Companies sometimes rely on outside help to handle human resource functions like payroll, benefits administration, workers’ compensation administration and compliance issues. This may also include workforce management, like hiring, onboarding or terminating employees. For small and mid-sized companies, this outside help can allow a smaller team to manage the HR needs of a larger workforce. This type of arrangement can also help companies stay compliant with some of the more complicated business functions, like administrating 401(k) plans.
Administrative Services Organizations (ASO) and Professional Employer Organizations (PEO) are two options for companies seeking outside help with HR functions. While these types of companies are similar in many ways, there are some critical differences that make PEO’s a less favorable solution for most companies. If you’re new to outsourcing HR, you’ll want to understand these differences before making a decision that impacts some of your company’s most critical business functions.
Key differences between a PEO and ASO
Professional Service Organizations (PEOs) focus on administrative duties related to human resource management, but to use their services you must enter a co-employment relationship. This means the PEO becomes the employer of record for tax purposes. You no longer have a workforce, they are employees of the PEO, operating under their federal employer identification number (FEIN). Your company essentially leases employees from the PEO, making this type of organization far more invasive than an ASO.
PEOs often position this as a benefit, stating that the arrangement puts the burden of employment on them. While this is true, it also gives them control of your workforce. People are your most valuable asset, directly influencing your ability to service clients and create growth. When you turn control over to a PEO, you’re allowing an outside agency to direct your company culture, talent acquisition and retention. This is even more dangerous if you’re in a competitive industry where recruiting top talent is essential.
PEOs also decide what benefits you offer and administer them on your behalf. This puts them in charge of vital decisions that impact your profitability. They also come at a premium, typically charging a percentage of your monthly payroll. So not only do they make decisions that affect your workforce, tax burden, cost of employee benefits and payroll costs, they are an additional expense. This means a PEO can impact your ability to make money and make you pay for the privilege.
An Administrative Services Organization (ASO) is a middle ground between the need for human resource management help and wanting to maintain your company’s autonomy. ASO’s greatly simplify complicated aspects of running your business, just like a PEO. They streamline things such as payroll, workers’ compensation and benefits administration. Some even help with compliance issues and everyday HR functions. This allows companies to focus on the services they provide without getting buried in administrative duties. It also empowers a smaller staff to manage a larger workforce.
The main difference between a PEO and an ASO is control. An ASO provides you with critical services but they do not exhibit control over your workforce or business decisions. When you partner with an ASO, your employees are under your FEIN and you’re still in charge of who you hire, what benefits you offer and how you operate as a company. An ASO may even help facilitate benefits, but you still make all the decisions. This critical difference makes ASO’s a more attractive solution for most companies.
With all the disadvantages of PEOs, they still simplify many HR functions. For some companies, this initially seems like it is worth the tradeoff. The trouble comes when the decisions of a PEO start to alter or negatively impact the way a company functions. By opting for an ASO, however, a company gets all of the help they need while maintaining ownership and autonomy.
The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.
