As companies move from pre-seed to seed to Series A+ funding rounds and teams grow, HR needs become more demanding. Many startups outsource their human resources functions so they can focus on company growth and strategic goals. A professional employer organization (PEO) and an administrative services organization (ASO) are their two main options.
Both are third parties that help founders, CEOs, CFOs, CHROs, and their teams with essential day-to-day HR tasks and support, benefits administration, payroll, and compliance to varying agrees. They also reduce inefficiencies and errors in HR operations.
However, there are vital differences between a PEO and ASO that decision-makers should be aware of before committing to an HR outsourcing service. Read on to learn the differences between a PEO and ASO to determine which is right for your startup.
What is a Professional Employer Organization (PEO)?
Small to medium-sized businesses primarily use PEOs. However, companies well within their B series are known to use PEOs as well if they haven’t built an internal team of HR, payroll, benefits, and compliance experts.
A PEO is a type of full-service HR outsourcing that’s completed through co-employment. This means that employees’ federal and state wages are reported with the PEO’s Employer Identification Number (EIN). And, if the PEO is a certified PEO (CPEO), it’s also liable for payroll and tax compliance instead of the startup.
Co-employment, however, doesn’t mean the PEO gains business decision-making power. As a PEO client, your startup maintains control of the business and remains the legal employer of all your employees.
By pooling employees from its client companies, PEOs give smaller companies access to high-quality, cost-effective plans typically affordable only to larger companies. For example, instead of a company with 50 employees negotiating benefits costs alone, partnering with a PEO gives them the leverage of thousands of employees, resulting in more appealing health insurance plans at better prices.
It’s important that VC- or PE-backed startups choose an HR outsourcing service that’s well-versed in what growing companies need at different funding stages. To meet these needs some PEOs also offer strategic benefits and compensation guidance that helps propel business outcomes.
What is an Administration Services Organization (ASO)?
Much like a PEO, an ASO may handle HR admin, manage payroll, and help with benefits administration and compliance. However, there’s no co-employment arrangement, which means employees’ federal and state wages are reported with the client company’s EIN. This also means that client companies are held liable for any payroll and compliance issues instead of the ASO.
Also, the client company is responsible for negotiating, setting up, and maintaining benefits plans with insurance carriers without the negotiation power of a larger pooled group.
The Key Differences: ASO vs PEO
The major difference between an ASO and PEO lies in the relationship each model has with a startup and its employees:
- Employer of record: With a PEO, the PEO becomes the employer of record, meaning it officially handles employment-related responsibilities for employees. In contrast, with an ASO, your business remains the sole employer of record and is responsible for employment-related duties.
- Benefits administration: A PEO aggregates all its clients’ employees and can negotiate better benefits packages for smaller companies and handles benefits administration. With an ASO, your organization handles all benefits negotiations and may need to handle the administration as well.
- Compliance: As the employer of record, a PEO takes full responsibility for compliance with HR laws. CPEOs are also responsible for all tax compliance issues. Some ASOs provide advice and administration support but aren’t accountable for compliance and tax issues. Some ASOs only help with payroll processing but don’t offer other services such as compliance, HR support, and benefits administration.
Choosing the Right HR Outsourcing Service for your Business
When deciding between a PEO and ASO, it’s important to consider several key factors such as:
- What’s the size and scope of your current HR team? PEOs partner well with developing and existing HR teams due to the breadth of their expertise and service. ASOs may not offer the comprehensive support HR teams receive from PEOs.
- Are you looking for a competitive, cost-effective benefits package? Working with a PEO over an ASO may be best for your startup because of its negotiation power. The benefits packages it provides can help attract and retain top talent to help your business grow.
- Do you already have an established relationship with insurance brokers, carriers, and providers that you’re not willing to let go? Because ASOs don’t provide benefits plans and packages and the responsibility of crafting those remains with the client, your startup is free to work with whatever provider you choose. Some PEOs may only work with a predetermined set of carriers for health insurance, wellbeing benefits, retirement, life insurance, disability, and workers compensation. In many cases, however, PEOs already work with the carriers and providers a startup is currently using.
HR Outsourcing with the Most Referred PEO in Tech
A PEO can help VC- and PE-backed companies remain focused on strategic growth. Sequoia One was specifically designed to help tech startups through each round of funding, helping optimize your comp and benefits strategies and management while outsourcing your HR, payroll, and compliance.
See how Sequoia One helps transform great companies into great BIG companies by speaking to one of our business consultants today.
