- In co-employment, two companies share the supervisor/employer responsibilities of an organization.
- One business hires a co-employment partner to take over HR functions, including employee payroll & taxes, employee benefits, talent management and more.
- The co-employer responsible for day-to-day supervision is often known as the ‘operational employer’ or ‘worksite employer’. The co-employer that takes over HR, payroll and compliance functions is often known as an ‘Employer of Record’ or ‘EOR’.
- The co-employment business model provides four core benefits: time savings and business growth, better employee benefit offerings, lower HR-related expenditures, and assured compliance.
- While co-employment does involve risks, these can usually be managed by choosing the right co-employment partner, and ensuring that co-employment contracts are compliant.
The very term ‘co-employment’ is puzzling for many businesses: Isn’t, by definition, employment a relationship between two individuals — employer and employee? Here we delve into the meaning of co-employment, and explain how this arrangement might benefit your business.
What Is Co-Employment?
Co-employment means that two separate companies or organizations share the employer role. Most commonly this occurs where business decides to outsource parts of their human resource functions, including employee payroll & taxes, employee benefits management to a third party. This third party is also known as a ‘Professional Employer Organization’ (‘PEO’) or an ‘Employer of Record’ (‘EOR’).
When this occurs, the client company still has full authority over who they hire and how much they pay them. And it remains their responsibility to ensure their employees are on track and doing their jobs correctly. For these reasons, the client company is often known as the ‘worksite employer’ or the ‘operational employer’.
However, the PEO will now manage the HR responsibilities associated with those employees. These responsibilities may relate to employee training, employee payroll & taxes, or employee benefits.
In other words: the client company retains the control and oversight of their employees that they previously had. But the PEO now takes care of the payroll, tax and HR compliance part of the employer role.
Effectively, the client company gives up control of their employees’ administration responsibilities in exchange for more time and less stress.
But you’re asking: “Why exactly do this?” “What are the benefits and risks associated with co-employment?” Let’s take a look.
What Are the Benefits of Co-Employment?
Co-employment helps businesses find relief from many of the employment-related responsibilities and risks that come with running a business.
Specifically, The co-employment gives businesses four core benefits:
- Time savings and business growth: Co-employment means business leaders are able to free up their time to focus on their primary duties and move their companies forward. A study has shown that businesses using a PEO co-employment arrangement tend to grow at a 7–9 percent faster rate, and are 50 percent more likely to stay in business, than those that don’t.
- Better employee benefit offerings: Because PEO co-employers manage thousands of employees, they can often give small businesses access to high-quality employee benefits you would normally only find at larger corporations.
- Lower HR-related expenditures: Again, because PEOs co-employ so many workers, they’re able to negotiate better rates with insurance companies and other benefits providers. It has been reported that businesses that use a PEO save, on average, $450 per employee on administrative costs each year.
- Easier compliance obligations: Employment laws are complex and ever changing, and if you don’t follow them, you may be faced with fines and penalties. PEOs have compliance experts who monitor employer-related laws and ensure the business is compliant.
How Does Co-Employment Benefit Employees?
From their workplace, employees want to feel a sense of financial security, they want to feel valued, and they want the opportunity to grow and personally develop. When their company teams with a co-employer, employees often have access to benefits such as health insurance, dental care and retirement savings plans, which they would not otherwise have access to.
According to NAPEO research, businesses that have a PEO co-employment arrangement in place report higher satisfaction levels and up to 14 percent lower employee turnover rates.
What Are the Risks of Co-Employment?
The co-employment business model can reduce compliance and payroll costs, fuel company growth and take the employee administrative burdens off your plate. However, it is not without some potential risks that need to be considered:
Here are three potential risks or disadvantages of co-employment that you need to think about:
- Losing control: With co-employment, you are trusting the PEO to act in the best interests of your company and employees. To mitigate this co-employment risk, you must do your research and ensure you trust the PEO provider and fully understand the contractual agreement.
- Compliance ambiguity. With two employers, there may be uncertainty over which employer duties which co-employer is liable for. For example, even if a PEO files employee taxes under its own Employer Identification Number, this doesn’t necessarily mean the worksite employer is no longer liable (to avoid this risk entirely a certified PEO arrangement may be best).
- Employee resistance: People tend to avoid change as much as they can. When employees learn there’s a change in their employment structure they can feel unsettled and lose a sense of security. You will have to educate them about how the PEO can help them and the business.
Co-Employment and the Joint Employer Standard
In the video below, the Economic Policy Institute (EPI) explains one of the legal implications of co-employment — the joint employer standard.
What Are the Costs Associated with the Co-Employment Model?
The co-employing PEO makes money by charging a fee for the services they provide. Typically, you will find PEOs charge their fees based on one of two pricing structures:
- A fixed fee calculated per employee, per year.
- A fee calculated as a percentage of the company’s gross payroll per year.
A fixed fee usually ranges between $900 to $1,500 per employee each year. While if the fee charged is as a percentage of the company’s gross payroll, the rate will typically be 3-15 percent on average.
Co-Employment — Our Take
Deciding on co-employment is a big decision for most businesses. While the benefits are significant, to manage co-employment risk it is essential to choose your PEO co-employment partner carefully, and make sure your co-employment agreement covers exactly the services you intend it to.
In co-employment, employer duties are split between two separate organizations. Usually, this means that one employer (the worksite employer and supervisor) directs staff on a day-to-day basis, and another company (the PEO, or Employer of Record) takes care of payroll and employee taxes.
No. In joint employment, two employers have full liability (joint liability) under the law, such as under the Fair Labor Standards Act. In co-employment, the two employers are intended to be responsible for different aspects of the employer role.