coworkers in a meeting shaking hands
ASOs and PEOs are both great options for small businesses looking to outsource administrative tasks — from payroll to benefits. — Getty Images/vladans

Small business owners juggle many administrative tasks, including human resource (HR) operations. As your company grows, handling employee benefits, payroll and training are time-consuming and resource-intensive.

Businesses often hire additional staff to perform HR tasks. However, other options exist. Professional employer organizations (PEOs) and administrative services organizations (ASOs) are outsourced HR solutions.

Partnering with one of these organizations can help you address pressing operational needs without having to sacrifice the time you spend on making your business successful.

Before you decide whether you want to work with a PEO or ASO — or whether HR outsourcing is right for you at all — it's important to understand how these organizations work and what they can offer your business.

What is a professional employer organization (PEO)?

PEOs provide small businesses with payroll processing support, benefits administration, workers’ compensation compliance and human resources support. Think of a PEO as your end-to-end human resource management partner.

A professional employer organization differs from other HR outsourcing methods because PEO uses the co-employment model. The co-employment arrangement lets you maintain complete control over your business and employees. But, for tax and legal purposes, the PEO becomes the employer of record for your full- and part-time staff members. Consequently, the PEO model transfers the administrative burden from your small business to the PEO company.

PEO services include:

  • State unemployment insurance.
  • HR management.
  • Benefits administration.
  • COBRA health insurance coverage.
  • Employee retirement plans.
  • Payroll administration and processing.
  • Workers' compensation.
  • Insurance packages.
  • Safety training and programs.
  • Employee onboarding services.
  • Tax and payroll compliance.
  • Other types of employee training.
  • Recruiting assistance.
  • Outplacement services.

PEO benefits and cost

PEO cost varies by provider and service. You can choose a flat fee per-employee pricing model or elect to pay a fee as a percentage of your overall payroll. Typically, the per-employee charge is around $150 per worker a month, and the rate runs up to 11% of your payroll salaries. However, some professional employer organizations start at under $100 per employee a month with less robust services.

According to the National Association of Professional Employer Organizations (NAPEO), more than 170,000 small businesses already work with professional employer organizations. Joining a PEO is like joining a national small business organization or society — there's strength in numbers.

Because they have hundreds of thousands of employees nationwide on their books, PEOs have more leverage than the average small business when negotiating with insurance and retirement plan providers. This means they can help you offer group-discounted benefits, including health, vision and dental plans and solid 401(k) options, to your employees at an affordable price.

Other advantages of a PEO are:

  • Legal compliance: Staying updated on the latest state and federal employment laws is challenging. PEOs manage compliance issues and offer tax and legal services.
  • Access to resources: Small businesses often lack resources to offer comprehensive training and on-site OSHA-compliant classes. A PEO provides tools and support to improve employee experiences.
  • Scalability: Many PEO companies have a range of plans and services, so you can pick services and features that suit your specific needs.

What is an administrative services organization (ASO)?

ASOs also offer HR administration, regulatory compliance, payroll support and benefits administration. Companies can outsource one or more HR functions, as ASOs provide a la carte options or full-service plans. In addition, administrative services organizations help small businesses find and compare insurance coverage and related benefits.

Unlike PEOs, the ASO model doesn't establish a co-employment relationship. Instead, your business remains the employer of record. The ASO is simply an outsourced HR vendor. They provide clients with HR services, such as administering and tracking employee benefits on your behalf. However, your company is responsible for providing workers’ compensation coverage and filing payroll taxes.

ASO services consist of:

  • Workers' compensation insurance.
  • HR services.
  • Benefits management.
  • Payroll processing.
  • Tax and government compliance.
  • Employee training and development programs.
  • Recruiting support.
  • Outplacement resources.

The difference between an ASO and PEO comes down to the co-employment model.

ASO benefits and cost

The ASO model typically charges a flat fee per employee, but the amount is usually lower than the costs at a professional employer organization. ASO costs can run from $50 to $100 per employee a month. Although the services are less robust than with a PEO, small businesses benefit from outsourcing human resources.

As the client, your company and staff have access to cloud software tools and training resources. Additionally, an ASO can oversee your employee onboarding program and help your business comply with regulations.

Other ASO benefits include:

  • Extended network: Although ASOs may not directly provide all types of insurance coverage, they offer resources and bargaining assistance.
  • HR expansion: Hiring and providing ongoing training for HR specialists are expensive. An ASO can cost less than a full-time HR staff without sacrificing expertise.
  • Flexibility: Many ASOs offer a la carte HR services, giving companies access to as few or many services as needed.

PEO vs. ASO: the co-employment model

The difference between an ASO and PEO comes down to the co-employment model. By taking over as a co-employer, the PEO assumes much of the risk of having employees, such as on-the-job injuries. A PEO's responsibilities include complying with the State Unemployment Tax Act (SUTA) and other regulations.

As such, the yearly W-2 forms list the PEO as the employer. The PEO files your employees under their federal identification number, and your business doesn't claim the workers. This partnership helps larger companies with risk management goals, whereas smaller ones benefit from better insurance options.

On the other hand, an ASO delivers a provider-client relationship. They manage HR services on your behalf. While ASOs may organize and file your payroll taxes, your business's name is on the W-2 form. Administrative services organizations oversee transactional HR tasks, but ultimately, your business is the employer and takes on the liability risks.

PEO vs. ASO: coverage and benefits

An ASO may have partnerships with health insurance or disability insurance providers. Some offer workers’ compensation coverage as well. This gives your business more flexibility over choosing providers. However, the main focus of an ASO is to arrange and administer benefits.

In contrast, a PEO is a direct benefit provider. Some let you customize your employee benefits or can work with existing programs. But part of the deal with a PEO is using their benefits and insurance services, and there's less flexibility to pick your own options.

In general, a PEO helps a company provide a more extensive range of benefits and insurance options, possibly at a reduced price. ASOs are ideal for small businesses that already have benefits, workers' compensation or retirement policies and are only looking for extra HR support.

PEO and ASO alternatives

Employers wanting to outsource HR tasks or responsibilities have several options besides PEO and ASO companies. A human resource organization (HRO) works like an ASO but offers extra support for managing employee relations and development.

HR and payroll software help your team with compliance and management of employee files. Some software providers also offer consulting services. Another option is to use payroll services, such as Gusto or Paychex. These provide payroll processing and administration. In addition, some offer employee benefits.

Which HR outsourcing model is right for you?

When deciding which type of organization to work with, examine your business's needs and define precisely what you need. Once you know how your business could benefit from these services, reference our guide to outsourcing payroll and HR processes.

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.

Follow us on Instagram for more expert tips & business owners’ stories.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

Where business leaders go to grow

CO— is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce.

Published August 25, 2021