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5 key co-employment nuances that employers must understand


Co-employment is the legal structure that professional employer organizations (PEOs) and their client companies use to share HR responsibilities.

As with any contractual relationship, it’s important that each party in the co-employment agreement fully understands all the nuances of the arrangement.

While PEOs take on many tasks for their client organizations, they’re unable to assume all tasks associated with being an employer.

Also, each PEO will have a customized approach to service delivery for their clients, so you can’t assume that you’re getting the same services when comparing providers.

Here are five co-employment nuances you should understand when shopping for a PEO partner.

1. Classifying workers

Generally, a PEO will provide guidance to its clients to support accurate employee classifications. But the act of classifying employees (and the consequences for potential mistakes) resides with the business.

Said another way, determining which individuals are employees (and receive W-2s) and which are independent contractors (who receive 1099s) is a responsibility reserved for the business – not a PEO.


Generally, the classification analysis requires review of how the individual is paid and what level of supervision or control, if any, exists in how the work is performed. A PEO won’t be physically present to verify the nature of your employees’ work and therefore can’t classify your employees for you.

The contractor-versus-employee classification can be a confusing gray area for many employers. That’s why having a PEO’s guidance can be beneficial.

Similarly, it’s the business’ responsibility to correctly classify employees as exempt or non-exempt, but a PEO will offer its guidance to help you avoid common mistakes.

If a business is knowingly misclassifying workers, a reputable PEO will encourage further review and support the business’ efforts to correct the classification.

If you rely on independent contractors, they will fall outside of your co-employment relationship with a PEO and outside of their payroll system. Essentially, you must pay contract workers on your own.

2. Wage and hour compliance

Ensuring wage and hour compliance is another responsibility that remains with the company when you enter a co-employment relationship with a PEO.

PEOs don’t assume responsibility for wage and hour compliance because the PEO must rely on what their clients report.

Make sure you’re working with a PEO that will provide you with guidance on how to stay compliant with wage and hour laws. While the ultimate responsibility remains with the business, support and guidance from a reputable PEO can help you navigate common pitfalls.

Situations that can lead to wage claims include employees not getting:

  • Lunch breaks
  • Overtime pay
  • The minimum wage
  • Paychecks on time

3. Payroll taxes

Choosing to go with a certified PEO (CPEO) may seem like a small distinction when you’re comparing PEOs, but it can put your company in a much more favorable position in terms of tax withholding and reporting.

Having earned this IRS-established classification, CPEOs assume responsibility for the federal employment taxes withholding, remittance and reporting.

What happens if you partner with a PEO that hasn’t earned the CPEO designation?

If federal employment taxes aren’t paid, the IRS can go after the PEO as well as your company for what is owed, even if you already paid the PEO for these taxes.

When you’re comparing PEOs, don’t overlook the CPEO designation.

To see a full list of CPEOs (and other important information), visit the IRS’ page on the topic.

4. Single vendor relationship

If you haven’t worked with a PEO yet, chances are you have several HR service vendors.

  • One for payroll
  • Another for time and attendance
  • A benefits broker
  • A recruiting tool to track applicants
  • And so on

Each has their own cost, sales rep, help line and quirks. And, more often than people want to admit, these systems don’t integrate with one another. That means manually entering data from one system to another. (Hello, human error.)

One of the great perks of working with a reputable PEO: a single provider will be responsible for processing payroll, as well as providing workers’ compensation insurance coverage, benefits, and more. Many PEOs provide integrated systems that work together to support your business.

Bundling these services together helps you simplify and save. For many small and medium-size businesses, this co-employment nuance — simplicity and peace of mind — can be worth its weight in gold.

People who value high degrees of control might be disappointed to learn that they’re giving up the ability to negotiate for each of these services individually in the open market as long as they’re with the PEO.

5. Workers’ compensation experience rating

You may wonder what will happen to your experience rating for workers’ compensation (i.e., the amount of loss that you experience compared to the amount of loss that similar insured companies have) when you join or leave a PEO.

For example, if you join a PEO, and you have a good experience rating, and then you want to leave the PEO at some point, do you start over? Or do you get to take your good experience rating with you when you go back into the open market?

The truth is, it depends on the PEO.

Some PEOs track losses individually by client and report those to your state. If a client leaves, the business takes their experience rating with them.

Other PEOs may not do that, which could be detrimental if the company inherits the PEO’s experience rating and that rating is worse than that of the individual company. That’s why it’s important to get into the right co-employment relationship.

Risk mitigation for small businesses

In a co-employment relationship, you share certain HR-related responsibilities with the PEO. Read your client service agreement closely to understand exactly which protections you receive and which liabilities will remain with you.

At the end of the day, joining the right PEO can strengthen your position as an employer.

To learn more about how engaging with a PEO works, including the various co-employment nuances, download our free e-book: Your no-nonsense guide to co-employment.