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PEO vs. ASO: What's Best for Your Business?

Matt D'Angelo
Matt D'Angelo
Freelance Writer

If you're considering outsourcing your HR responsibilities, there are several options to consider, such as PEOs and ASOs.

As a small business owner, your expertise is likely in the industry your company is in and not necessarily in some of the tasks that go into running any business, like running payroll, managing tax compliance, and researching benefit options. That's why, depending on the size of your business, it may be in your best interest to outsource these responsibilities. Among the options you may want to consider are using a professional employer organization (PEO) or administrative services organization (ASO) to manage all, or some, of your human resources responsibilities.

PEOs and ASOs handle a multitude of small business services, including payroll processing, benefits administration, and HR training services. While these companies assist with similar functions, they are under a different agreement structure to accomplish them.

If you're feeling overwhelmed by your responsibilities as a business owner, it may be worth it to look into these two options. Before diving in, however, it's important to understand the difference between the two and which type is right for your business.

What is a PEO?

A PEO is an outsourcing company that handles a wide range of services for companies. Although we've listed the services offered by PEOs below, the three main services are HR services, payroll processing and employee benefits administration.

If you partner with a PEO, you'll work with a designated representative who can handle your business's needs, scale your services to suit your company, and help you better understand how the PEO can help your business.

The goal of working with a PEO should be to offload certain HR responsibilities and make running your business less complicated. A good PEO adapts its services to your business's needs and will gradually fade to the background as back-end processes are handled with ease.

What are the benefits of a PEO?

The following are a few key benefits that businesses can take advantage of if they choose to use a PEO service. Most companies that start to use a PEO continue with the service because, in addition to these benefits, it cuts down on overhead.

Expansion of business services

The main benefit of working with a PEO is unloading perfunctory responsibilities but also accessing a range of business services that you would not be able to provide your employees on your own. This is especially true for training and HR services.

Many PEOs provide extensive training options for employees, including OSHA-required safety programs, conflict management programs and other HR-focused curricula. Access to these resources could take your business to the next level. A PEO will work with you to customize service options to meet your company's exact needs. Many PEOs will repeal or add services throughout the contract period with the organization.

Access to benefits packages

The second major benefit of working with a PEO is having access to benefits packages. It's difficult to find and attract good talent to your company. One way to do this is to offer employees appealing benefits.

By partnering with a PEO, you gain access to benefit options. Some companies provide only one standard benefits package, but they are usually pretty good. If you're interested in multiple packages, you can negotiate with the PEO service to see if they can provide customizable options. By offering your employees enticing benefits, you can attract and retain good talent at your company. Small businesses often can't afford benefits, and a PEO makes it possible to provide them. Also, in some cases, you need to provide benefits to comply with local, state and federal business laws.

Compliance with tax laws

A third major benefit of working with a PEO is tax compliance and payroll processing. Tax laws are complicated, and they change frequently. So, too, is processing your own payroll.

Many PEOs offer small businesses the opportunity to offload both of those processes. You'll have access to cloud-based payroll processing platforms. When it's time to pay your quarterly payroll tax obligations, your payroll representative handles it outright for you. By not having to focus on these two aspects of your business, you can direct your attention to more important matters.

What are the disadvantages of a PEO?

Although there are many advantages of a PEO, your company should consider the drawbacks too before making a final decision. The following are a few reasons that companies sometimes pause on entering in contracts with PEOs.

Lack of continuity

The business owner has no control over the HR staff hired by the PEO. You may be assigned one representative and then later switched to another without any warning. Any staffing changes could have a negative effect on your business continuity operations.

Potentially higher in-house turnover

If your current in-house staff is unhappy with the changes implemented by bringing in a PEO, you may see a higher employee turnover rate. Your goal is to retain talent; you don't want to lose employees due to discontent over changing job duties related to the PEO's contract.

Lack of communication

Ideally, you want to work with a PEO that is highly responsive. If you tend not to hear back from the PEO in a timely fashion, it may delay critical business decisions within your organization.

What services do PEOs provide?

When you partner with a PEO, there are several services they can perform for you. Here's an abbreviated list of services:

  • HR management
  • Benefits administration
  • Insurance plans
  • Section 125 plans
  • Payroll administration and processing
  • State unemployment insurance
  • 401(k) retirement plans
  • COBRA
  • Workers' compensation
  • Safety programs (OSHA compliance)
  • Training and development
  • Recruiting and outplacement support
  • Government compliance
  • Tax compliance

How do PEOs work, and how much do they cost?

What makes a PEO unique is its co-employment model. Instead of your employees appearing on your financial books, they appear on the PEOs.

Don't worry – you still control your company and all its employees. Instead, though, your business joins a larger group of small businesses under an umbrella PEO company. This is only a legal commitment and does not have any implications on the autonomy of your business in terms of day-to-day control.

The co-employment model is a special arrangement that allows it to group services and better provide options for small businesses. Its most important aspect is its ability to bargain with healthcare providers for better rates. By joining thousands of businesses across the U.S., PEOs can negotiate favorable benefits prices for small companies.

In terms of cost, PEOs break down their services in two main ways: per-employee fees and percentages of monthly payroll. The type of pricing structure depends largely on which PEO you partner with.

Some companies offer short-term, month-to-month contracts, while others require you to sign on for a year or more. Make sure you review your options to find what works best for you and your business.

What is an ASO?

ASOs offer very similar services, but the structure is a bit different. ASOs mainly offer HR services. They can provide help with the arrangement of benefits and payroll processing services, but ASOs don't directly provide these services. Small companies that may not need the firepower of a PEO may find it beneficial working with an ASO.

What are the benefits of an ASO?

You may also be open to using an ASO as a service provider. The following are a few of the benefits you can expect when choosing an ASO over a PEO:

Perfect for small businesses

One of the main benefits of an ASO is they're a great option for small companies. You can mix and match the services they facilitate to meet your needs as a small business.

Variety of services

Because they don't directly provide payroll services and administer benefits to small businesses, ASOs may offer more variety with their services, pairing you with other companies that handle those services. ASOs can provide some tax and payroll services, but they function more as an outsourced service and less as the partnership you'd get with a PEO.

Employee benefits

As with PEOs, companies can choose an ASO as a provider of employee benefits. An ASO arrangement isn't usually for long-term benefits like life insurance. Instead, the ASO gives options for disability insurance and other types of medical coverage.

More flexibility

This can be an advantageous relationship for a small business. It largely depends on the type of small business you run and whether the co-employment model is ideal for your company or not. In many instances, working with an ASO could mean getting a lot of the same great services without the partnership agreement.

What are the drawbacks of an ASO?

There are a few disadvantages of using an ASO that a business should consider before signing any contracts:

Potential for high costs

ASO costs are usually higher than PEO prices, because ASOs don't sponsor the plans. Also, according to Business Insurance Services, if claims are higher than the ASO contract, a deficit will occur and your organization will be responsible for covering the difference. 

More risks

Organizations assume a lot of risk when choosing to use an ASO. Legal issues and regulatory compliance are typically the responsibility of the business, not the ASO firm. If you have a small business and don't have experience with compliance issues, this could become problematic.

What services does an ASO provide?

The main services of an ASO include:

  • HR services
  • Benefits administration
  • Payroll processing
  • Workers' compensation insurance
  • Training and development
  • Recruiting and outplacement support
  • Government compliance
  • Tax compliance

What is the difference between a PEO and an ASO?

The major difference between PEOs and ASOs is the co-employment model.

By signing with a PEO, you're signing a joint partnership where you are becoming a part of the PEO you're working with. This gives the PEO bargaining power with healthcare companies, it streamlines tax compliance, it can help with legal issues, and your business gains access to excellent resources.

ASOs provide very similar services to PEOs, but there's no co-employment model. So, while you have access to some of the same services, it won't be as a jointly partnered organization. ASOs can arrange benefits and payroll services, but they do not directly provide them. This can be a great arrangement for small businesses.

While PEOs are priced according to either a per-employee basis or a percentage of your payroll, ASOs usually charge on a per-employee basis. Much like the services and agreement offered, ASOs and PEOs share similar cost structures, but they are technically different.

Does my small business need an ASO or PEO?

This decision starts with analyzing your small business's needs. By contacting a few different providers, you can get a better sense of what's right for your business. Outline five major services you need for your small business, then compare the offering among a few different PEOs and ASOs to find the right one.

In the end, all of these companies will offer similar services. What's crucial for you is finding the best agreement for your business. PEOs provide a co-employment agreement that can provide bargaining power, but it may be limiting in some benefits situations. ASOs may provide more flexibility, but they may be more hands off in some scenarios compared to PEOs.

By analyzing several companies and judging them based on your business's needs, you can make the right decision.

Image Credit: Creative Credit / Getty Images
Matt D'Angelo
Matt D'Angelo
business.com Contributing Writer
I've worked for newspapers, magazines and various online platforms as both a writer and copy editor. Currently, I am a freelance writer living in NYC. I cover various small business topics, including technology, financing and marketing on business.com and Business News Daily.