PEO vs. ASO: Human resources are at the core of any business, and effective human resource management can be the difference between success and failure of a business venture. And for a small business owner, managing HR functions while also focusing on developing winning products or services, managing administrative and logistical tasks, and overseeing business finances can be challenging.
Outsourcing some or all your HR functions can free up your resources and allow you to focus on core business functions.
You have two options when it comes to HR outsourcing:
- Professional Employer Organization (PEO)
- Administrative Services Organization (ASO)
Both have their unique pros and cons, and the decision to leverage PEO vs. ASO depends on your individual business needs.
PEO vs. ASO: What Is a PEO?
PEO stands for a professional employer organization and is a third-party HR services provider that acts as a co-employer and shares the risks and liabilities for your workforce.
A PEO can offer you several HR services, including payroll and benefits administration, training and development, and workers’ compensation insurance. PEOs can also offer numerous other benefits while providing HR stability for small businesses. This makes a PEO a great fit for a small business with small or no HR teams, as it handles the necessary HR responsibilities and leaves you free to focus on other aspects of your business.
However, it is important to note that a PEO is not responsible for your day-to-day business operations, and you maintain the ownership and accountability of keeping your business running. Additionally, although a PEO can help with employee onboarding, it does not offer staffing solutions.
What Are the Benefits of a PEO?
Choosing the right PEO partner has many advantages and can save your small business hours of stress by taking on the HR processes. Some of the pros of PEOs for small and medium businesses include:
Help Recruit Top Talent
Many small businesses have difficulty reaching the right talent pool for their needs. A PEO can offer recruitment support to increase the recruitment process’s speed, efficiency, and effectiveness.
Simplify Payroll
A PEO can run all payroll-related tasks, like payment processing, accounting, garnishing wages, and filing W-2s, without direct involvement from the business owner, greatly simplifying and speeding up the process.
Provide Access to Competitive Benefits
Small businesses are often financially incapable of offering competitive employee benefits. As a co-employer, a PEO can amend your ability to provide competitive benefits while also simplifying benefits administration.
Administer Workers’ Compensation
In addition to providing coverage, a PEO can also help you direct the administration of time-consuming and costly workers’ compensation claims. This includes facilitating compliance with federal laws, necessary paperwork, certifications, and audits.
Maintain Legal Compliance
A PEO can help you navigate the complexities of various state and federal laws and the constantly evolving guidelines to maintain legal compliance.
Offer Legal Assistance
One benefit of a PEO many businesses often overlook is legal assistance in the event of a lawsuit. Many PEOs share liability in employment-related lawsuits as co-employers and thus have an expert team to help you remain compliant and prevent issues that could lead to litigations.
What Are the Disadvantages of a PEO?
Despite its advantages, a PEO is not without some drawbacks. Some cons of a PEO that may stop a small business from partnering with them are:
Lesser Control Over Payroll and Benefits
PEO simplifies payroll and benefits administration, but you have less control over these functions, making resolving issues and disputes difficult. Additionally, you can only choose from the list of benefits your PEO partner offers, limiting your choice in the matter.
Potential Employee Resistance and Delayed Claims
Similar to the first point, in the case of payroll issues, an external control may cause delayed claim resolution. Additionally, employees may resist the idea of sharing their personal information with a third-party company, opening them up to a risk of data breach.
Lesser Control Over Hiring Decisions
A PEO helps you in the recruitment process. But it can mean loss of knowledge within the company, making it difficult for you to control the staffing processes and employee onboarding.
Potential Impact on Company Culture
Without an intimate knowledge of your company’s culture, a PEO can adversely affect the workplace environment and company culture. This can further contribute to lower employee engagement, satisfaction, and productivity.
PEO vs. ASO: What Is an ASO?
ASO is an administrative services organization offering specialized outsourcing services, focusing on core HR functions.
Partnering with an ASO means outsourcing your core HR functions, like payroll processing or employee benefits management, to an expert third-party partner. Since an ASO does not follow a co-employment model, it does not offer support in areas like workers’ compensation or HR risk management. However, it still provides excellent specialized HR services to smaller companies without the extent of the commitment of a PEO.
What Are the Benefits of an ASO?
If you want to gauge if partnering with an ASO is better for your business, it is necessary to understand what they have to offer. Some of the pros and key offerings of an ASO are:
Ideal for Small Companies
An ASO can offer you access to expert HR services without committing to a PEO’s complex suite of services. This offers you more control over the HR services you want to outsource, maintain current relationships with insurance companies, and retain your internal HR team.
Flexible
ASOs provide increased flexibility, offering options that may be lacking in a traditional co-employment arrangement. ASO does not tie you down with mandatory packages, customizing its service offerings to suit your needs. And you can always add more services to your package as your business grows.
A Variety of Service Offerings
ASOs offer various HR services with the flexibility to build your customized package. This can allow a small business to access expert HR services without an internal HR team.
Medical Coverage
Many ASOs can offer benefits and medical coverage via third-party insurance service providers. This can allow your small business to leverage the ASO’s relationship with the insurance company and offer essential medical benefits without having to approach them independently.
What Are the Disadvantages of an ASO?
On the flip side, working with an ASO also has a downside in terms of liability sharing and risk management. Some of the cons of an ASO are:
Limited Risk Management
Since the ASOs do not operate under the co-employer model, they offer limited HR risk management services and do not share liabilities, such as workers’ compensation offerings.
Legal and Tax Compliance
With an ASO, you remain responsible for legal and tax compliance. And if you are trying to enter new or unpredictable markets, it may complicate compliance for you.
Managing Business Growth
Although ASOs offer the alternative to expand the HR services you outsource, you may struggle to cope with growing business. Additionally, managing teams in new locations can pose challenges. Here, global PEOs would be a more appropriate choice to effectively manage your business growth.
PEO vs. ASO: The Difference
Summarizing the points above, the key differences between a PEO and an ASO become apparent across four categories:
HR Services Offered
A PEO offers packages that include fundamental HR services with the option to add more as your business grows. On the other hand, an ASO allows you to customize the core HR functions package but with fewer options than a PEO.
Cost
The cost difference between a PEO and an ASO can vary based on factors such as the size of the organization, specific services required, and the agreement with the provider. PEOs typically operate under a co-employment model and charge a percentage of employees’ wages, ranging from 2% to 12% or more. ASOs, on the other hand, offer more limited services and their cost structure may involve fixed fees or fees per service. It’s important to assess the services and costs of each provider to determine the best fit for your organization’s needs.
Benefits Flexibility
With a PEO, you only have the option to choose from that firm’s suit of employee benefits, with only a few choices if you are not satisfied. Conversely, an ASO allows you to choose from a wide variety of benefits though it may come with higher costs.
Risk Absorption
Since PEOs act as co-employers, they share equal risks and liabilities when it comes to your workforce. This is not the case with ASOs, who share no risk.
PEO vs. ASO: What My Small Business Needs?
So, now the question is, what does your small business need? How to decide between PEO vs. ASO? The answer depends on your business and its unique needs. For example, if your small business needs flexible HR services, an ASO is probably the right partner for you. But if your business is growing and you need extensive HR support for HR operations, benefits management, and risk management. In that case, you might want to choose a PEO partner.
The good news is that many reputed PEOs also offer ASO services. So, if you are unsure of your business needs, you can start with an ASO and then gradually move on to complete PEO service offerings as your business grows. Refer to our HR section for more comprehensive information on managing human resources in businesses.
