PEO vs. ASO vs. HRO: What's Best for Your Business?

Many businesses face the challenge of effectively managing their human resource functions. In fact, almost two-thirds of respondents in Paychex's 2024 Priorities for Business Leaders study said they spend at least 11 hours a week on HR administration — equivalent to more than 25% of the average workweek.

HR outsourcing (HRO) options, including professional employer organizations (PEOs) and administrative services organizations (ASOs), are unique approaches that businesses can adopt to streamline and optimize their HR processes. Read on to learn more about HRO, the differences between PEO vs. ASO vs. HRO, and how to choose an HR outsourcing solution that aligns with your unique business needs and goals.

HRO: Human Resources Outsourcing

Human resources outsourcing, as the name suggests, involves outsourcing specific HR functions or processes to a third party based on the needs of the business. In particular, online HRO services can help HR teams with benefits administration, custom HR support, compliance support, and learning management. HR software solutions like these may help businesses reduce inefficiencies and inaccuracies that arise from internal data transfers.

Benefits of HRO

Why do businesses choose to outsource HR? With ever-mounting business challenges, organizations rely on HR outsourcing because it can help them:

• Focus on business productivity: Instead of handling routine tasks, employers and their HR teams can focus on more strategic business functions that offer greater potential rates of return. HR outsourcing may help businesses lower health care costs, reduce HR expenses, process fewer workers' compensation claims, reduce turnover, and help generate higher revenue growth. With the help of a third-party HR services provider, there are often fewer concerns about hiring, retaining, and motivating employees.
• Access to leading technology: HR outsourcing enables companies with minimal resources to use innovative technology that could otherwise be costly to maintain independently. With outside support running some of the functions, businesses can enjoy the advantages of HR outsourcing without purchasing this technology outright.
• Help with compliance: Handling HR compliance independently or without help from a professional well-versed in business compliance matters can be difficult. That's why some HR outsourcing options include assistance to help you understand and stay on top of applicable regulatory and legislative developments that may impact your business.
• Automate benefits administration: Outsourcing your HR to a top provider can give you access to an integrated benefits platform that can help you manage your company benefits more efficiently. Automated benefits administration technology helps streamline processes such as eligibility tracking, enrollment forms, and benefits changes to help reduce administrative burdens and costly errors.
• Gain access to expert guidance: Today's leading HR outsourcing providers offer dedicated HR advice from an HR professional. They can educate and help guide businesses through the turbulent waters of laws, regulations, and employee-related matters.

PEO: Professional Employer Organization

A PEO, or professional employer organization, may allow client companies to outsource human resource administrative tasks to a third-party provider through a co-employment arrangement. This may include payroll, employee benefits administration, training, and other HR functions.

When understanding what a PEO is, business owners often want to know who maintains control over the business and its employees. In a PEO, the client company remains the employer, maintains business control, and oversees all business decision-making, including employee supervision and staffing decisions.

Employee wages are reported with the PEO's federal Employer Identification Number (EIN) for federal and state withholding purposes and, in some states, for unemployment insurance reporting. The PEO also helps support administrative tasks associated with human resources services, payroll, employee benefits administration, and risk management and sponsors the benefits plans and workers' compensation benefits of which employees may take advantage. If the business has an in-house HR staff, the PEO can offer expert support and guidance to that team.

ASO: Administrative Services Organization

An administrative services organization, or ASO, is a model where specific HR-related tasks (payroll processing, benefits administration, etc.) are outsourced to a third party, similar to a PEO. However, the primary difference between ASO vs. PEO is that in an ASO model, there is never a "co-employment" arrangement, and the client company always retains administrative employer status. This means employee wages are reported with the business's federal EIN.

Similarly, the company would remain responsible for setting up and maintaining benefits plans and other coverage with benefits providers and insurance carriers. The ASO's role may be to help manage insurance administration functions on the business's behalf.

Differences Between PEO and ASO

The following PEO vs. ASO comparison chart offers a high-level look at how these HR outsourcing options compare.

Benefits of a PEO

Businesses of all sizes choose to use a PEO for many reasons, a few of which include:

• Freedom to focus on business growth: HR, benefits, and payroll administration are all essential business functions, but they take time and resources that could be used on more strategic initiatives.
• Competitive benefits: A PEO is often well positioned to negotiate attractive insurance rates and benefits for its members. When a company might only be able to offer its workers a bare-bones health insurance plan, a PEO often has the bargaining power to offer generous coverage options for medical, dental, and vision care, as well as life, disability, and workers' compensation coverage.
• Regulatory compliance: PEOs help businesses monitor and adapt to changes involving local, state, and federal regulations; healthcare reform; COBRA; and minimum wage requirements, as well as state unemployment insurance.
• Employee relations support: PEOs can assist businesses to think strategically about each touchpoint of the employee life cycle, including hiring and recruiting, creating job descriptions, onboarding, training and development, employee handbooks, and performance management.

Things To Consider With a PEO

When evaluating whether PEO is the right HR outsourcing option for your business, here are some factors to consider:

• Your business's financial health: A PEO will typically vet your business operations and finances before entering this relationship. These organizations may prefer working with companies in good financial shape, without pending litigation against them or allegations of misconduct or wrongdoing.
• Industry: High-risk businesses, such as heavy construction or roofing, may require a more specialized service agreement with a PEO set up to assume higher-risk liability.
• Control and accountability: Some companies and in-house HR teams may find it challenging to relinquish control over certain HR functions or bring another perspective into HR decision-making.
• Flexibility: PEOs may work with a pre-determined set of carriers for benefits, workers' compensation, and other areas.
• Size and goals of your business: Many PEOs work with companies with anywhere from 10 to 250 employees, but this varies.

Who PEOs May Be Best For

A PEO can work for any business. The National Association of Professional Employer Organizations notes that while businesses that use a PEO have an average of 19 worksite employees, companies with 500 or more employees and an existing HR department also find value in partnering with a PEO. PEOs may work for companies under many types of situations, such as:

• Businesses whose HR team members need additional support
• Small businesses looking for HR expertise and support as the organization grows
• Established companies that want to save time and money on HR-related tasks, payroll processing, and employee benefits
• Businesses that want to retain and engage employees with attractive benefits offerings but can't afford or manage them independently
• Companies that want access to sophisticated, integrated HR technology

Benefits of an ASO

Businesses may prefer an ASO vs. PEO model for many reasons, some of which include:

• Flexible services: Depending on the terms of the agreement, companies can select, add on, or change specific HR services they need, allowing for a more customizable approach when outsourcing. Businesses that choose an ASO also have more flexibility to select their own benefit carriers and plans.
• Control: ASOs generally help manage the operations of HR-related tasks only, while businesses retain control over their HR processes.
• The ability to pay independent contractors: Some PEOs can't process payments for independent contractors, whereas ASOs can help businesses manage 1099 worker payments.
• Suitable for most industries: ASOs are not subject to underwriting or rigorous risk assessment.

Things To Consider With an ASO

Even with the flexibility and control that an ASO offers, an ASO may have its limitations:

• Scope of support: ASOs may not offer the comprehensive range of services that PEOs provide since they don't share liability with the client company, requiring businesses to manage certain HR aspects internally.
• Benefits coverage limitations: Unlike a PEO, which can negotiate attractive insurance rates and benefits for its members, an ASO doesn't offer group policies or plans. While ASOs offer benefits administration technology and assistance, the business is responsible for sponsoring its own benefits plans.

Who ASOs May Be Best For

Generally, businesses that would benefit from using an ASO include:

• Companies that have a dedicated HR team but require additional assistance
• Businesses looking to customize HR solutions to complement their existing infrastructure
• Businesses that already have established relationships with insurance brokers, carriers, and providers
• More prominent companies that have large group status when negotiating health benefits

Choose What's Right for Your Business

Businesses have many options for HR outsourcing. The decision between a PEO vs. ASO vs. HRO may depend on numerous factors, including the size of your business and the level of administration you want over HR functions.

Luckily, today's leading HR outsourcing solutions offer scalability, so you can add or upgrade these and other services to fit your current business needs. Understand the advantages of each option to help you make an informed choice that supports your HR operations and strategy.