Co-employment is a contractual arrangement where a business partners with a Professional Employer Organization (PEO) to share certain employer responsibilities. This relationship allows the PEO to handle many human resources functions, while the business maintains control over its daily operations and workforce. The goal is to mitigate administrative burdens and liabilities associated with employment, freeing up resources to focus on core objectives.
How Co-Employment Works
The co-employment model establishes a relationship between the client business, its employees, and the PEO. In this structure, the PEO becomes the “employer of record” for administrative and legal purposes, handling tasks like payroll and taxes under its own federal employer identification number. The arrangement is governed by a detailed contract that outlines the responsibilities of both the PEO and the client company.
A PEO’s duties center on human resources administration. This includes processing payroll, filing employment taxes, and managing employee benefits, such as health insurance and retirement plans. The PEO also manages workers’ compensation claims and helps ensure the business stays compliant with complex employment regulations.
The client business retains authority over all substantive aspects of the work. This includes making decisions related to hiring, firing, and promoting employees. The business directs its employees’ day-to-day tasks, sets work schedules, and remains in charge of its workplace culture and overall business strategy.
Benefits of a Co-Employment Relationship
A primary advantage for a business is gaining access to superior employee benefits at a more affordable cost. Because PEOs represent a large pool of employees, they can negotiate for robust health insurance and 401(k) plans that a smaller business could not secure on its own. Offering competitive benefits is a significant factor in attracting and retaining talented employees.
Another benefit is the reduction in administrative workload. Outsourcing functions like payroll and compliance allows leadership to focus on strategic initiatives. PEOs provide access to a team of HR and compliance experts who stay current on regulations, helping protect the business from fines and legal issues.
Employees also see direct benefits. In addition to better health and retirement packages, they gain a formal HR support structure that might not exist in a smaller company. This includes HR professionals who can assist with questions about benefits, payroll, or workplace policies, enhancing the overall employee experience.
Potential Risks and Drawbacks
A primary consideration is the cost. PEOs charge for their services as a percentage of total payroll or a flat fee per employee. These fees must be factored into the company’s budget to ensure the financial benefits outweigh the expense.
A significant legal risk is “joint-employer liability.” This doctrine means both the client company and the PEO can be held responsible for employment-related issues, such as wage disputes or wrongful termination claims. If a legal challenge arises, both parties may be implicated, which underscores the importance of choosing a reputable PEO.
Some business owners may feel a loss of control over their HR functions. Turning over administrative tasks means relinquishing direct management of payroll and benefits. This requires trust in the PEO’s ability to handle these functions accurately and in the best interest of the company.
Co-Employment vs Other Employment Models
Co-employment differs from other workforce arrangements. A staffing agency, for instance, provides its own employees to a client for temporary or permanent positions, handling all HR tasks and risks. In contrast, a PEO works with the client’s existing employees.
Employee leasing is an older model sometimes mistaken for co-employment. It involved a company terminating its employees, who were then hired by a leasing company and “leased” back to the original business. Co-employment with a PEO does not require this “fire and rehire” process and instead shares responsibilities for the existing workforce.
The difference between co-employment and joint employment lies in workforce management. In co-employment, the client company retains sole control over daily supervision and hiring. Under a joint employment scenario, both entities often have shared control over matters like wages, schedules, and supervision.
Is Co-Employment Right for Your Business?
Deciding whether a co-employment arrangement is the right move requires evaluating your company’s needs. The decision hinges on balancing the cost of PEO services against the value of offloading administrative tasks and gaining access to better benefits. A business owner should begin by assessing how much time and resources are currently consumed by HR administration.
If your leadership team is bogged down with payroll and compliance issues, a PEO could be a valuable partner. Consider whether your business is struggling to offer benefits packages that can compete for top talent. Finally, a realistic budget analysis is necessary to determine if your business can afford the PEO’s fee, weighing this cost against potential savings and strategic advantages.