Trying to figure out the best way to handle your payroll and HR functions? There are people who can do that for you. Administrative services organizations (ASOs) and professional employer organizations (PEOs) are good options for businesses small and medium-sized growing businesses.
Rather than wasting time and resources getting bogged down by employment regulations, complicated payroll and managing health insurance plans, outsourcing your HR functions to an ASO or PEO makes a lot of sense for growing businesses. Here’s what a PEO offers and how to determine whether a PEO or an ASO is right for you.
What is a PEO?
A professional employer organization is a human resources company that contracts with small businesses to take on functions such as payroll, taxes and employee benefits. The agreement essentially makes the PEO a “co-employer”, in that the PEO combines the employees of several small ventures to offer lower costs, more efficient paperwork and better compensation packages.
How does this work in practice? A PEO partners with a small business, usually one with at least 10 employees. The PEO becomes the legal and tax-related employer for the SMB’s employees. This means the PEO performs administrative functions, such as payroll and offering benefits coverage, on behalf of the small business. By working with multiple small businesses, the PEO can negotiate more expansive, less expensive benefits, insurance and workers’ compensation.
An administrative services organization (ASO) offers similar services to a PEO, but it does not use the co-employment model.
The differences between ASOs and PEOs
There are six key areas in which ASOs and PEOs differ:
Employees
The big difference between a PEO and an ASO is for whom your employees work. In a PEO, the employees are actually employees of the PEO. You determine salary, hours and job description, but the employees don’t work for you directly.
The PEO is often viewed as a co-employer, but you as the client company have no employees on the books. This is beneficial when it comes to negotiating health insurance and other compensatory elements, because a PEO is seen to have millions of employees, meaning they have much greater purchasing and negotiating power than you would as a small business owner. And, since all employees belong to the PEO, that organization can handle the unseemly task of firing that problem employee whom you don’t want to deal with.
In an ASO, your employees remain yours. The only relationship an ASO has with the employee is like that of any HR department: the ASO's purpose is simply to administer employee relations compliance, but it also means you don’t have to hire another full-time employee to handle those tasks. An ASO can help with the development of employee handbooks, policies and procedures, but ultimately the enforcement will fall to you. The ASO only assists in an advisory capacity.
Health insurance
An ASO can help you find the right kind of insurance for your organization and even help you negotiate your rates and coverage. They can also help you administer the program for your employees. The only limits to your health and dental benefits are what you can afford. It is much easier to have an ASO help find the right kind of coverage than it is trying to navigate the marketplace on your own.
Because the PEOs have millions of employees on the books, they can offer extremely affordable health and dental insurance plans. They can also offer 401(k) plans, life insurance and other benefits that you would find in much larger organizations. The only knock on this kind of insurance savings is there might be a limited number of plans to choose from. Regardless, the PEO handles all negotiations and administration. Some organizations leverage the insurance benefits offered by their PEO as a recruiting tool.
The ASO will take care of all of your payroll functions and it will all be done under your company’s federal employee identification number, which is a big difference from a PEO.
State unemployment insurance
The PEO takes care of all of this. It handles the unemployment insurance deductions and payments, and, because it has a huge pool of employees, its risk of claims is reduced. Additionally, the larger PEOs provide a number of free job performance, improvement and training resources which their clients can offer to employees who may want to take on a new challenge or pursue a new direction with their employer. This has the potential to keep the employees engaged and could cut down on the need to terminate employment.
With an ASO, the unemployment insurance rate is solely based on the number of claims generated by your business. This is great if you have few claims. A PEO could generate significantly more claims by the sheer size of the organization; but, just like a PEO, ASOs also have resources available to assist with hiring and retention, which should help limit the exposure to unemployment claims.
Workers’ compensation
With an ASO, the coverage is the responsibility of the employer. An ASO can help a business find the right kind of coverage and negotiate a policy. It can also manage the administration of that policy and handle any claims on behalf of the business. An ASO can also work with a client company to suggest ways to mitigate risk, should the business's employees be prone to physical injury, like in a warehouse or construction business.
PEOs take on all the responsibility that comes with offering workers’ compensation insurance. They can do this because their risk is spread over a much larger pool of employees, so small- to mid-sized businesses may end up paying rates that are usually reserved for larger employers. The PEOs try to mitigate that risk by doing assessments for clients whose employees could be at risk for injury.
Claims, safety and loss
The PEO can act as a shield for its partner depending on the contract. In some cases, the PEO takes on the bulk of responsibility and liability for insurance claims, safety and loss. The business is paying for this coverage through its contract with the PEO. But, just like with workers’ compensation, the PEO will help its client look for areas where it can mitigate risk.
An ASO can once again help its client find the right kind of coverage; but, since there is no large pool to help spread the risk, all the responsibility and liability for any insurance claims, safety and loss rest solely with the company. Should there be a claim, the ASO can help from an administrative standpoint, but that’s it.
Payroll
The ASO will take care of all of your payroll functions and it will all be done under your company’s federal employee identification number, which is a big difference from a PEO.
The PEO will take care of all of your payroll functions but it will pay federal payroll taxes under its federal employer identification number because your employees are actually its employees. The PEO collects all the federal withholding, Social Security and Medicare. You just let the IRS know that you had no employees.
Cost
The PEO is typically the more expensive option. There is an incredibly wide range of prices that vary from a percentage of payroll to a cost per employee per month. Paying a percentage of payroll can be expensive at the beginning of the year because the wages reflect very little withholding, but then evens out around August. A full-service PEO will cost upwards of $150 per employee per month, but it will come with an amazing level of service, resources, online options for employees to sign up for benefits, training, videos and assessments. As with most things, you get what you pay for. There are nightmare stories of PEOs collecting payroll taxes then failing to pay them when due.
ASOs typically charge a flat rate instead of a percentage and it’s usually much lower per employee per month. It can be much less than $100 per employee per month. Each service you need can be purchased a la carte, whether you need help with compliance issues, taxes or workers’ compensation insurance. You pay only for what you need.
Think hard about what you need help with. If you’re OK with your employees not being your employees and someone else carrying all the risk, then you will likely want to look at a PEO. If you just need a bit of help and aren’t ready to hand your staff over to someone else, an ASO may be your preference.
CO— does not review or recommend products or services. For more information on choosing the best PEO, visit our friends at business.com.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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