Benefits, Training

How Does HR Outsourcing Work? (ASO vs. PEO)

Human Resources Outsourcing (HRO) has become one of the fastest growing segments of the Business Process Outsourcing (BPO) market. According to Forbes, an estimated 50 percent of large companies outsource all or some of their HR services. Small businesses are now following the lead of larger companies and have quickly recognized that HRO is a cost effective alternative. Businesses are turning to HRO firms for help in managing payroll, legal compliance, benefits and HR administration, recruiting, staffing and other related services.

Businesses are always looking for ways to reduce cost and improve efficiencies and productivity. By outsourcing certain HR functions, business leaders gain time to play a more strategic role in their organizations. Two popular models for handling outsourced HR functions are common. The first arrangement is referred to as an Administrative Services Organization (ASO) and the second a Professional Employer Organization (PEO). The PEO model may be subject to individual state restrictions.

How does it work? What’s the difference between an ASO and a PEO?

Whether you enter into an arrangement under an ASO or PEO model, you will be able to cost-effectively outsource payroll and payroll taxes, legal compliance, benefits and HR administration, recruiting and other HR related services to a third party. The Society for Human Resource Management (SHRM) surveyed clients and results indicate that by engaging an HRO firm, companies save money, can focus more on strategy and improve their compliance with federal and state regulations. However, there are differences between the two models that will be outlined below:

Administrative Services Organization (ASO)
The major distinction between an ASO and a PEO is there is no employment relationship between the ASO and the employees of the client. In a PEO arrangement, a “co-employment” relationship is created making the PEO “employer of record” with the authority to have control over client’s employees. The ASO does not become the “employer of record” and typically offers the following:

  • Ability to outsource some or all HR functions such as payroll and payroll tax filings, compliance, human resources administration, employee benefits administration, recruiting and other related HR services.
  • Ability to retain your own employee benefits and workers compensation or have the HRO quote, implement and manage benefits on your behalf.

The largest difference between the ASO and PEO model is who employs the client’s employees and client choice and flexibility with workers’ compensation, health Insurance and other benefit carriers. Service fees may also be less under the ASO arrangement, depending upon the services under contract.

Professional Employer Organization (PEO)
The PEO concept began more than 20 years ago. It was previously referred to as “employee leasing”. Under this model, the PEO becomes the “employer of record” with the authority to have some control over client’s employees. Services offered by the PEO are similar to those with an ASO as follows:

  • Ability to outsource some or all HR functions such as payroll and payroll tax filings, compliance, human resources administration, employee benefits administration, recruiting and other related HR services.
  • Access to the PEO’s carrier for customized health and other benefits. This could be an advantage or disadvantage based on the demographics and health of the client individual group.
  • Ability to fall under the PEO’s SUTA rate which could be an advantage or disadvantage based upon the client SUTA rate compared to the PEO rate.
  • Ability to utilize the PEO’s workers’ compensation policy which could be an advantage or disadvantage based on the PEO’s history/modification rate compared to the client.

The disadvantages that may arise under the “co-employment relationship” that is formed when the PEO becomes the employer of record include:

PEO Control over Client Employees
The PEO will have some control over a client’s employees and depending upon the agreement, this could include the PEO having the power to hire and fire client employees.

Group Health Insurance
PEO’s may have many unhealthy groups in their employee base that may have a negative impact on a client with a reasonably healthy group.

Workers’ Compensation
As is the situation with group health, PEO’s may have some higher risk groups in their employee base that could have an adverse impact on a client with a lower risk employee base. Additionally not all states recognize a PEO and state insurance departments may individually rate each client in a PEO thus negating the benefit of being part of a larger group.

Businesses are turning to HRO firms for help in managing Human Resource functions. Whether you enter into an arrangement under an ASO or PEO model, you will be able to cost-effectively outsource all or some HR services to a third party. When exploring HRO solutions decide whether an ASO or PEO model is best for your company. At HR Affiliates, we adopt the ASO model. We feel that the client should remain as the “employer of record” and have all the control over their employees. Using an ASO approach, we are able to deliver all the benefits to a client and add value they are seeking from HR Outsourcing.

For assistance with any or all of your human resource needs, HR Affiliates provides solutions that fit any company.