Co-Employment

Co-employment is a contractual arrangement where a client company shares certain employment responsibilities with a professional employer organization (PEO). As the co-employer, a PEO provides human resources services and shares some legal liabilities of employment. This article will explore the ins and outs of co-employment, its benefits, potential risks, and how it differs from other employment arrangements.

How Co-Employment Works

When a business decides to work with a co-employer, they sign a written contract called a Client Service Agreement (CSA). This contract establishes both entities (company and co-employer) as legal co-employers and outlines each party’s responsibilities. The co-employer is responsible for the legal aspects of compliant hiring, such as:

• Hiring and firing employees and independent contractors
• Performing work authorization checks
• Assigning workers to jobs
• Pre-screening employees (background checks, reference checks, drug screenings)
• Determining pay rates
• Paying employees and handling payroll taxes and employment taxes
• Complying with employment laws and regulations

Meanwhile, the client company manages the day-to-day work of its employees, including:

• Coaching and supporting employees
• Delegating assignments
• Conducting evaluations
• Measuring workers’ performance
• Specifying the length of employee contracts
• Providing proper work conditions and equipment

Benefits of Co-Employment

Co-employment offers several advantages to client companies, particularly in terms of HR support, talent acquisition, compliance assistance, outsourced payroll, workers’ compensation insurance, and competitive benefits.

Reliable HR Support

Building an internal HR department can be expensive and time-consuming. By partnering with a co-employer, companies can access HR experts and expand their HR offerings without the need for an in-house team. This is especially appealing for start-ups and small businesses with limited resources.

Talent Acquisition

Co-employers can help client companies attract skilled workers by staying on top of the latest work trends, such as the increasing prevalence of contract workers and distributed teams. They can provide advice on sourcing fresh talent and assist with training, onboarding, performance management, and providing competitive employee benefits packages.

Compliance Assistance

Co-employers have risk and compliance experts who keep up with evolving HR regulations and develop protection strategies to avoid fines and penalties. They can assist with employee classification, labor laws, payroll, tax reporting, unemployment and workers’ compensation claims, workplace policies, and data privacy.However, it’s important to note that if a legal issue arises, co-employers will only take some of the legal liability. Since both the company and co-employer are legal employers, both are responsible for the employee and can be held liable for issues like misclassification.

Outsourced Payroll

Companies can outsource payroll to co-employers, who will handle calculating salaries, paying workers, managing withholdings, collecting documentation, and completing employment taxes. This eliminates errors and penalties, providing peace of mind for the client company.

Workers’ Compensation Insurance

Managing workers’ compensation coverage can be stressful for business owners. Co-employers can take charge of benefits administration, ensuring coverage for each client and handling any claims. Experienced agencies may also launch initiatives like training programs and webinars to help companies prevent accidents.

Competitive Benefits

Providing cost-effective yet high-quality healthcare insurance is another reason businesses opt for a co-employment agreement. Many co-employers go beyond essential benefits like dental and medical insurance, offering additional benefit plans such as retirement savings.

Risks and How to Avoid Them

While co-employment offers many benefits, there are some potential risks to be aware of, such as tax errors and worker misclassification. If a co-employer is not certified by the IRS and fails to pay taxes on behalf of the client company or misclassifies a worker, the company could be held partially liable and face penalties. To mitigate these risks, companies should:

1. Use a certified co-employer: Ensure the co-employer is certified by the IRS and the Employer Services Assurance Corporation (ESAC). These governing bodies run thorough background checks and set reporting requirements to ensure co-employers are reliable and worthy of certification.
2. Be diligent about independent contractor classification: Misclassifying workers as independent contractors when they perform the duties of an employee can lead to penalties and legal consequences. Certified co-employers are experts in worker classification and can help avoid these issues.

Common Myths and Misconceptions

There are several common myths and misconceptions surrounding co-employment:

1. Co-employment is bad: Co-employment is not inherently bad. Problems only arise if either entity is uncertain of their roles and responsibilities or fails to comply with employment law requirements. Partnering with a certified company that communicates openly and transparently can prevent issues.
2. Co-employment is risky when hiring independent contractors: Bringing on independent contractors while in a co-employer agreement is not risky as long as they are classified correctly. Great co-employers will offer knowledge and recommendations regarding independent contractors and help navigate classification issues.
3. Using a staffing agency removes co-employment risks: Not necessarily. When a company engages a staffing agency, both entities are viewed as employers and have obligations to the worker. If the staffing firm fails to comply with employment laws, both parties can be held liable.
4. Co-employment replaces the company’s HR team: Co-employment manages the most technical and legally complex aspects of employment, but many companies still have HR teams focused on employee experience, company culture, and performance management. A co-employer can augment the HR team’s capabilities and provide additional expertise and initiatives.

Co-Employment vs. Other Arrangements

Co-employment is sometimes mistaken for other employment arrangements, such as joint employment or employee leasing. Joint employment means that two separate employers govern the same worksite employees, with both parties contributing to a worker’s wage, schedule, and performance supervision. In co-employment, the company is in charge of the hiring process and the workers’ day-to-day work. Employee leasing is an arrangement where a staffing agency provides a business with temporary workers. Once a temporary employee has fulfilled their duties, they return to the staffing company. Co-employers, on the other hand, are not responsible for sourcing new employees on the company’s behalf. If a company decides to stop working with a co-employer, the employees remain with the company.

Choosing the Right Solution

When considering co-employment or other employment arrangements, it’s essential to choose a solution that meets your long-term needs. If you plan to expand internationally, an employer of record (EOR) may be a better fit than a PEO. EORs have local entities and partners in multiple countries, allowing you to hire workers without setting up a branch office. They also provide better employee benefits and insurance, handle international compliance and legal responsibilities, and have no minimum employee requirements. However, if you plan to stay local and retain full legal responsibility for your small contingent workforce, a PEO could be a better choice. PEOs are an excellent solution for businesses that want to offload HR responsibilities to focus on other aspects of the company. In conclusion, co-employment can be a valuable arrangement for companies looking to streamline their HR processes, attract skilled workers, and ensure compliance with employment laws. By understanding the benefits, risks, and differences between co-employment and other arrangements, businesses can make informed decisions about their workforce management strategies.