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PEO vs ASO – Understanding the Differences

The industry is rife with abbreviations and PEO and ASO have popped up with greater frequency lately. PEO vs ASO is not the same thing. We discuss the major differences so that you can be better informed when meeting with respective vendors.

Smaller companies in particular are comparing PEO vs ASO in order to reduce their administrative overhead, lower process costs, stay in compliance, create greater operating efficiencies and perhaps reduce HR & payroll headcount in some cases.

What is a PEO?

A professional employer organization (PEO) is a firm that provides a service where the employer outsources all human capital management tasks. This might include employee benefits administration, payroll and workers' compensation, recruiting, risk/safety management, and training and development.

The PEO does this by hiring a client company's employees, thus becoming their employer of record for tax and insurance purposes. This practice is known as joint employment or co-employment. The client company continues to manage the employees' day-to-day activities.

PEOs charge a service fee for taking over the human resources and payroll functions of the client company. Typically this ranges from 3 to 15% of total gross payroll, in addition to the normal employee overhead costs, such as the employer's share of FICAMedicare, and unemployment insurance withholding.

Use of a PEO saves time and potentially eliminates staff that would be used to prepare payroll and administer benefits plans, and may reduce legal liabilities or obligations to employees that it would otherwise have.

The PEO model is most attractive to small and mid-sized businesses and associations under 200 employees.  As of 2010, there were more than 700 PEOs operating in the United States, covering 2-3 million workers.

What is an ASO? (MassPay's HR Services)

An administrative services organization (ASO), provides similar services offered by PEO’s, but they do not “own the employees”. Under an ASO arrangement, employees remain solely under the control of the client company. Tax and insurance filings are still done by the ASO, but under the client company's Employer Identification Number.

Just like PEO’s, the ASO vendor can provide outsourced human capital management tasks. Depending on the depth of services offered by the ASO, this also might include employee benefits administration, payroll and workers' compensation, recruiting, risk/safety management, compliance, creating the employee handbook and revised job descriptions, and training and development.

ASO’s charge a service fee for taking over the human resources and/or payroll functions of the client company. These vendors may address some, all or specific services that the client company cannot provide. Typically, ASO fees are contract or retainer based for a set time period, rather than based on a percentage of total gross payroll.

The ASO model is also attractive to small and mid-sized businesses and associations who do not have the bandwidth to constantly monitor compliance rules and regulations, nor increase their headcount to handle additional HR & Payroll tasks. Additionally, ASO services are also needed by larger companies that need additional resources for specific areas of HR and Payroll.

The Main Differences: PEO vs ASO

Depending on the vendors, both PEO’s and ASO's can offer the same services. The main differences include who owns the employees and whether the client company plans to maintain staff in HR and Payroll.

Companies that wish to maintain internal HR/Payroll staff usually lean towards the ASO model. The ASO vendor is used to fill in specific gaps, work on a specific project and keep them in compliance with ACA and other legislation. The ASO vendor is viewed as an extension of their staff, rather than outsourced staff in the PEO model.

Control: PEO vs ASO

Under the PEO model, the PEO company will often dictate things such as handbook policies, disciplinary strategies, and even whether or not you can hire 1099 workers. Failure to follow their direction can sometimes lead to a loss of liability coverage.

Under the ASO model, businesses have both a support system and experienced advisors that function in a consultative way. ASO vendors will provide content, advice and best practices, but the client company ultimately has the freedom to do what they feel is best for their company.

Benefit Options: PEO vs ASO

With a PEO, there are often limited benefit options for health insurance and 401k. ASO's tend to have a more flexible and customizable benefit offering.

Severability: PEO vs ASO

Joining or leaving a PEO can sometimes create issues with employees. If this is done mid-year or mid plan year, workers will be subject to multiple W-2s, and will need to enroll in new benefit plans. Highly compensated employees may also be subject to a reset in their taxable wage bases.

With an ASO, the W-2 will not change and many times the benefit plans can carry over or be transferred with no employee-facing effect.

Employee Satisfaction: PEO vs ASO

While the issue of “control” is generally transparent to the employee, the real difference between a PEO and ASO hits home when an employee needs to reach out to HR with questions.

Under a PEO arrangement, the contact will be someone at the PEO company instead of an internal HR/Payroll person. Some employees may see this as an “outside” resource that can’t be seen face to face. This may create dissatisfaction among a subset of employees however.

Under an ASO arrangement, the employee can still contact their internal HR/Payroll person if needed.

Both PEO and ASO models offer tools like Employee Self-Service portals that can significantly reduce questions about vacation balances, automate time off approvals, allow viewing of paystub and W-2’s information, or facilitate life event changes like adding new dependents or changing home address, so this may not be an issue.

Costs/Fees: PEO vs ASO

ASO costs are typically much less than PEO’s because they are geared to supplement client resources. Use of an ASO saves time, improves efficiencies and supplements client staff.

About MassPay

MassPay provides HR, Payroll and Time & Attendance solutions, along with HR Services (ASO) and other services, to help small to mid-sized companies automate process, stay in compliance and save time and money by leveraging the iSolved HCM platform.