While small and many medium-sized businesses try to take care of everything to make their operations a success and profitable, what many leadership teams find is that they can’t adequately address every aspect, especially in administration. Key areas often need expertise to manage competently. Good examples of this situation can be accounting as well as personnel and HR administration. Because of this, a number of smaller companies lean on outsourced support that brings the requisite expertise onboard immediately versus with a long learning curve. Two types include an Administrative Service Organization or ASO, and a Professional Employer Organization or PEO.
What’s the Difference?
Typically, use of an ASO tends to be targeted. The resource is applied to a single task area, such as managing payroll, for example. In comparison, a PEO provides a broader service, managing or providing support for multiple HR-related functions, ranging from payroll to benefits management to training. Not every business’ need is automatically the same, so either of these two support resources can easily find market opportunities that change over time, as well as when businesses grow and develop their own in-house expertise.
The key value of the PEO comes in its comprehensive support approach. It’s an ideal resource for small and medium businesses that have no HR support at all and either need to get started or are shifting from a full contracted support environment to actual employees for the first time.
Given the amount of laws, regulations, tax requirements and employment guidelines that have to be tracked and met, a PEO helps a company get up and running quickly versus struggling just to meet minimum immediate needs in HR. That includes workers’ compensation management, risk management, HR compliance and a lot more. Probably the biggest risk area in all tends to be tax obligations at both the federal and state level; a PEO helps new business payroll onboarding avoid critical rookie mistakes. Small businesses in particular really benefit and learn from PEOs to train their own internal staff over time.
Why Would a Business Use an ASO?
In many cases, a company hiring an ASO may already have in-house resources for part of its HR functions and just needs a targeted approach to fill a gap in support. That gap may be in a critical area that needs expertise, or it may be easier for a business to have an outsourced resource to manage an intensive but mundane function while internal resources are applied to more complicated work. Payroll, employee file management and data input tend to be common areas for this kind of ASO application.
The à la carte approach of ASO tends to lean far more into the stopgap strategy area, especially when long-term expertise is lost, a business is still growing rapidly, or a new requirement or function has to be started and no one in-house is familiar with it.
Legality Differences
PEOs are far more useful when a business needs a resource to act as a full proxy. In this regard, a PEO can become the legal employer representative to outside agencies like government tax offices, for example. That becomes particularly useful in handling ongoing issues and questions regarding managed payroll transactions, for example. If the same was handled by an ASO, the client company would still have to be directly responsible for anything the ASO did or reported. PEOs are also quite useful in areas with lots of legal involvement, such as workers’ compensation, retirement administration, employee benefit insurance plan management and more. These tasks tend to be varied in complexity and need personnel resources who can ramp up to issues that involve more analysis than redundant task performance.
There is No Perfect Plan for Everyone
Again, as noted earlier, the ASO vs PEO choice varies from one business to the next. It can also change over time as well with the growth of the business and its own in-house maturity from experience. A business that finds the outsourcing of HR tasks useful can easily migrate from a PEO starting out to an ASO approach later on or vice versa with a big reorganization, so neither category is set in stone. Leadership simply needs to utilize what works best for short-term and long-term success.