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Professional Employer Organizations vs. Administrative Service Organizations

by Corie Stark | Aug 17, 2017
Do you outsource any payroll or human resource services?

Looking to outsource your payroll or human resources practices? Have you considered an Administrative Service Organization (ASO) or Professional Employment Organization (PEO)? Here’s a breakdown of the two.

Professional Employer Organizations

A PEO is an organization that provides certain services that an employer can use to outsource certain tasks like payroll, workers’ compensation, benefits, recruiting, and training. To do this, the PEO and the client must engage in co-employment, meaning the PEO hires the client company’s employees, becoming their employer for the purpose of taxes and insurance.

PEOs typically provide their services to small and medium size companies to alleviate some of their human resource needs. These businesses gain the most because with a PEO they are offered the advantage of larger company benefits. They also have more time to dedicate to day-to-day practices within the company, such as branding and sales. A PEO and a client company share a tax ID, but the PEO is the business that files paperwork for tax purposes using the tax ID. The control of the employees still remains in the client company’s hands. A PEO simply provides services determined by the hiring client. A PEO is considered the “Employer of Record” for federal and state employment laws. An employee’s check will have the name of the PEO, and not their hiring company because of this. Again, they are still employed by the PEO’s client and not the PEO. Should a human resources issue arise, the PEO may mitigate some of the risk. PEOs operate across the U.S., Sweden, and Germany.

PEOs offer a cost-effective alternative to handling these issues in-house. PEOs generally charge for their work either as a percentage of total payroll (somewhere from 3%-8%) or a flat-rate.

Administrative Service Organizations

An ASO is similar to a PEO in that they provide similar services such as outsourcing payroll and other human resources practices, but an ASO and its client do not establish a co-employment relationship. ASOs do not provide or sponsor benefits or workers’ compensation programs. However, they can assist in arranging coverage for workers’ compensation, but the ultimate responsibility lies with the hiring client. Because of this, the client company remains the sole sponsor when working with ASO. For example, an ASO handles a client’s payroll and tax filing, but the paperwork is filed under the client’s tax ID. ASOs can offer advice on compliance, but ultimately the decision lies within the client’s organization. Like PEOs, ASOs can ease workload on small to medium-sized businesses but don’t make sense for larger companies with enough workers to handle these services in-house.

ASOs are more “a-la carte” than PEOs. Client companies can pick one to two services, and are charged on a flat-per-employee basis.