A 2019 survey found that nearly half of HR outsourcing companies expected to grow in the near future. This steady growth is largely due to the demand for third-party HR services from small businesses of all types – perhaps including yours.
If you’re looking to outsource your HR, maybe you’ve stumbled upon an HR outsourcing model known as a PEO. This common HR outsourcing type isn’t your only option – ASOs also exist. But what exactly do these abbreviations mean, and what separates one from the other? Learn more below, including which type might be best for your business.
A professional employer organization (PEO) is a company that offers third-party human resources services such as payroll administration, benefits, workers’ compensation and other business insurance. If your company hires a PEO to handle your HR, you can offer employee benefits you might otherwise struggle to afford, as PEOs can access lower-premium, higher-quality health insurance typically available only to large companies.
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If you contract a PEO to handle your HR, you’ll sign a co-employment agreement. In this agreement, you’ll designate your PEO as the party entirely responsible for certain HR tasks normally relegated to an employer. As a result, you’ll have fewer HR administrative tasks to handle and thus more time for actual business affairs.
Additionally, as your co-employer, your PEO will handle tax affairs under its employer identification number (EIN) instead of yours. Since your PEO may have a lower state unemployment tax rate than yours, this arrangement may prove beneficial for you come tax time.
In signing your co-employment agreement, you effectively give your PEO full power to act on your behalf in the realms designated in your contract. However, contrary to somewhat popular belief, you don’t lose full employer powers over your employees. You’ll still have full control over any employer concerns not designated to your PEO in your contract – company culture, day-to-day affairs, shift planning, you name it.
If you’re still worried about a potential loss of control with a PEO, then look only for PEOs that the IRS or Employer Services Assurance Corporation (ESAC) has certified. These certifications indicate that the PEO has done extra work to meet rigid standards and can be trusted with your company’s affairs.
A PEO is a company that offers HR services, such as benefits and payroll, for your company through a co-employment agreement.
An ASO, or administrative services organization, is an HR outsourcing company that does not require you to sign a co-employment agreement. As such, an ASO will not sponsor your benefits plans or remit your taxes under its EIN. Instead, an ASO will handle your day-to-day HR tasks such as administering benefits and running payroll. Most ASOs do not provide workers’ comp.
The primary difference between a PEO and an ASO is the business model. A PEO is legally your co-employer and thus entirely oversees whatever affairs you designate to it. As such, it offers benefits to your employees as though the PEO, not you, employ them. This arrangement means PEOs have more employees and thus access to higher-quality, lower-cost insurance plans, as insurers find larger companies less risky.
Additionally, only a PEO will use its own EIN to remit your company’s taxes. Since an ASO is not your co-employer, it will not remit your taxes under its own EIN or offer you higher-quality healthcare plans; it will just help you obtain benefit plans and run payroll. [Read related article: PEO VS EOR, or PEO VS Insurance Broker, or PEO VS Payroll Provider]
Although PEOs and ASOs offer roughly the same suite of HR services, only PEOs sponsor your benefits and use their EINs to remit your company’s taxes.
Beyond the PEO and ASO business model distinction explained above, each of these outsourced HR types has its own benefits and drawbacks. These pros and cons fall into the below categories:
|Fundamental HR services included, with the option to add many more||Employer’s choice of core HR functions, though perhaps from fewer options|
|Often higher cost||Often lower cost|
|Inflexible benefits||Flexible benefits|
|Some risk absorption||No risk absorption|
PEOs and ASOs offer many of the same HR services, such as benefits, payroll and business insurance. However, since PEOs offer lower-cost, higher-quality health insurance, you may find that working with a PEO allows your company to obtain better plans.
When starting with a PEO, you may also be able to modify your contract to designate whichever tasks you want to yourself and your PEO. For example, if you want to outsource your hiring or disciplinary practices, you can assign these responsibilities to your PEO in your co-employment agreement. ASOs typically offer a narrower selection of HR services, though these services are generally still quite beneficial for your company.
The total cost of a PEO depends on its pricing model. Some PEOs charge a percentage of your payrol per pay period alongside administrative fees that vary by employee. On top of all this, your PEO may charge you however much it spends to pay your taxes and insurance premiums.
Other PEOs may charge you a flat fee per employee each month. This setup may be easier for your accounting, but it can come with one-time setup fees that cost thousands of dollars. ASOs also typically charge a flat per-employee fee each month, but these fees are often lower than a PEO’s. PEOs often charge $150 to $200 per employee per month, whereas ASOs cost closer to $50 to $100 per employee per month.
When you choose a PEO, you can only access your outsourced HR firm’s custom suite of employee benefits. Although these plans are often high-quality, you’ll have few other choices if you’re not satisfied with your plan. An ASO allows your company to choose from a greater variety of benefit plans, but your options may have higher premiums alongside higher deductibles, copays and out-of-pocket limits.
Since a PEO will act as your co-employer, you and the PEO share equal risk. Beyond this co-employment arrangement, several PEO HR services – workers’ comp, employee training, regulation compliance – can lower your risk. By contrast, your ASO will assume none of the risk involved with your business affairs. This lack of risk absorption may be a dealbreaker for small companies afraid of potential lawsuits.