ASO Vs PEO: Differences, Advantages & Disadvantages

ASO and PEO are different services that companies can use when outsourcing various services, each with key differences that affect the types of services they can offer.

1. Definitions

Administrative Services Organization (ASO)

An ASO specializes in administrative and HR services. This mainly involves payroll processing, employee benefits and their administration, and compliance support. 

This is all carried out without the ASO becoming a co-employer. Your company would act as the legal Employer Of Record (EOR), retaining full control over the workforce and hiring activities. 

Professional Employer Organization (PEO)

A PEO enters into a co-employment relationship with your company. This means the PEO shares particular employer responsibilities such as payroll tax filings, benefits sponsorship, and compliance management. As the company, you would still retain responsibility for day-to-day operations.

2. Key Differences

There are differences between ASOs and PEOs, which are based on the relationship with the client company and the level of services that they require.

• Service Delivery: ASOs act as a service provider, with companies outsourcing HR functions by remaining the legal employer. PEOs operate as a co-employment partner, managing HR functions as a legal employer.
• Co-Employment: ASOs do not take on legal responsibilities as a co-employer, whereas PEOs do.
• Benefits Sponsorship: ASOs help companies administer benefits plans, while a PEO can pool employees from multiple clients to access large-group benefits plans.

3. Co-Employment Model

In a PEO arrangement, the co-employment model allows PEOs to manage HR compliance, payroll taxes, and employee benefits by allocating the PEO a unique Federal Employment Identification Number (FEIN).

This means small businesses can access enterprise-level benefits and can help reduce administrative risk. It also means the PEO shares the responsibility for compliance and employee liabilities, helping to share the load between the employer and the PEO.

4. Administrative Services Organization

An ASO acts as a consultative HR partner, meaning that they support your internal HR teams with their expertise but do not have legal control within your organization.

This is useful for companies looking for support without relinquishing control over HR processes.

Services Offered

ASOs and PEOs offer a range of different services, ranging from payroll and tax filing to HR support and risk management.

1. Payroll and Tax Filing

Both ASOs and PEOs can assist with payroll processing and tax filings. 

The main difference here is that a PEO organizes taxes under its own FEIN, while an ASO acts as support for processing and compliance for your company, which maintains legal tax responsibility.

2. Human Resources Support

ASOs specialize in offering their customers different HR tools. These could include employee handbooks or policy guidance.

PEOs tend to offer a more hands-on approach. This usually consists of providing onboarding processes, performance management, and compliance training.

3. Risk Management and Compliance

With ASOs, full responsibility for risk management and compliance is left to the employer, while they provide guidance and administrative support.

PEOs assume a larger portion of compliance risk, particularly in terms of labor laws and workplace safety.

4. Benefits Administration

For benefits administration, ASOs help to administer the benefits plans that you have selected and funded as a business.

PEOs can help to sponsor benefit plans such as health, dental, and retirement, often accessing enterprise rates that companies can benefit from.

Financial and Legal Considerations

It’s important to consider the financial and legal implications when choosing whether to instruct an ASO or a PEO.

We’ve included some steps below to help companies do this.

1. Cost Analysis

ASOs and PEOs differ greatly when it comes to their cost structures.

ASOs tend to be the cheaper option, as they operate under a service fee model, allowing for more predictability with their services.

As PEOs assume legal responsibilities, they are usually more expensive and charge a percentage of a company’s total payroll. However, they can usually offer more cost savings to companies working with them.

2. Insurance and Liability

ASOs can assist with insurance policy administration, but do not normally extend their coverage to a company’s employees.

PEOs can often assist with workers’ compensation insurance, unemployment insurance, and risk management assistance.

3. Regulatory Compliance

ASOs can advise and assist on regulatory compliance, while a company maintains legal control of this process.

PEOs assume legal responsibility over compliance, including IRS, DOL, and state-level labor laws. 

Impact on Business Operations

The impact on business operations differs depending on whether a company opts to seek support from an ASO or a PEO. We’ve explained in the sections below how these operations may be affected and why.

1. Control and Flexibility

Companies maintain full control and flexibility over their employees when instructing an ASO. They receive support and expertise from the ASO, without having to relinquish full control.

A PEO requires more control, which can limit a company’s flexibility, as a PEO can manage different employment functions within its own systems.

2. Economies of Scale

Where PEOs manage multiple clients under one umbrella, they can easily access enterprise discounts for benefits such as health insurance and retirement plans.

ASOs cannot leverage this scale; however, it does mean employers have the freedom to negotiate vendor contracts directly.

3. Core vs. Administrative Tasks

Both ASOs and PEOs can help reduce HR administration burdens; however, PEOs provide more in-depth, bespoke solutions as they’re a co-employer.

ASOs tend to offer support that complements your existing structure.

Employment and Recruitment

Employment and recruitment are other areas that ASOs and PEOs can help with to allow you to spend more time on other areas of your business that need you.

Here are some of the aspects of employment and recruiting that they can help with, and their differences in doing so:

1. Hiring Processes

ASOs are known for assisting with recruitment by managing the hiring process, including offering recruitment tools and guidance. 

PEOs take this one step further by acting as the hiring entity, posting new job adverts, screening candidates, and setting up employment contracts.

2. Onboarding and Training

Welcoming your new workers to the team is something both PEOs and ASOs can help with.

ASOs tend to offer useful administrative tools and customizable templates for onboarding, allowing the company to handle the onboarding process independently. PEOs can be more involved, managing the onboarding process and learning new management systems.

3. Employee Relations Management

Employee relations is an important aspect for any business, but it can be very time-heavy. Both ASOs and PEOs can help here; however, PEOs are often more involved due to being a co-employer.

Benefits and Employee Experience

Employee benefits and experience are a large area that ASOs and PEOs can assist in. 

Ensuring employees receive their entitled benefits is a strict compliance point for labor laws in most countries, making it crucial when employing new workers.

1. Health and Welfare Plans

PEOs are known for offering enterprise-grade health and welfare plans due to their strong purchasing power. 

ASOs can also help here; however, this is usually on a more administrative level as opposed to sponsoring specific benefits.

2. Retirement and Financial Benefits

PEOs offer access to retirement and financial benefits, including 401(k) plans, life insurance, and flexible spending accounts.

As with health and welfare plans, ASOs can then manage said plans on behalf of the employer.

3. Company Culture and Development

If you want to maintain your company culture, an ASO may be more beneficial as they’ll assist you while you maintain your own company culture and branding.

PEOs are known for streamlining operations; however, this may reduce cultural autonomy to some extent.

Special Considerations for Small and Midsize Businesses

Small and midsize businesses should consider the following areas to ensure their chosen model works best for their size and structure.

1. Adapting to Growth

Small businesses looking to grow are often best suited to a PEO. This is because a PEO can quickly offer access to affordable benefits and compliance expertise, taking on a large portion of the administrative burden while the company focuses on growth. 

However, if a company is keen on maintaining control, an ASO is more suitable.

Midsize businesses could choose either model, but may find that an ASO is more useful as they scale when attempting to maintain company culture and development.

2. Strategic HR Outsourcing

Outsourcing HR can be a good move if you’re looking to grow your business while keeping the primary decision-making in-house.

ASOs usually charge a flat fee, which some companies prefer. Alternatively, volume pricing is more common with PEOs, based on the level of HR support.

Choosing the Right Solution

Companies should weigh up how much control they want to retain over the hiring process, and how they want service agreements/pricing to be structured.

Thinking about these points will help determine whether they instruct an ASO or a PEO.

1. Evaluating ASO vs PEO Providers

When comparing ASOs and PEOs, companies should think about the following factors:

• Scope of the HR services offered: It’s important to consider the services you need now and may require in the future
• Cost structure: Whether they’d prefer to pay based on a percentage or a flat fee
• Benefits and insurance access: PEOs tend to offer better insurance rates, while ASOs will allow the company to control more of this process
• Contract flexibility and exit clauses: Can you leave the contract easily, and if so, what are the terms?
• Customer service and technology platforms: Think about how the model’s tech platforms and support levels would align with your business

2. Service Agreements and Pricing

Contracts and pricing should always be reviewed carefully before signing. This ensures transparency and reduces the risk of misunderstandings from occurring in the future.

PEO agreements will establish a co-employment relationship, while an ASO is usually service-based. Consider which option is best for your business and choose a provider that is clear, transparent, and upfront about their responsibilities and costs.

Conclusion

ASOs and PEOs offer useful support to businesses outsourcing HR, and making the choice between the two is primarily informed by your needs as a business and your preferences in terms of relinquishment of control and flexibility.

In short:

• An ASO is best if you value flexibility, control, and a partner that can support your business.
• A PEO is best if you’re seeking a co-employment partner that can provide comprehensive HR outsourcing, potentially with access to a competitive benefits package.

At RemotePad, we specialize in helping companies evaluate their options and choose the best solution for their business size, structure, and growth strategy. Contact RemotePad to see how we can help your business outsource today.