Co-Employment

What Is Co-Employment?

Co-employment is a contractual arrangement between a professional employer organization (PEO) and a client business in which both companies act as employers.

This unique setup can benefit HR professionals working within the client business, reducing their HR-related time costs and compliance risks. In doing so, it allows for a greater focus on strategic tasks, increasing their capacity for high-value work and the positive impact they deliver to the organization.

How Do Co-Employment Arrangements Work?

Co-employment arrangements work by allowing the client business to handle the day-to-day operations and focus on making employment decisions. The PEO then handles most administrative HR tasks, such as benefits and payroll taxes.

This agreement between the PEO and the client company is contractual—all decisions about which responsibilities each organization will take on are usually outlined in the contract before it’s signed.

In a co-employment arrangement, the PEO is listed as the employer of record, taking on some legal responsibility for the business’s employees. However, there’s no transfer of ownership, and the business keeps all of the operational control, ensuring 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, not the business itself. In this case, 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 important for businesses not to assume they will receive it.

Key Benefits of Co-Employment Relationships

Co-employment relationships offer robust benefits to HR teams looking to offload some liability and administrative burden.

HR and Compliance Expertise

Staying in compliance with pay and labor laws can be overwhelming. These laws often have lots of requirements to keep up with at both the state and federal levels. They also change often, and HR professionals are held responsible for knowing about 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 number 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’re in compliance 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 the business.

Cost-Effective Benefits

Many businesses find it challenging to provide a great benefits package because of the sheer 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 your PEO has 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 to your organization. In this way, working with a PEO can be an essential strategy for achieving organizational goals and creating a robust talent pipeline.

Worker’s Compensation

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

Fortunately, you can allow a PEO to 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.

Risks and Drawbacks of Co-Employment

Although working with a co-employer can have significant benefits for the organization, it’s still important to be aware of the drawbacks associated 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 an FEIN change with the IRS.

In turn, co-employment laws 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, which is an organization that’s been certified by the IRS and 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, it can then cause a drop in morale.

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 employees to have to deal with someone outside the 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 morale and 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 even more time-consuming.

Best Practices for Co-Employment

What is co-employment’s main benefit for your organization? It’s being able to maximize your team’s resources by gaining access to expertise and support. However, you must ensure you start off on the right foot.

Here are a few best practices to help you avoid compliance risks and get the most out of your co-employment relationship:

• Consider partnering with a CPEO for added tax and liability benefits.
• Ensure the PEO works with reputable benefits carriers and offers the options your employees want most.
• Ask for references so you can see how similar companies in your industry have benefitted from the PEO’s services.
• Push for clarity around contract terms, including pricing and termination policies.
• Ensure a clear breakdown of responsibilities between your team and the PEO.
• Consider the level of support and ensure the PEO will respond to your needs in a timely manner.