May 22, 2024

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What Is Co-Employment Under a PEO Arrangement?

PEO services and benefits

Despite the fact that professional employer organizations (PEOs) have been around for decades, they remain somewhat mysterious to American employers. Many employers who have heard about PEOs know they exist but don’t know anything about them – including the concept of co-employment.

Co-employment is a legal arrangement that only exists between an employer and its PEO. Understanding that relationship starts with understanding exactly what a PEO does. According to BenefitMall, general agency that offers PEO services and benefits, a PEO is a type of HR outsourcing provider.

PEOs in More Detail

PEO providers are companies that offer a range of HR services, most of which center around payroll and benefits administration. BenefitMall as a typical PEO will handle:

  • Time and attendance.
  • Weekly payroll processing.
  • Tax withholding and reporting.
  • Employee benefits administration.
  • HR regulatory compliance.

Contracts between employers and PEOs generally contain language that outlines what each company’s specific responsibilities are. That being the case, employers and PEOs are free to divide up the responsibilities as they see fit. The one thing common to all PEO contracts is that they establish the PEO as a co-employer.

What It Means to Be a Co-Employer

As previously stated, co-employment is a legal arrangement. Under the law, employers and PEOs become legal partners as far as employing workers is concerned. However, the PEO becomes the employer of record for all staff members. What does that mean? It means that the law makes the PEO legally responsible for things like payroll compliance and tax reporting.

If the IRS or Social Security Administration have questions about a particular employee’s earnings, they go to the PEO. Tax documents filed on behalf of employees are filed by the PEO. Pretty much anything dealing with payroll, benefits, and workers compensation is the legal responsibility of the PEO.

What is the original employer’s responsibility? Original employers maintain control over day-to-day operations. They assign employee roles and tasks. They establish work schedules. They handle hiring and firing, recruiting, and so forth. Original employers even maintain control over determining compensation.

Why an Employer Would Contract With a PEO

With a basic understanding of co-employment under a PEO arrangement, you might be wondering why an employer would enter into such an arrangement at all. It boils down to priorities. HR is complicated enough without worrying about payroll and benefits. But when you add payroll and benefits to the equation, HR gets extremely complicated.

You may have a company that relied on ownership or management to handle all things HR while the company was small. For a time, everything worked out well. But growth has made managing HR functions too much for ownership or management to handle. They now have a choice to make – hire additional HR staff or outsource.

Some choose to keep HR in-house from top to bottom. Others maintain control over most HR functions but still choose to outsource payroll and benefits. Still others choose to go the PEO route. Contracting with a PEO not only eliminates the burden of having to handle HR, but it also shifts some of a company’s legal responsibilities to the PEO partner.

Co-Employment Benefits Both Parties

The co-employment relationship works when both parties benefit. Most of the time, this is exactly what happens. PEOs benefit by selling their services to employers. Meanwhile, employers benefit by being able to offload most HR functions without giving up control of day-to-day operations.

And what about employees? In nearly every case, they don’t notice any difference. All things remain the same for them, at least for practical purposes. Co-employment only affects their employer of record. The original employer is still the boss.