The difference between a PEO and an ASO

Posted on March 31, 2010 by Matt Meigs in HR Outsourcing

What is a PEO and what is an ASO? Photo of a cloud by KevinDooley on Flickr.

What is a PEO and what is an ASO? Photo of a cloud by KevinDooley on Flickr.

PEO? ASO? HR Outsourcing? Which is which? Every now and then we get a confounded business owner asking us “What exactly is a PEO? And how is it different from an ASO?” We thought it might just help to write something about it.

What is a PEO?

The term “PEO” stands for Professional Employer Organization. PEOs provide small and medium size companies with outsourced human resource services, specifically employment, payroll, benefits, safety and risk management services.

How does a PEO work?

The PEO delivers value to its customers through a shared tax ID; this model is referred to as a “co-employer” or “co-employment” relationship. The co-employer arrangement enables a company to transfer many of its key employer responsibilities to the PEO, including aspects of employer-related risk and compliance. A formal Customer Service Agreement specifies the division of responsibilities between the PEO and its customers. A common misconception is loss of control through co-employment. Companies working with PEOs retain complete control over operations, workforce management, building company culture and defining the employment brand.

What is an ASO?

The term “ASO,” on the other hand, stands for Administrative Services Organization. The most important difference between an ASO and a PEO is that the service provided through an ASO does not establish a co-employer relationship with the employees.

How does an ASO work?

Much like a PEO, an ASO oversees the day-to-day administrative aspects of managing a company’s human resource functions. While an ASO does not sponsor employee benefit programs or workers compensation coverage, the ASO is generally active in arranging coverage and assisting the client in securing coverage. The client company remains the sole sponsor when working with an ASO. Many companies find this preferable because they retain control and can still be very hands-on without having to handle mundane details on a daily basis.

An ASO will handle your company’s payroll and tax filing, the paperwork is filed under your federal employer’s identification number. An ASO can also offer assistance with legal questions on compliance although it remains the client company’s responsibility to act on these issues.

Which tasks does a PEO handle on an employer’s behalf?

Both U.S. and Canadian governments now recognize there are two employers in a co-employer situation, but for the most part, government agencies look at a PEO as being as the responsible party for the administration of human resources. They consider a PEO the “Employer of Record” for the purposes of federal and state/provincial employment laws such as wage and hour, civil rights, and similar laws imposed on employers.

This arrangement means employees’ checks will carry the name of the PEO, though to the rest of the world, they are employed by the client. And if there are any legal problems arising from the HR function, the PEO assumes some of that risk.

HR functions that are not core to the business, including payroll and workers compensation coverage, are handled by the PEO. The PEO also becomes the sponsor of the employee benefits programs, such as health coverage and retirement plans.

What types of businesses are suited to using a PEO model?

Small to mid-sized businesses (1 to 500 employees) are best suited to the PEO model because the PEO’s bargaining power gives smaller companies the advantage of “larger company” benefits. These plans are normally only available to larger corporations. Plus, PEO services are able to free up the limited resources of SMBs, allowing them to focus on more strategic initiatives.

Large enterprise corporations have enough employees to negotiate for better benefits programs themselves, and they may have enough manpower for in-house HR, making the PEO less essential.

Free White Paper
For a more thorough discussion on PEOs and co-employment, download our free white paper: “What is a PEO?” from our library. Scroll down to the bottom of the page under “HR Outsourcing.”

This text first appeared on the ChoiceVendor blog as part 2 in a 2-part series on HR outsourcing.