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What is Co-Employment?

If your company decides to partner with a professional employer organization (PEO) for HR outsourcing services, the first step will include signing a co-employment contractual agreement.

So, what is co-employment? In short, it’s an agreement that allows your PEO to share HR-related responsibilities with your company. In this article, we’ll dive deeper into how this unique structure works and the benefits and risks of co-employment.

Two men shake hands in an office setting.

How does co-employment work?

Co-employment is a concept that is often misunderstood, so first and foremost, it’s important to understand that co-employment does not mean you lose control over any part of your business.

When you engage a PEO, you and your professional employer organization enter into a co-employment relationship that allows the PEO to handle HR administrative tasks on your behalf, such as HR management, payroll processing, benefits administration, and compliance assistance. You continue managing your employees, handling operations, and making any and all business decisions. Through co-employment, a PEO is essentially giving you time back to focus on your core business, rather than spending valuable hours on HR.

Let’s break it down another way. Below is a sampling of typical business-related responsibilities you are likely juggling today, and who would handle each under a co-employment agreement with a PEO.

You & your business

Business Responsibilities

Your PEO

Makes personnel decisions
(Who to hire, fire, promote)

Manages operations

Makes business decisions

Onboards new employees
(I-9, enter employee data, benefits enrollment, etc.)

Provides and supports HR-related technology
(Payroll, time and attendance, learning and performance management systems, etc.)

Withholds and remits payroll taxes

Processes payroll & delivers paychecks, direct deposits

Sets wages & salaries
(Including bonuses)

Determines company holidays and PTO policy

Chooses benefits plans to offer employees based on needs & budget

Administers employee benefits
(including open enrollment & assisting employees)

Provides workers’ compensation and manages claims

Supervises employees on daily basis
(including performance reviews)

Manages company and departmental budgets

Remits corporate taxes

Provides regulatory guidance on workplace-related requirements
(OSHA, FMLA, FLSA, etc.)

Responsible for compliance with workplace-related requirements

Processes and distributes W-2s

Answers HR-related questions for employees

Provides strategic guidance on HR matters

In addition to offloading time-consuming HR duties, many of the tasks that you handle related to your employees – such as, setting wages, creating policies, or choosing benefits – become easier when you have your PEO’s team of HR experts by your side to provide insights and guidance. Ultimately, though, you make all final decisions related to your business.

What is an example of co-employment?

The best examples of co-employment come from small-business owners who know first-hand the benefits of using a PEO.

For example, a building controls supplier partnered with G&A to grow their business and ensure a smooth onboarding process as it acquired several smaller companies, while another business owner improved operational efficiency so he could pursue his dream.

Discover more client stories from G&A Partners or dive into our case studies for more examples of co-employment and how it has benefited our clients.

Benefits of co-employment

While partnering with a PEO can help you realize a number of long-term benefits, some benefits of co-employment can be seen almost immediately, such as:

  • Offloading HR administrative tasks so you (and your employees) have more time to focus on your core business.
  • Access to a wide range of high-quality, comprehensive employee benefits that can save your organization money and lead to improved employee retention and recruiting.
  • Better and integrated HR technology that helps streamline daily HR tasks.
  • Guidance on workplace requirements to help avoid costly noncompliance penalties.

Then there are the benefits of co-employment that give you the strategic tools needed to build a strong company culture. When you partner with a PEO, you get access to HR experts who can:

  • Help you build a safer and more inclusive workplace.
  • Advise you on how to properly handle tricky HR situations.
  • Help you navigate upcoming trends or common HR issues.

Is co-employment a risk?

By choosing a certified professional employer organization (CPEO) – one that is reputable and has years of experience – you can minimize any potential risks associated with engaging in a co-employment agreement.

The IRS states that “becoming and remaining certified as a CPEO means that a PEO has met the background, experience, business location, financial reporting, tax compliance, and bonding requirements described in the statute and regulations of the CPEO program.”

Working with a PEO that is not certified by the IRS has consequences. If that PEO fails to pay payroll-related taxes on your behalf, you can be held responsible and be penalized.

How to avoid co-employment issues

Finding the right fit for your unique needs and doing thorough research before choosing a PEO are essential to avoiding issues down the road. It’s important to:

  • Choose a PEO that is certified
  • Ask to see audited financial statements and local, state, and federal licenses
  • Research recent awards or accolades, and check references

It’s also critical that you understand your role in a co-employment agreement. Though the PEO is handling many HR responsibilities on your behalf, they are not responsible for ensuring you’re following workplace requirements or classifying your employees appropriately. They can only offer guidance on how to comply with workplace laws and regulations. So, if an employee files a complaint during co-employment, any legal issues are your responsibility.

These co-employment DOs and DON’Ts will ensure you get the most out of your PEO:

Co-employment DOs
(that will lead to a successful arrangement)

Co-employment DON’Ts
(that may negatively impact co-employment)

Do understand the PEO’s role and what they can (or cannot) handle on your behalf. For example, a PEO won’t settle employees’ HR complaints.

Don’t ask your PEO to create employee policies. A PEO can advise you on best practices and guide you, but the policies must come from you.

Do ask your PEO how the latest workplace laws and regulations impact your business.

Don’t expect your PEO to discipline or fire employees for you. They can guide you through the process, however.

Do ask for a detailed list of services a PEO provides before signing a contract.

Don’t expect your PEO to file and pay your corporate taxes. A PEO only handles payroll-related taxes on your behalf.

Do consider your PEO as a trusted HR partner who can guide you through strategic initiatives to elevate your employee experience.

Don’t avoid tricky employee situations, but rather lean on your PEO for guidance.

Do utilize the expertise of your entire PEO team, from payroll and benefits to safety and compliance.

Don’t forget to ensure the payroll data you provide your PEO is accurate, so they can properly process it and remit payroll taxes.

Why G&A

Co-employment is a strategic relationship with a PEO that empowers you to unload the burden of time-consuming HR and instead focus on the reason you started your business – to achieve your dreams and pursue your passions. At G&A Partners, our team of HR experts have proudly supported thousands of businesses nationwide and across multiple industries – helping their organizations (and their employees) grow and thrive. Schedule a consultation with one of our HR experts to learn how G&A can help you.