Glossary

What is co-employment?

Co-employment is a legal and operational arrangement where a business shares employer responsibilities with a Professional Employer Organization (PEO). This setup allows companies to delegate HR-related functions such as payroll, benefits administration, and compliance while retaining control over day-to-day management of employees. Co-employment is commonly used by businesses to reduce administrative burdens, ensure compliance with labor laws, and access specialized HR expertise.

How does co-employment work?

Co-employment is formalized through a Client Service Agreement (CSA), which outlines the roles and responsibilities of both parties:

• Co-employer (PEO): Manages HR functions like payroll processing, benefits, tax compliance, and risk management.
• Client company: Oversees day-to-day operations, including employee performance, training, and work assignments.

This division of responsibilities allows businesses to focus on their core operations while benefiting from the PEO's expertise in managing employment complexities.

Benefits of co-employment

• HR expertise: Access to seasoned HR professionals who streamline administrative tasks and ensure compliance with labor laws.
• Cost savings: Reduces the need to build and maintain an in-house HR department.
• Enhanced recruitment and retention: Co-employers can offer competitive benefits and insights into market trends, helping businesses attract and retain top talent.
• Compliance support: Helps mitigate legal risks by ensuring adherence to employment laws, including worker classification, tax reporting, and labor regulations.
• Payroll and benefits management: Simplifies payroll processing and provides cost-effective, high-quality benefits like health insurance and retirement plans.

Risks of co-employment

While co-employment has many advantages, there are risks to consider:

• Shared liability: Both the client company and PEO share legal responsibilities. For example, misclassification of workers or failure to comply with tax regulations can result in penalties for both parties.
• Dependency: Over-reliance on a PEO for HR functions may limit the company's internal capabilities.
• Cost considerations: While PEO services save time and resources, they come with fees that may not suit all business budgets.

How to mitigate risks in co-employment

• Choose a certified PEO: Ensure the PEO is accredited by organizations like the IRS or Employer Services Assurance Corporation (ESAC) to guarantee reliability and compliance.
• Clarify worker classification: Properly classify employees and independent contractors to avoid misclassification risks.
• Maintain oversight: Regularly review and audit the PEO's processes to ensure alignment with your company’s policies and objectives.

Differences between co-employment and other HR models

• Co-employment vs. joint employment: In joint employment, two companies share equal responsibility for managing the same workforce. In co-employment, the PEO manages HR functions while the client oversees daily operations.
• Co-employment vs. employee leasing: Employee leasing involves a staffing agency providing temporary workers who remain employees of the agency. Co-employment applies to permanent employees managed jointly by the PEO and the client.
• Co-employment vs. EOR (Employer of Record): EORs take full legal responsibility for employment in foreign jurisdictions, whereas PEOs share responsibilities only for domestic employees.

Is co-employment right for your business?

Co-employment can be an excellent solution for businesses that want to offload HR tasks without losing control over day-to-day workforce management. However, it’s essential to evaluate your long-term goals:

• For local operations: A PEO is ideal for businesses looking to streamline HR functions without expanding internationally.
• For global hiring: An Employer of Record (EOR) may be a better option, as it allows companies to hire employees across borders while ensuring compliance with local labor laws.

Final considerations

Co-employment offers a flexible and efficient way to manage HR complexities, reduce operational burdens, and enhance employee satisfaction. Businesses should carefully evaluate their needs and choose a solution that aligns with their growth strategy, ensuring both compliance and operational success.