PEO or ASO: Which outsourcing model is right for your business?
As a business owner or CHRO, you've probably considered outsourcing routine HR tasks such as running payroll and administering employee benefits at some point.
There are many advantages associated with hiring a professional service organization to take on these responsibilities—for starters, it can free up your HR team to focus on more strategic initiatives and help your organization provide a better employee experience.
But in order to start reaping those benefits, you've got to decide which HR outsourcing model is right for your business, and between PEOs and ASOs, there are a lot of details to consider.
Ahead, we'll take a look at the two most common HR outsourcing models in order to help you make an informed decision about which kind of service provider would best fit your business’s needs. In addition to research from Gartner[1], you'll get a first-person perspective on the topic from experienced HR professional, Ashley T. Brundage.[2]
What is a PEO?
A PEO, or professional employer organization, is a type of service provider that manages human resources operations for a business by entering into a co-employment relationship"Entrepreneurs and small- or mid-level businesses don’t typically have the budget to create a human resources department, so this is usually the thing that can protect their business more than anything."
Ashley T. Brundage
HR professional
PEOs typically oversee processes such as payroll and benefits administration, as well as anything related to compliance (including things like workers compensation, tax law, and new hire reporting). One major advantage of contracting a PEO for small businesses is that they can access lower-premium, higher-quality health insurance plans that are typically only available to large companies.
In some cases, PEOs also contribute to strategic HR initiatives such as developing workplace policies and programs and managing employee recruitment and retention processes. Brundage noted the advantage these extra resources PEOs provide impact businesses, saying:
“It drives their success because they're able to have handbooks, they're able to have compliance, they're able to have posters, they're able to have training and other things that they probably would never even realize that they need to support their organization.”
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What is an ASO?
An administrative services organization (ASO) is a type of service provider that helps manage day-to-day administrative aspects of a company’s HR function. Unlike a PEO, an ASO can not directly provide payroll or benefits administration services. However, they do facilitate the outsourcing of these tasks by connecting businesses to third party service providers who can.
ASOs can’t provide workers compensation, remit your taxes under their EINBusinesses who hire an ASO to help them manage their HR function experience more flexibility than those who work with a PEO. While a PEO requires businesses to commit to a certain roster of HR services they provide, ASOs connect organizations to programs that work well for their budget and needs (such as à la carte insurance plans).
PEO vs ASO: What are the primary differences?
The main difference between a PEO and an ASO is that a PEO acts as your co-employer and an ASO does not. This distinction means that employees who work for a company in a co-employment relationship with a PEO are technically also employees of the PEO.
We’ve summarized the key differences between ASOs and PEOs in the table below.
PEO | ASO | |
|---|---|---|
Scope of services | PEOs run payroll, administer benefits, ensure compliance, and manage taxes and worker’s compensation. They may also support employees by providing additional resources in the form of handbooks and training. One notable aspect of a PEO's scope of services is that you are limited to the plans they offer, whereas an ASO will work with you to find a provider that best fits your budget and needs. | ASOs oversee day-to-day administrative aspects of managing your company’s human resource functions such as arranging and securing coverage. ASOs do not sponsor employee benefit programs or workers' compensation coverage (as a PEO does). |
Pricing | Pricing models vary depending on the PEO, but typically, PEOs are more expensive than ASOs. Some PEOs require businesses to pay administrative fees in addition to charging a percentage of payroll each pay period. Other PEOs opt to charge a flat fee per employee each month—usually between $150 to $200 per employee.[3] | ASOs typically charge a flat per-employee fee each month between $50 to $100.[3] |
Risk | Due to the co-employment model, when you partner with a PEO your business and the PEO share equal risk. | ASOs assume none of the risk involved with your business affairs. |
Brundage makes the point that how you present each of these models to your employees matters:
“To me, it’s a subtle difference. But for the human on the other side, it matters greatly.”
She suggests that business leaders choose their words wisely when explaining how a PEO or an ASO is involved with their operations. For example, she uses the word "partner" when referring to the PEO that helps manage HR ongoings for her business, Empowering Differences.[4] And when asked how she'd describe an ASO, she chose the word "protector."
"When you're bringing in a third party organization, you want to make sure that you frame it in a way where your employee understands what the role of that partner or protector is."
Ashley T. Brundage
3 considerations for determining which HR outsourcing model is best for your business
1. The capabilities of your in-house HR team
We asked Brundage what businesses should consider when deciding which HR outsourcing model will work for them, and here's what she had to say:
“I think it depends on if you have an HR person or not. That’s the biggest, fastest, easiest delineation between the two.”
If you don't currently have an HR department, then partnering with a PEO is likely the best solution for you. In fact, that’s what Brundage decided to do for her business:
“I don't have an HR person. Obviously, yes, I have the background and I could do that. But is that the best use of my time? And is that me working on my business or in my business?”
That said, if you do have an HR department or even just a VP of HR, a better option could be to work with an ASO who can help connect you to the programs and plans your business needs.
2. Your available budget
The second biggest consideration Brundage brought up for businesses deliberating between PEOs and ASOs? Their budget.
“Budget is always going to have an impact here as well. Can you afford it? Or rather, what can you afford not to happen?”
As is covered in the table, ASOs are slightly more affordable than PEOs. Some sources say that PEO administrative fees range from 2% to 6% of your gross wages.[5] However, partnering with a PEO often means saving on insurance costs, while ASOs do not sponsor health care plans (so you won't benefit from lower rates as you would with a PEO).
When shopping around for potential providers, ask them to provide a quote based on your employee headcount and service needs. Or, use the formulas in this guide to give you a ballpark idea of what it may cost to outsource with a PEO or ASO. Then, meet with your organization's CFO to determine which model makes more sense based on your budget.
3. Your business’s credit rating and relationship with insurance brokers
Most insurance providers use businesses' credit ratings to determine the premium they'll pay. If you have a relatively high credit score, there’s a good chance you'll pay a lower premium than a business with a low credit score. With that in mind, it's important to consider the status of your credit rating and whether you have a pre-existing relationship with an insurance broker before committing to outsourcing your organization's benefits administration.
To get specific: ASOs allow you to maintain your relationships with insurance carriers but will connect you to an expert who can manage the insurance administration functions on your behalf. PEOs, however, require businesses to sign up for health coverage through the specific insurance providers available through its plans.
Brundage suggests running a Dun & Bradstreet Credit Report to determine your creditworthiness.[6] She says:
“Employer insurance protection, unemployment insurance—all those things are gonna matter based on your business credit score.”
If your business's credit score is good and you're successfully working with an insurance provider already, an ASO is likely the best option for your business. Alternatively, if your credit score isn't very strong, your business could benefit from the lower insurance rates a PEO can provide.
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In conclusion: Effective outsourcing requires forethought
Before becoming a full-time CEO, Brundage worked at PNC Bank for over 10 years. She shared that despite the fact that PNC had a robust in-house HR department, they still found opportunities to outsource aspects of their HR operations from time to time.
Outsourcing HR can help you better support your business and the employees who run it. But before you commit to a provider, use the considerations and information in this guide to make sure you're choosing the best fit for your needs. And as a final recap:
Both PEOs and ASOs are types of HR outsourcing companies.
The main difference between the two models is that a PEO acts as your co-employer and an ASO does not.
PEOs typically cost more than ASOs and have a narrower selection of benefits to offer, but they absorb more of your risk.
Not sure if outsourcing is the answer for you? Review your benefits administration options with these related resources: