PEO vs. ASO: Differences & Which Suits Your Business Best

Whether you’re a small office of five or a multinational corporation, managing the administrative work associated with back office HR functions likely takes more time and talent than you’d like to admit. Compliance, benefits, and payroll are essential to the smooth running of your business, but can steal valuable time from other core-business work.

Solutions like a Professional Employer Organization (PEO) or Administrative Services Organization (ASO) can remove some of the challenges modern businesses face when it comes to managing important tasks, freeing your HR professionals to focus on more strategic tasks and your executives to focus on growth.

What is an ASO?

An ASO helps to support your business  in outsourcing certain HR functions, such as payroll, employee benefits management, and workers' compensation, to a third party. While the ASO won’t handle these functions directly, it will take on the responsibility of connecting your business to suitable service providers and overseeing the relationship. 

Example: Acme Corp. would like to outsource its payroll processing and payroll tax compliance operations. The company partners with an ASO, which recommends a number of payroll vendors whose services and pricing align with Acme Corp.’s needs and budget. Acme Corp. selects a vendor. The ASO ensures that the vendor processes payroll on time and in accordance with Acme Corp.’s policies. The ASO also coordinates with the vendor to manage the payroll tax filing process on Acme Corp.’s behalf.

Benefits of implementing an ASO

Working with an ASO can benefit businesses of all sizes

• Reduced administrative burden. Assigning back office HR tasks to an ASO frees time for your professionals to focus on strategic work like employee development, talent acquisition, and organizational planning.
• Functional control over HR. In a relationship with an ASO, the business retains complete discretion over all of its policies and procedures. The ASO acts on behalf of the business and only to the extent authorized.
• Access to expertise. Working with an ASO offers direct access to specialists in a range of HR disciplines, such as employee benefits and risk management. This can address knowledge gaps in your organization without hiring a dedicated professional.

What is a PEO?

When working with a PEO, a business enters into a co-employment relationship with a service provider. While the business remains responsible for managing employee performance and behavior, the PEO handles all administrative HR tasks, from payroll to onboarding.

PEOs offer a broader suite of services than ASOs, such as paying taxes for you under their own EIN and sponsoring health insurance and other employee benefits. 

Benefits of implementing a PEO

Working with a PEO can benefit businesses of all sizes

• Make onboarding seamless: From paperless onboarding to tax registration in different states, a PEO can simplify the process of getting an employee ready to hit the ground running.
• Access big-company benefits: Because PEOs have greater buying power and proactive claim management policies, they can help businesses access quality benefits at reasonable prices.
• Protect your business: A PEO can help identify and fix potential compliance issues so business leaders can focus on strategic initiatives.

ASO vs. PEO: 8 main differences

While an ASO and a PEO have some similarities, including outsourcing HR functions to a third party, they differ in some important ways. The table below summarizes the key distinctions between these types of services:

HR services

Both a PEO and an ASO provide HR services; however, a PEO acts as a co-employer, and an ASO does not. An ASO will manage particular back-office tasks depending on company needs. 

Costs

ASOs and PEOs follow different fee structures. While a PEO charges a percentage of your business's payroll plus a monthly administration fee, an ASO will adjust its fees up or down depending on the services you choose to outsource or your headcount.

Risk management

Because a PEO acts as your co-employer, it bears the risk of non-compliance along with your business. An ASO remains at legal arm’s length and will not share risk with your business, even if you receive compliance-related assistance.

Benefits administration

A PEO not only sources and negotiates employee benefits from carriers but also takes responsibility for administering those benefits to your employees. Due to their size, PEOs can often negotiate favorable terms when purchasing benefits.  

An ASO may offer assistance in negotiating with carriers and administering benefits plans but does not purchase them on your behalf. Because they don’t buy benefits directly, ASOs may not have access to the same volume-based discounts as a PEO.

Employee management

A PEO will, to a limited degree, have the authority to manage and direct employees to ensure that the business meets its compliance obligations. An ASO does not manage your employees and is more concerned with overseeing important HR processes.

Insurance handling

A PEO will negotiate with multiple carriers and use its size to negotiate favorable terms for health benefits. It will also administer any claims and reporting requirements. An ASO will usually manage relationships with carriers chosen by your business, as well as related administration.

Compliance assistance

Both a PEO and an ASO can oversee compliance operations within HR. However, only the PEO will share the risk with your business in the case of errors. 

PEO vs. ASO: which is better for your company?

Whether your business would benefit most from partnering with a PEO or an ASO depends on a number of factors, including:

• Size. Larger companies with an established HR department may get more value from outsourcing a discrete process to an ASO for a competitive monthly fee. Small businesses, on the other hand, often receive more HR coverage working with a PEO than they could afford if hiring in-house HR professionals.
• Cost. If your business has specific insurance needs, the higher cost of a PEO may be worth the savings in premiums and claims management. If, on the other hand, you already have benefits packages that fit your budget, the administrative experience of an ASO may better align with your needs. 
• Compliance burden. For businesses held to strict compliance standards, such as federal contractors, working with a PEO may bring more peace of mind than an ASO. As your co-employer, a PEO shares in the liability for non-compliance and is motivated to exercise strong oversight. 

ASO and PEO: Rippling has you covered

A comprehensive, single-system solution for HR, payroll, spend, and IT, Rippling offers support to businesses of all sizes worldwide. Rippling’s integrated HCM removes barriers between key HR functions, including payroll, benefits management, headcount planning, and learning management, for a seamless experience.

For businesses interested in streamlining one or more HR functions, Rippling ASO provides access to expert assistance without sacrificing flexibility. Bring your own brokers, benefits, and workers’ compensation plans, and Rippling takes charge of administration and compliance. If your business needs more support or would like to outsource the HR function, Rippling PEO offers a co-employment relationship that takes payroll, compliance, and benefits entirely off your plate. Rippling provides access to a selection of quality employee benefit plans and supports employees through enrolment with a unified platform.

This blog is based on information available to Rippling as of July 30, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.