PEOs, ASOs, And SaaS: Choosing Your Best Option

If your small business has expanded beyond a handful of employees, it’s likely that you’ve recognized that you no longer have the time or expertise to manage human resource administration while also focusing on the work you love to do. According to a survey by the payroll service Paychex, fewer than 50 percent of small business owners described themselves as “very confident” when it came to assessing how their company was handling HR. That lack of confidence reflects an awareness that HR responsibilities become increasingly complex when a business grows, with payroll tax administration, employment-related liability, and the cost of group health insurance only a few of the challenges.

Typically, it’s time to hire a full-time HR professional when your business reaches about 100 employees. But what about the many businesses that aren’t at that threshold, yet still require skilled HR expertise? For those businesses, outsourcing HR is a smart, strategic choice.

There are several options when it comes to outsourcing vital HR tasks, but which should you outsource—and how? Most small to medium business owners turn to one of three options for HR administration.

The first is SaaS, or Software as a Service.

Quite simply, this is a self-service software platform for HR management. There are many different choices when it comes to HR management software. Most use what’s called a human-resource information system (or HRIS) database, which can store some of the basic components of employee records, with documentation such as anniversaries and training credentials. There’s software to track and distribute employee compensation to make the payroll process easier.

SaaS offers great support if you are skilled in accounting, understand tax reporting, and just need an intuitive resource to generate financial statements and facilitate record keeping. But it’s a one-size-fits-all approach, with little customization potential. I liken it to using tax prep software rather than hiring a CPA.

Your next option is an Administrative Service Organization, or ASO.

The ASO provides outsourced HR and administrative services such as managing payroll, taxes, and insurance filings. Taxes are filed under your federal tax ID number, and you remain the employer of record for all your employees. That also means you’re responsible for employment-related risks and liabilities. The benefit of the ASO is the ability to outsource administrative tasks in a more customized way.

The third option is the one that I think makes the most sense for small business owners, and that’s the PEO, or Professional Employment Organization.

While the ASO offers an a-la-carte approach to HR support services, the PEO provides full-scale, comprehensive resources. The difference stems from the PEO’s relationship as a co-employer. In this co-employment relationship, you are the common-law employer for your employees, while the PEO becomes the statutory employer.

These legal terms can be confusing, but they are very significant when it comes to your ability to access better insurance and benefits packages for your employees at much more affordable rates, and to minimize many of the employment-related liabilities and risks small businesses typically face. The PEO assumes the responsibility and liability for employment-related factors such as risk management, human-resource management, payroll and payroll-tax compliance. You retain the responsibility for day-to-day supervision and management of staff—the functions that will enable you to deliver excellent service and to ensure that your business is operating satisfactorily. You control how your business is run; the PEO manages payroll, benefits, and workers’ compensation.

This expertise is vital, but the value of the PEO also lies in the economy of scale. Let’s say that your business employs 25 people. A reputable PEO will be servicing multiple clients, meaning that they are a co-employer of hundreds or even thousands of employees. As a result, they have access to a much wider range of group health insurance, retirement, and workers’ compensation plans, often available at a cost far lower than you could negotiate independently.

HR administration shouldn’t be just one more task for your busy team to manage. Your employees matter. Outsourcing HR management is a smart strategy to protect your company’s most valuable asset—its people—while freeing you to focus on growing your business.