
- Core Services: The best PEOs provide comprehensive support for all HR functions, including payroll, healthcare benefits packages, onboarding, compliance with complex labor laws, and risk management. ASOs offer administrative services but do not assume legal responsibility for its client’s employees.
- Risk Management: PEOs assume legal responsibility for the client’s employees, which reduces the risk of liability and exposure to potential legal actions. An ASO does not take on employer responsibilities, leaving the client company fully responsible for its workforce.
- Employer of Record: PEOs are the employer of record and are responsible for managing all employee matters. ASOs do not assume any legal responsibility for their client’s employees.
ASO vs. PEO: Revelo Makes This Decision Easy
So which is the best option for your organization — a PEO or ASO? The answer to this question will depend on the size of your business, its needs, and its budget. A PEO may be the ideal solution for your organization if you're looking for comprehensive support to manage your human resources and reduce exposure to legal risks. However, an ASO may be the way to go if your organization seeks more significant cost savings.
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