ASO vs. PEO: Which is Right for Your Company?

Human resources (HR) plays a critical role in your company by managing employees and ensuring regulatory compliance. However, for small and medium-sized businesses, managing HR in-house can be overwhelming and cost-prohibitive. This is why many organizations are choosing to outsource some or all of their HR needs. In fact, the HR outsourcing industry has seen rapid growth in recent years, with the market expected to be valued at over $52 billion by 2031.  

Of course, if you are considering outsourcing HR, you have likely noticed that HR outsourcing can take many different forms. You may then wonder which option would work best for your company. Ultimately, this depends on what you are hoping to achieve by outsourcing human resources. For instance, you may choose to use an outside firm to help you handle a single HR process such as workers' comp, or you could choose to have an outside firm handle all of your company's HR needs.   

As you work through your options, you will encounter different types of HR firms, two of the most common being Professional Employer Organizations (PEOs) and Administrative Services Organizations (ASOs). Both ASOs and PEOs offer businesses support with human resources, payroll, benefits administration, and compliance, which can make it difficult to know which type of firm you should work with. However, while PEOs and ASOs share similarities, their structures, and the depth of services they provide vary significantly, impacting how they might benefit your business.

To help you decide which option is right for your company, keep reading as we explore the benefits and differences between PEOs and ASOs, and the things that you should consider when choosing a firm to work with. 

Benefits of Working With a PEO

Co-Employment Model: One of the main differences between a PEO and an ASO is that PEOs operate on a co-employment model. When you sign an agreement with a PEO, the PEO becomes the employer of record for tax purposes. While this requires you to give up some control over your staff, it may also allow you to offer a broader range of benefits at a lower cost due to the PEO's buying power.

Comprehensive HR Services: PEOs typically offer a more comprehensive suite of services than ASOs including payroll, benefits administration, workers' compensation, risk management, and compliance support. This can significantly reduce the administrative burden on an organization, allowing them to focus their time and resources on their core business. 

Access to Better Benefits: Due to their scale, PEOs have better buying power than a single company and can provide organizations with access to high-quality health insurance, retirement savings plans, and other benefits that might be too expensive for small businesses to provide on their own.

 Regulatory Compliance and Risk Management: PEOs often have experts on hand who can help you navigate the complexities of employment laws and regulations, reducing the risk of non-compliance. Additionally, since a PEO co-employes your staff, they may also manage responsibilities related to regulatory compliance. As your co-employer, the PEO also shares equal risk with you, reducing your compliance liability. 

Cost: PEOs can offer cost savings through economies of scale on benefits. However, these comprehensive services typically come at a higher cost than ASOs. Some PEOs require businesses to pay administrative fees plus a percentage of payroll each period, while others will charge a flat fee per employee each month. 

Benefits of Working With an ASO

Direct Employment Relationship: Unlike PEOs, ASOs allow businesses to maintain a direct employer relationship with their employees. ASOs provide services such as payroll and benefits administration without becoming the employer of record. This can make working with an ASO a more attractive option for businesses that prefer to maintain full control over their employees and operations. This is particularly important for companies whose industry requires them to maintain direct oversight of their employees. 

Flexibility in Services: When you work with a PEO, you are often limited by the service plans that they offer. However, when working with an ASO, businesses can pick and choose which services they need, allowing for more customization and potentially lower costs if fewer services are selected. Whether you need a single HR service managed or you need comprehensive HR support, working with an ASO allows you to create a plan that meets your needs. 

Flexible Benefits Administration: While an ASO can administer benefits, it lacks the buying power of PEOs. This may mean that you will have higher costs for health insurance and other benefits if you choose an ASO instead of a PEO. However, the benefit of working with an ASO is that they will work with you to find you the best benefit plans that will work with your budget and needs. Alternatively, if you work with a PEO, you will be limited to the plans that they offer and you may not be able to get exactly what you were looking for.

Compliance Support: When you work with an ASO, they may offer you advice and support with compliance and HR best practices. While this can give you valuable insight you would not have had if you managed HR in-house, the responsibility and risk remain more squarely on your company compared to a PEO arrangement.

Decision Factors: Which Should You Choose?

Size and Scale: Small businesses may find PEOs more advantageous as their PEO will have access to benefits they wouldn't have otherwise been able to afford due to their PEO's buying power. Sharing the costs of HR services with your PEO's other clients can also mean lower HR costs, which can help control rising overhead. However, larger businesses that have established a comprehensive in-house HR team may prefer to work with an ASO, as this will allow them to maintain control while allowing them to outsource certain services and administrative tasks.

Cost vs. Benefit: When deciding between a PEO and an ASO, businesses must weigh the cost of these services against the benefits they provide. While PEOs are more expensive, they also provide comprehensive services and benefits that smaller businesses wouldn't be able to provide on their own. Ultimately, the scale and nature of your business can influence which option is more cost-effective.

 Control and Flexibility: Companies that value direct control over their HR policies and practices might lean towards an ASO. Of course, if you are like many companies, you may not mind giving up control to a PEO due to the convenience and cost savings that come with turning over your HR management to an outside firm.

Regulatory Environment: If your business operates in an industry that is highly regulated or has complex labor laws, the comprehensive compliance support of a PEO might be more beneficial, as your PEO will help ensure compliance. Additionally, they will also share the risk burden with you should something go wrong. However, you may find an ASO works better for you if you need to directly oversee and manage your staff. 

When trying to choose between a PEO and an ASO, which option will work best for you will depend on various factors including your business's specific needs, size, and how much control you want to maintain over HR functions. It's also crucial that you consider the long-term implications of each arrangement on your business's operations and growth trajectory, as you will want to ensure that the option you choose will help you achieve your business's goals and objectives.

Whether you are looking for the right partner to provide you with a comprehensive HR solution, or you are trying to tackle a particular HR challenge, talk to Alloy to find answers and discover your best options to move forward and find the best possible outcome.