Both PEOs and ASOs are HR outsourcing organizations that can help companies reduce overhead and focus on money-making activities. However, there are differences in how they operate and what they do.
What Is a PEO?
A Professional Employer Organization, or PEO, provides companies with outsourced HR services, such as payroll, state unemployment insurance, worker’s compensation, and employment law compliance assistance.
PEOs do this through a shared tax ID with their client company—a model known as “joint employment” or “co-employment.” This arrangement allows the client company to transfer many of its key employer responsibilities to the PEO, while continuing to manage their employees’ day-to-day activities.
The PEO is considered the “Employer of Record” for tax and insurance purposes, as well as federal and state employment laws like wage and hour regulations. If legal problems arise that are related to the HR function, the PEO assumes some of that risk. Formal agreements between the PEO and client company are used to spell out the division of responsibilities between the two.
The PEO can also sponsor employee benefit programs, such as retirement plans and health coverage. PEOs are able to provide more cost-effective benefits through combined buying power and spreading the risk across many clients. This gives small to mid-sized businesses access to larger company benefits.
What Is an ASO?
The term “ASO” stands for Administrative Services Organization. Like PEOs, they provide outsourced HR services, such as payroll and benefits administration. The specific services provided vary by ASO.
The main difference between an ASO and PEO is that there is no joint employment arrangement. An ASO does not become the co-employer of the client company’s employees. With the ASO model, the client company outsources specific HR tasks and retains the liability while the ASO performs the services. While an ASO may handle tax and insurance filings, they are done under the client company’s tax ID, not a shared one. An ASO can offer guidance with legal questions on compliance, but it is solely the responsibility of the client company to act on them.
An ASO does not sponsor employee benefit programs such as health plans, but can help the client company find and secure coverage, as well as handling the day-to-day administration.
Deciding Between a PEO or ASO
While it varies from vendor to vendor, PEOs and ASOs can offer similar HR and payroll services. There are also differences in cost based on SUTA (State Unemployment Tax Act) rates, but often times the cost is similar. The decision mostly comes down to how hands-on an employer wishes to be in terms of HR and employee benefits, and whether or not they want to maintain internal HR staff.
PEOs are the choice of many companies who wish to outsource all of their HR. They seek to reduce their risk and liability as well as reap the benefits of collective bargaining, such as lower health plan costs. The PEO acts as a complete outsourced HR department.
Companies who wish to retain internal HR staff may favor the ASO model. The ASO works as an extension of the internal department by handling specific HR functions and projects, and filling in skills gaps. While the client company retains more hands-on control in areas like choosing health coverage plans, they also retain liability and sole responsibility for enacting compliance measures.