What Is Co-Employment? Everything You Need to Know as an HR Professional

Key takeaways

• Co-employment is a contractual arrangement where a professional employer organization (PEO) and a client business share employer responsibilities.
• The PEO acts as the employer of record, while the client business retains all day-to-day operational control and decision-making power.
• Benefits include compliance expertise, fewer administrative tasks like payroll, and access to more cost-effective, high-quality employee benefits packages.
• Drawbacks include potential federal employment tax penalties, loss of control over some HR functions, limited data access, and the risk of unclear responsibilities.

Co-employment can help organizations reduce administrative burden, manage compliance, and provide cost-effective benefits—giving you more time to focus on the things that really matter.

However, both parties must clearly define their roles so it’s clear who is responsible for what. Confusion over employer responsibilities could result in misunderstandings and legal complications.

Read on to learn more about what co-employment is and whether a co-employment agreement could benefit your business.

What is co-employment?

Co-employment is a contractual arrangement between a professional employer organization (PEO) (the co-employer) and a client business (the primary employer) in which both companies act as employers. This means that both parties share responsibilities for the same employees.

However, the client business typically handles day-to-day business operations, such as overseeing employees’ workloads. The PEO typically handles HR tasks such as tax filings and benefits.

This unique setup can benefit HR professionals working within the client business, reducing HR-related time costs and compliance risks, allowing for a greater focus on strategic tasks.

How does co-employment work?

In a co-employment agreement, the PEO is listed as the employer of record, taking on some legal responsibility for the business’ employees. However, there’s no transfer of ownership, and the business retains all operational control, preserving its autonomy and decision-making power.

Having co-employees is often mistaken for employee leasing, a contractual arrangement where a business’s employees are hired and paid by a staffing agency. However, in the case of leasing, the employees don’t work for the client business. The staffing agency is the sole employer, handling all HR tasks and assuming all compliance risks.

Unlike staffing agencies, PEOs don’t usually provide a business with employees. While some do offer this type of service, it’s worth checking before you sign up if that’s what you need.

What are the benefits of co-employment agreements?

Co-employment agreements offer great benefits to HR teams looking to offload some liability and administrative burden. This includes, but isn’t limited to:

HR and compliance expertise

Staying compliant with pay and labor laws can be overwhelming. These laws often have lots of requirements at both the state and federal levels. They also change often, and HR professionals are held responsible for understanding and responding to those changes.

PEOs provide businesses with access to compliance expertise when it comes to taxes, insurance, and workplace policies. Working with an expert brings peace of mind to HR and business leaders, ensuring that all actions align with the law.

Additionally, PEOs can provide strategic advice for workforce management issues, such as:

• Writing job descriptions
• Building compensation structures
• Improving employee performance
• Making the hiring process more efficient
• Increasing employee engagement
• Reducing turnover

Administrative support

When you find a PEO that’s responsive to your HR team's needs, you can access seamless administrative support that aligns with your workflows. This means you can offload a variety of administrative tasks, including:

• Payroll
• Benefits administration
• Workers' compensation claims

The PEO team has expertise in these areas, so you can rest assured that you’ll remain compliant with all regulatory requirements, which is especially important when it comes to taxes and payroll.

Also, outsourcing your administrative tasks this way can simplify your to-do list and give you more time to focus on strategic moves that actually grow with your business.

Cost-effective benefits

Many businesses find it challenging to provide a great benefits package because of the costs involved. PEOs often have access to high-quality options that some employers don’t.

Many of these options are much more cost-effective when you get them through a PEO because you can leverage the deals they have already negotiated with insurers. Working with a PEO also makes it much easier to provide additional fringe benefits like retirement plans and educational reimbursement.

Attracting top talent

Offering seamless payroll processing and an excellent benefits package can help you build your employer brand and attract top talent. In this way, working with a PEO can be an essential strategy for achieving organizational goals and creating a robust talent pipeline.

Workers’ compensation

Just like payroll, workers’ compensation is another area in which HR professionals struggle to keep up with regulatory requirements.

Fortunately, a PEO can provide this coverage on your behalf and take care of all the administrative tasks that come with it. That includes guiding employees through the claims process and conducting audits to ensure a safe workplace.

Co-employment risks and drawbacks

Although working with a co-employer can have significant benefits for the organization, it’s still important to be aware of the drawbacks that may come with outsourcing your HR tasks.

Wage base restart

When you choose to work with a PEO, your employment taxes will be paid under that organization’s Federal Employer Identification Number (FEIN). If you start or end your relationship with the PEO any time before the tax year is up, it’ll trigger a FEIN change with the IRS.

Co-employment laws also require that the IRS restart federal employment taxes on the wage base (the maximum wages subject to taxes in a given year). Even though you already paid the taxes, the “restart” forces you to pay them again, which could negatively impact your budget.

To avoid this penalty, you must have excellent timing with your PEO contract. Additionally, you may choose to work with a CPEO—an organization certified by the IRS that isn’t subject to wage-based restart rules.

Some loss of control

When working with a PEO, your team has to give up control over at least some aspects of HR management, such as payroll and benefits.

This will lighten your administrative burden, but it can also cause issues. For example, if the PEO decides to drop a benefit carrier that’s popular with your employees, the PEO can impact company culture.

Limited HR access

Signing a PEO contract introduces a third party to your HR workflow. This doesn’t only affect your team’s roles—it also affects your employees’.

It can be frustrating for workers to have to deal with someone outside their organization if payroll or benefits issues arise. There’s not always a guarantee that a PEO will deliver the same employee experience, which can impact overall satisfaction.

Limited data access

When you offload payroll, workers' compensation, and other HR management tasks to a PEO, you lose direct access to that data. This can make tasks like carrying out compensation audits difficult.

Though working with a PEO usually saves your HR team a lot of time, the tradeoff is that some tasks will become more time-consuming by default.

Unclear employer responsibilities

Failure to clearly define responsibilities in a co-employment agreement could lead to confusion about which party is responsible for certain employer duties. This also includes ensuring both organizations understand and remain compliant with a range of employment laws. Failure to comply with the relevant employment laws could result in legal consequences for either one or both parties.

Next steps: Make co-employment work for your business

Co-employment can be a useful arrangement for businesses looking to reduce administrative burdens and manage compliance risks and benefits. But, before you draw up a co-employment agreement, take some time to familiarize yourself with the relevant employment laws and regulations to ensure compliance.