What Is an Administrative Services Organization (ASO)?

What is an ASO?

An ASO is a business outsourcing service specializing in core HR functions, including employee benefits and payroll processing. However, it doesn’t directly provide these services to your small business under a co-employment model — meaning it doesn’t share legal responsibilities and liabilities pertaining to your employees.

Working with an ASO means outsourcing your HR to a partner that can facilitate services and provide excellent HR service options for your business. According to the National Association of Professional Employer Organizations, businesses that outsource HR functions increase their annual ROI about 27 percent. However, because it lacks the co-employment model, ASOs can’t help in some areas. For example, most ASOs don’t provide workers’ compensation services and an ASO’s overall HR risk management offering is limited compared to a PEO.

Still, ASOs can provide excellent services to smaller companies with less commitment than PEOs require.

ASO pros and cons

To better understand what it’s like to partner with an ASO, it helps to see how they’re structured and what they offer. The following are some upsides and key offerings of ASOs:

• ASOs are an ideal solution for small companies: PEOs typically require a minimum of five employees, while ASOs can work with businesses of any size. PEOs also tend to offer full-fledged HR services, which can be overkill for smaller companies. In contrast, working with an ASO gives you access to top-level HR support without committing to a complex suite of services. Many PEOs provide ASO offerings, so as your company grows, you can always add services to your package.
• ASOs are flexible: Without the co-employment commitment, ASOs are more flexible. If your company is the right size and you don’t need workers’ compensation or extensive risk management support, partnering with an ASO gives you access to excellent services without getting bogged down in a mandatory package.
• ASOs have a wide range of offerings: ASOs can provide comprehensive services including payroll processing, HR policy development, benefits administration, compliance assistance and employee onboarding systems. Small businesses can access essential HR systems without hiring an internal HR department.
• ASOs can help with medical coverage: Despite not operating under a co-employment model, ASOs can provide benefits and medical coverage through third-party service providers. This means very small businesses can access essential medical benefits without shopping for them independently. 

The primary downsides of working with an ASO include the following:

• Limited risk management
• Limited workers’ compensation offerings
• Full liability remains with the employer for compliance issues
• Less negotiating power for benefits compared to PEOs

What is a PEO?

A PEO is a business outsourcing service that provides extensive HR support to small companies under a co-employment model, meaning it shares some employee legal responsibilities. PEOs often provide ASO-type services to client businesses until they grow and require more extensive assistance under a co-employment model.

PEOs operate as small business conglomerates, providing top-level services to a wide range of businesses without the high logistical overhead. Your business is still yours and your employees still work for you.

Partnering with a PEO means working with a representative assigned to your company who handles all your business’s HR needs. PEOs help with benefits administration and rolling out new HR service offerings, allowing you to scale your services as a company.

When you partner with a PEO, you release certain HR responsibilities to another organization, allowing you to focus more on the day-to-day operations of your business instead of administrative tasks. 

PEO pros and cons

Like ASOs, PEOs have upsides and downsides that businesses must consider before deciding to work with them. Consider the following PEO pros:

• PEOs provide more extensive HR services: While many HR services offered by ASOs and PEOs overlap, PEOs typically offer a more complete range of HR services, similar to what an internal HR department would handle. PEOs can help with health insurance, workplace safety programs, payroll processing, benefits management and administration, workers’ compensation insurance, unemployment insurance, tax filing and retirement plans.
• PEOs offer competitive pricing for benefits: Because of their economy of scale, PEOs have lower overall costs for third-party benefits. Their purchasing clout can help reduce health insurance costs and other employee benefits costs for their client businesses. An ASO does not have the same buying power.
• PEOs provide compliance support: With co-employment, PEOs share liability for employment law compliance, reducing your risk of costly penalties.

The following may be seen as PEO downsides for some businesses:

• PEOs require long-term contracts: Some PEOs require clients to sign contracts ranging from one to three years. This can entail risk for smaller companies or businesses with more revenue uncertainty. Since your company will be getting a full suite of services with a PEO, costs can add up and may end up being too expensive compared to an ASO.
• PEOs have a higher risk of miscommunication: With a PEO, an outside company handles essentially all your HR tasks. Because of this structure, there’s an increased risk of miscommunication compared to handling these functions internally.
• PEOs charge higher fees: Typical PEO costs range from 2 to 12 percent of gross payroll, which can be substantial for businesses with narrow margins.

What’s the difference between a PEO and an ASO?

The co-employment model is the primary difference between PEOs and ASOs and their offerings. Because of this model, PEOs assume significant risk when they partner with small businesses. In contrast, ASOs assume much less risk.

When you partner with a PEO, you remain in complete control of your business. The PEO acts as a conglomerate organization for thousands of other small businesses nationwide, leading to efficient HR offerings. When working with a PEO, the following occurs:

• You sign a co-employment agreement and your employees are signed onto the PEO’s books.
• You tap into the PEO’s significant buying power in the benefits markets, which allows the PEO to consolidate extensive HR services into Fortune 500-level offerings throughout the nation.
• The PEO becomes the employer of record for tax purposes and files payroll taxes under its federal employer identification number.
• You share liability for workplace safety and employment law compliance with the PEO.

In contrast, when you partner with an ASO:

• You don’t sign a co-employment agreement.
• You have greater flexibility to choose HR services tailored to your company’s needs.
• You won’t be able to access the risk management and workers’ compensation services PEOs provide.
• You maintain complete control over employment decisions and retain all employer responsibilities.
• You can typically terminate the relationship easier since PEOs often require 30- to 60-day notice periods.

ASO offerings tend to be ideal for companies with 10 to 50 employees who need administrative support but want to maintain full control. However, PEOs now serve businesses of all sizes, with some specializing in companies with as few as five employees.

ASOs and PEOs have different pricing structures that reflect their service models. PEOs typically charge 2 to 12 percent of gross payroll or an annual flat fee per employee, while ASOs usually charge a lower flat fee per employee than PEOs, billed monthly.

Is an ASO or PEO right for your business?

The best outsourcing partner for your business depends on several factors including company size, industry, growth trajectory and risk tolerance. If your company is smaller and requires flexible HR services, an ASO may be the right choice. If you run a larger small business that needs extensive HR support, benefits administration and risk management planning, a PEO may be a better fit.

The good news is that shopping for HR outsourcing services lets you explore both options. Many of the best PEOs usually have an ASO offering, so if you’re unsure, you can always start with an ASO service suite and graduate to a full-fledged PEO solution.

When considering providers, request price quotes, check references and ensure the provider understands your state’s employment laws. The right partner can help your business save time and money as you build a stronger workforce together.

Jennifer Dublino contributed to the reporting and writing in this article.