Deciding between ASO vs. PEO is one of the many decisions you need to make when you’re looking to outsource your HR functions. Each option has its own advantages and disadvantages, making one more suitable than the other for certain situations.
An administrative services organization (ASO) doesn’t sponsor your benefits plans or remit your taxes under its EIN but helps streamline your daily HR tasks. On the other hand, a professional employer organization (PEO) offers third-party HR services, including payroll administration, workers’ compensation, and benefits.
But which outsourcing arrangement would make the most sense for your company? Let’s find out.
1. Employment and Payroll
A key difference between an ASO and a PEO is who your employees work for.
The ASO is a third party in the traditional sense and only assists in an advisory capacity, meaning your employees remain yours. Note that they will take care of your payroll functions under your company’s EIN.
Additionally, the ASO takes over the responsibility of administering employee relations compliance, so you don’t have to hire another employee to perform this task and help develop (not enforce) employee handbooks and policies.
A PEO, on the other hand, acts like a co-employer, where all employees belong to them. They take care of all your payroll functions while paying federal payroll taxes under their own federal EIN.
This has two immediate benefits for you:
- Since they deal with millions of employees, a PEO has greater purchasing and negotiation power compared to you as a small business owner. This can be handy when negotiating health insurance and other compensatory elements.
- You don’t have any employees on your books, so the PEO takes care of tricky tasks such as firing employees. (Don’t worry, you still make the decision of who gets fired, but the PEO does the actual firing.)
2. Choosing Insurance Vendors
In an ASO partnership, you have to select and manage the vendors you want to work with, but a PEO doesn’t require choosing your own partners.
Choosing a PEO would be beneficial for you if you aren’t well acquainted with insurance jargon and lack experience dealing with insurance vendors. But if you’ve dealt with insurance vendors before, an ASO partnership won’t be a frustrating experience for you.
3. Health Insurance
An ASO takes full responsibility for administering health insurance for your employees, including finding the right kind of insurance and negotiating rates and coverage as per your budget.
On the other hand, a PEO can present extremely affordable health and dental insurance plans, along with other benefits like 401(k) and life insurance, but the number of plans to choose from is fairly limited.
4. Workers’ Compensation
An ASO helps you find the right kind of coverage and negotiate a policy, as well as manage the administration of that policy and handle any claims on your behalf, but covering the workers’ compensation is your responsibility. You can also rely on them to suggest effective strategies to mitigate risk should your employees be prone to physical injury.
A PEO is fully responsible for offering workers’ compensation insurance.
As a small-sized or medium-sized business owner, you may end up paying premium rates usually reserved for larger employees. Luckily, a PEO can mitigate this risk by doing assessments on your behalf for employees that may be at risk for injury.
An ASO views you as a small employer, so you can’t expect it to offer volume pricing for purchasing benefits like life insurance. This is in sharp contrast to being in a PEO agreement, where you’re viewed as part of a larger group, and your insurance partner’s benefits are chosen on your behalf. In other words, a PEO provides you access to its own clients and procures benefits based on the larger group, giving you the advantage of volume pricing.
Note that the total cost of a PEO depends on its pricing model. While some charge a percentage of your payroll each day, plus administrative fees, others will charge you based on how much it’s spending to clear your business’s taxes and insurance premiums. You’ll also find PEOs charging a monthly flat fee per employee.
That said, an ASO is still often less expensive than a PEO. To put things into perspective, an ASO is likely to charge you $50 to $100 per employee per month, whereas a PEO may charge $150 to $200 per employee per month.
6. State Unemployment Insurance
Under an ASO partnership, the unemployment insurance rate is based on the number of claims generated by your business. If you have few claims, this will be a better deal for you.
But if you’re a larger organization dealing with significantly more claims, a PEO would make a better bet as they take full responsibility for handling unemployment insurance deductions and payments. What’s more, the risk of claims is also lower, thanks to their huge pool of employees.
The other benefit of partnering with a PEO is they provide a number of free job performance, improvement, and training resources to facilitate your employees’ professional development.
7. Claims, Safety, and Loss
You can rely on an ASO to find the right kind of coverage, but don’t expect access to a large pool to help spread the risk. In other words, you’ll bear all the responsibility and liability for any insurance claims, safety, and loss. Of course, the ASO can help from an administrative standpoint, but that’s just about it.
On the other hand, a PEO shields you from the bulk of the responsibility and liability for insurance claims, safety, and loss, depending on your contract. Similar to how it works with workman’s compensation, they can help you identify areas to mitigate associated risks.
8. Compliance and Liability Mitigation
An ASO doesn’t take over your employees. Naturally, they also don’t shoulder any employer risk and only act as consultants.
As a co-employer, a PEO shares some amount of the liability expected from an employer. This also creates vested interest on their part, where it helps your company comply with applicable rules and regulations and mitigate any liability to ensure good outcomes in different employment situations.
The Similarities Between ASO and PEO
In addition to the above differences, an ASO and a PEO also share certain commonalities.
The first similarity is their administrative services. Both outsourcing companies have a similar approach to how they operate and help their clients when it comes to administration assistance. Expect cost-effective and balanced HR services to facilitate the seamless functioning of your business.
If you have limited staff in the HR department or want to free up their time to focus on more important projects, both PEOs and ASOs can help formulate your overall business plan, reducing the burden of administrative duties from your HR staff.
This expands to tax filing, payroll, employee benefits assistance, employee complaints and concerns, and other related compliance and HR management topics.
Both outsourcing companies also offer managerial services, so you can hire them as external regulators, providers, and managers for your company’s affairs. They are also well-versed in planning out the best practices and best strategies and technology depending on your needs.
Final Thoughts About ASO vs. PEO
An ASO and a PEO at two different services that seem similar. While they both cater to small and medium-sized businesses, they serve your company in very different ways.
If flexibility is of utmost importance to you, an ASO partnership that pairs well with internal HR employees and the administration of your own health insurance program would be a better fit. But if you want access to additional options for health insurance programs and voluntary employee benefit programs without breaking the bank, partnering up with a PEO makes more sense.
Each business has different goals and needs. Consider your company’s current state and projected state over the coming years and perform a deep analysis of its current situation to understand how an ASO or a PEO partnership would impact your operations and growth plans.
Here are additional Quicksprout guides to help you narrow down the best outsourcing option for your needs: