Co-employment is a strategic partnership between a business and a professional employer organization (PEO) that enables the sharing of employer responsibilities. This arrangement allows business owners to focus on core operations while the PEO manages essential human resources (HR) functions such as payroll, compliance, and benefits administration. Understanding the dynamics of co-employment can help businesses leverage their benefits effectively and avoid potential pitfalls.
Defining Co-Employment
The National Association of Professional Employer Organizations (NAPEO) states, “The PEO relationship involves a contractual allocation and sharing of certain employer responsibilities between the PEO and the client, as delineated in a contract typically called a client service agreement (CSA).” Ultimately, the PEO does not make decisions for the business; all control remains with the business itself.
The business is responsible for all business decisions, operations, day-to-day supervision of employees, job assignments, employee reviews and assessments, and determining the employee's salary and benefits offerings. Although the PEO may be recognized by the state as the employer of record, the business retains the ultimate authority over crucial business decisions. The main advantage of sharing employer status is to receive access to tools and HR services that are typically out of reach for small businesses.
Benefits Of Co-Employment
Greater buying power
Small businesses often lack the purchasing power of larger companies, but co-employment helps level the playing field. Through a co-employment relationship, businesses can leverage economies of scale. PEOs utilize the collective buying power of all their group health clients, allowing them to secure more cost-effective, high-quality group health plans.
Some PEOs offer additional benefits beyond medical and dental insurance, such as retirement savings plans, pet insurance, legal insurance, and more. By combining the collective strength of all their clients, PEOs enable small to midsize businesses to access competitive premiums similar to those of large companies. This means businesses can benefit from lower health insurance premiums while still offering comprehensive coverage to their employees.
With rising health care costs, this buying power is more valuable than ever, allowing companies to provide top-tier benefits without sacrificing their bottom line.
Simpler payroll processing
In a co-employment relationship, the PEO is responsible for paying your employees. Businesses must apply for an Employer Identification Number (EIN) to manage payroll. Companies in a co-employment relationship agree to let the PEO handle this responsibility under its own EIN.
While changing the EIN might not seem exciting, it lets you offload many complex, time-consuming tasks. Using the PEO’s EIN, the PEO becomes responsible for more than just issuing paychecks. These additional payroll administrative tasks include:
- Calculating and withholding income and payroll taxes from employee paychecks
- Calculating and distributing overtime pay
- Reporting these taxes to the Internal Revenue Service (IRS)
- Determining proper employee classifications
- Filing and issuing W-2s and other payroll forms
This transfer of responsibility saves you significant time and effort. Additionally, having your PEO manage these tasks ensures that all calculations and filings are accurate and compliant with payroll guidelines. With a PEO, you can trust that your payroll is handled by trained professionals.
Safer workplaces
Businesses can also benefit from a co-employment relationship through improved workplace safety and risk management. A PEO can help your company qualify for workers’ compensation discounts and maintain lower unemployment tax rates, saving you money and reducing future headaches.
PEOs can assist with safety culture and claims management. These processes not only create a safer environment for employees but also help reduce workers’ compensation costs. Risk management measures include:
- Safety training
- Risk assessments
- Timely reporting
- Post-accident investigations
- Return-to-work programs
Better business alignment
As your company grows, you may need more than just payroll administration or benefits assistance. The co-employment relationship gives PEOs a vested interest in your business goals, working with you to identify growth opportunities and retain talented employees. A PEO can support your growth through:
- Employee recruiting and training
- Performance management
- Unemployment claims
- Human resource audits
- Wellness programs
- Telemedicine
In addition to helping you grow, being co-employed by a PEO means you have access to experts when you need them. This breadth of resources helps you stay on top of trends and regulatory changes that can impact your business.
Common Concerns About Co-Employment
Despite its benefits, some business owners hesitate to engage in co-employment due to misconceptions, such as:
- Loss of control: Business owners worry they will lose authority over their workforce. However, in a co-employment relationship, the client company retains full control over hiring, terminations, and workplace culture. A PEO serves as a trusted advisor, providing expert support and resources while allowing the business to maintain its leadership and decision-making power.
- Cost concerns: While partnering with a PEO requires a financial investment, the long-term savings on compliance, payroll, and benefits outweigh the costs. Businesses can streamline operations, reduce errors, and access high-quality benefits, ultimately enhancing efficiency and profitability.
- Employee confusion: Some employees may initially feel uncertain about their relationship with the PEO. However, clear communication and transparency about roles and responsibilities can alleviate these concerns and foster a positive working relationship.
Co-Employment Statistics
Partnering with a PEO through a co-employment arrangement offers numerous tangible benefits, including:
Cost savings on HR and benefits
- Studies from NAPEO indicate that businesses partnering with PEOs experience a 27% return on investment (ROI) through cost savings in HR administration and benefits procurement.
- PEOs leverage economies of scale to negotiate better health insurance rates, saving businesses up to an estimated 30% on premiums compared to standalone plans.
Improved compliance and risk mitigation
- PEOs stay updated on evolving labor laws, ensuring businesses remain compliant with regulatory changes such as overtime pay rules and workplace safety requirements under the Occupational Safety and Health Administration (OSHA).
- They assist with Equal Employment Opportunity Commission (EEOC) compliance, helping prevent discrimination lawsuits and penalties.
Enhanced employee retention and satisfaction
- Access to comprehensive benefits packages, including employee assistance programs (EAPs), professional development opportunities, and flexible spending accounts (FSAs), can boost employee morale and reduce turnover.
- According to NAPEO, businesses using PEOs have 10-14% lower turnover rates than those that don’t.
Streamlined hiring and onboarding processes
- PEOs offer applicant tracking systems (ATS), background checks, and onboarding software to ensure a seamless hiring experience.
- They help small businesses attract top talent by offering competitive compensation packages and structured onboarding programs.
Selecting The Right PEO Partner
When choosing a PEO, businesses should conduct thorough due diligence, considering factors such as:
- Accreditations and certifications: Look for PEOs certified by the IRS, ensuring they meet strict financial and ethical standards. These PEOs are called CPEOs.
- Industry experience: Choose a PEO with experience in your specific industry to ensure compliance with sector-specific regulations.
- Service offerings: Assess whether the PEO provides the necessary HR services tailored to your business’s needs, such as recruitment support or performance management.
- Technology capabilities: Ensure the PEO offers user-friendly HR technology solutions for payroll, benefits management, and employee self-service.
By partnering with a reputable PEO, businesses can access valuable resources and expertise that would otherwise be out of reach, creating a more efficient and productive work environment. If you’re considering co-employment, Group Management Services (GMS) can help guide you through the process and tailor solutions that meet your business’s unique needs. Contact us today to learn more about how we can support your business growth and help you reclaim your valuable time.