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What is co-employment?


What is co-employment, and how can it help your business?

If you’re like most employers, you’d like to create operational efficiencies, minimize risk and maximize talent – so that your business can be more profitable.

To achieve this, a co-employment relationship with a professional employer organization (PEO) might be the best solution.

How does co-employment work?

Co-employment is a contractual agreement between a company and a PEO that allocates and divides employer responsibilities between the two. The contract is often called a client service agreement (CSA).

In a co-employment agreement, your company’s employees (also called worksite employees) are employed by two separate entities:

  1. The client company
  2. The PEO

The PEO supplies services and benefits to a business and its existing workforce. (PEOs don’t supply a workforce.)

The business owner maintains control of:

  • All business decisions
  • Operations
  • Employees’ daily duties and core job functions

The PEO, in turn, assumes or manages certain employer-related responsibilities that are outlined and agreed upon in the CSA.

For instance, the PEO is typically responsible for:

  • Processing payroll
  • Administering payroll deductions
  • Issuing paychecks
  • Preparing, filing and depositing payroll taxes
  • Providing benefits to worksite employees
  • Workers compensation coverage and claims management
  • Providing HR advice to the client company

What are the benefits of a co-employment relationship?

When you enter a co-employment relationship, the PEO co-employs your employees and assumes certain employer responsibilities, while the client company gains access to numerous benefits.

In fact, this relationship incentivizes the PEO to align itself with your business goals and be a true partner in growing your business.

Here’s how the co-employment relationship can translate into benefits for your business:

1. Access to big-business benefits

Being an employer allows the PEO to offer benefits to its worksite employees. This shifts the risk associated with sponsoring employer-sponsored benefit plans to the PEO.

In addition, PEOs will typically offer a wide variety of benefits, many of which may not have previously been available to your employees.

Typical benefits offered by a PEO include:

  • Medical, dental and vision coverage
  • Health care flexible spending accounts
  • Retirement plans
  • Life and personal accident insurance
  • Short-term and long-term disability insurance
  • Adoption assistance
  • Commuter benefits
  • Educational assistance

As the plan sponsor, the PEO assumes all plan sponsor responsibilities and obligations from start to finish. This includes managing and administering the benefit plans.

You no longer have to worry about:

  • Negotiating rates with providers
  • Managing employee enrollment and notifications
  • Conducting nondiscrimination tests

2. Simplified payroll

The PEO also assumes responsibility for paying worksite employees, and the payment and reporting of wages and payroll taxes under its FEIN. This helps to ensure accuracy and compliance, and simplifies the payroll process so you can focus on other areas of your business.

Other payroll-related services include:

  • Assisting you in determining proper exempt/non-exempt classifications
  • Helping to ensure overtime pay is distributed appropriately
  • Issuing and filing W-2 forms

3. Workers’ compensation coverage and claim management

As an co-employer, PEOs can take on a client company’s workers’ compensation risk by providing worksite employees coverage under a policy sponsored by the PEO. In addition, the client company is provided with coverage under the PEO’s policy.

This relationship means that a reputable PEO will be invested in helping:

  • Investigate claims
  • Communicate with injured employees and their physicians
  • Assist with return-to-work arrangements

With potential liability through the co-employment relationship, it’s in the PEO’s (and everyone’s) best interest to take proactive measures to avoid workers’ compensation claims.

This can include:

Effective management of the program and proactive measures to prevent workplace injuries benefit both your company and the PEO by keeping costs low.

4. Strategic HR support and planning

A reputable PEO will do everything in its power to help you effectively and sustainably grow your business. When your company expands, often so does your headcount.

Therefore, in a co-employment relationship, a PEO might help you:

  • Manage I-9s and other employee paperwork
  • Design and conduct employee performance appraisals
  • Construct base compensation structures
  • Implement training and leadership development services, including supervisor coaching or online learning courses
  • Create an organizational chart and succession plan
  • Write job descriptions
  • Build an employee recognition program
  • Conduct company climate surveys

What are some common misconceptions about co-employment relationships?

There are a number of misconceptions about co-employment that exist because of pre-conceived notions about outsourcing in general:

1. You’ll lose control of your business

The most common is the belief that contracting with a PEO will result in a loss of control for the business owner.

In reality, the structure of a co-employment relationship allows you, the business owner, to retain control over business decisions and your employees’ daily to-dos and core job functions.

The PEO assumes or shares only those specific employer obligations set forth in your CSA.

2. Your employees will revolt

Business owners also worry that their employees won’t embrace the new arrangement or that employees will be considered as temporary or non-permanent employees.

These concerns are (seemingly) logical but unwarranted.

There is little, if any, disruption to existing employees when the relationship is established, and at no time is employee “leasing” involved in the agreement. The client company continues to employ the employees with the PEO becoming a co-employer for certain purposes.

Employees will also appreciate the benefits available to them through the PEO, as well as the online technology PEOs can offer.

3. Co-employment is a way to replace existing HR professionals

A co-employment relationship is administrative in nature and is beneficial to employees, including the existing HR staff.

PEOs often align with existing HR departments to provide much-needed expertise in areas where extra help is needed. A PEO can often extend a greater depth and breadth of benefits and services than could typically be offered by the business alone.

With that help, your existing HR team can focus on more strategic initiatives, such as organizational planning and performance management.

The result is a stronger organization and a better way of doing business.

(For a more in-depth look at myths about PEOs, read our blog on the topic.)

Summing it all up

Being an employer has never been more challenging, highly regulated and time consuming than it is today.

The good news is that you don’t have to go it alone.

Now that you can answer the question “What is co-employment?” you can begin your search for a reputable PEO that can help drive your business forward.

If you’d like a more in-depth look at how the co-employment relationship with a PEO can help you reduce HR burden, download our free e-book: HR outsourcing: A step-by-step guide to PEOs.