How to choose the correct outsourcing provider

Q: What is the difference between an ASO and a PEO? My organization is interested in possibly using the services of a PEO.

A: Administrative services organizations (ASO) and professional employer organizations (PEO) are a form of outsourcing for services such as benefits and payroll administration. An ASO and a PEO would offer clients similar service packages; however, an ASO is not considered the employer of record. A PEO would serve as an employer of record for employees leased to a client. PEOs are similar to temporary staffing agencies but provide a broader array of HR services with a long-term commitment to clients.

As many HR departments seek to realign services to become more focused on business strategy and prove valuable to the bottom line, outsourcing of many soft services has increased. Some of the major reasons ASOs and PEOs are employed are to add valuable expertise in the HR field; to reduce and control operating costs; to share risk with other organizations and free resources; and to increase opportunities to focus on other aspects of the HR function. Outsourcing is a strategic function driven by cost reductions and increased flexibility and service quality.

The National Association of Professional Employer Organizations offers guidelines for selecting a PEO that include assessing the workplace to determine human resource and risk management needs. More important, the PEO must be capable of meeting organizational goals—competence is essential when outsourcing. Organizations need to understand how benefits are administered and what is the level of responsibility attached to each outsourced function. Legal counsel should review the service agreement on behalf of the organization.

States with regulatory requirements for PEOs are Arkansas, Florida, Illinois, Kentucky, Louisiana, Maine, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia and Washington. All have some form of licensing or registration requirements.

Dyane Holt, SPHR, is an information specialist in SHRM’s Information Center.

Please Note: This material is provided as general information and is not a substitute for legal or other professional advice. National members may reach the Information Center by calling (800) 283-7476 and choosing option #5 or by using the Information Center’s Assistance Request Form found under HR Resources on SHRM Online.