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Co-Employment: Definition, Benefits & How To Avoid Risks

Co-Employment: Definition, Benefits & How To Avoid Risks

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Small and medium-sized businesses often get entangled in HR-related complications as they do not generally have a separate, dedicated department. This is because HR departments have so much to do – recruitment, employee experience, benefits, local compliance, and more.

As a result, handling HR tasks independently can hamper their operational efficiency and productivity. However, today, many companies are transitioning towards co-employment services provided by Professional Employer Organizations (PEOs). It is an arrangement where specific responsibilities are shared, and risks and fines are mitigated due to collaboration advantages.

What is Co-employment?

Co-employment, also referred to as a co-employer relationship, is a contractual arrangement where an employer and a PEO (or another employer) share specific employment responsibilities and obligations of employing workers. 

In this arrangement, the company oversees the day-to-day core business operations and functions of the workers while the PEO or co-employer takes over HR-related tasks like payroll, benefits, and compliance with labor laws. Such an arrangement reduces administrative burden and allows the company to focus on more vital aspects and less on HR.


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Benefits of Co-Employment

Access to Advanced HR Technology

Several high-quality PEOs possess specialized tools, such as advanced technology and experienced advisors. These resources are utilized to assist businesses in achieving smarter growth strategies. They are skilled in handling workforce issues, keeping up with rules and guiding you in managing different parts of your business smartly, leading to overall growth.

Human Resources Planning and Strategy

Co-employment involves the PEO assisting the company in creating an impactful HR strategy. The PEO suggests effective policies to boost company growth with a better workforce. They also help implement leadership programs and provide educational materials for employees.

Besides planning, the PEO assists with administrative tasks and employee onboarding, allowing the company to shape its HR policies.

Additionally, PEO provides various other HR solutions, including preparing for leadership roles, exit discussions, employee recognition plans, and team-building activities.

Premium Quality Benefits

Imagine having access to resources that provide benefits akin to those enjoyed by Fortune 500 companies. This is a prime reason small and medium-sized enterprises gravitate toward co-employment partnerships. PEOs within co-employment setups offer cost-efficient and top-notch health insurance, which proves to be reasonably priced for these modestly sized businesses. Many also offer benefits beyond medical insurance, including commuter perks, retirement plans, and education reimbursement.

Efficient Payroll Management

Through co-employment, the company streamlines payroll planning and administration. The PEO takes charge of employee compensation, paycheck distribution, and precise salary reporting. Numerous PEOs simplify payroll by integrating it with insurance and compliance services, reducing errors and repetitive data entry.

Additionally, they handle income and payroll tax compliance on the company's behalf, allowing more focus on core operations.

Employee and Contractor Classification 

Co-employers aid companies in accurately distinguishing between employees and independent contractors, avoiding payroll discrepancies. Even one misclassified contractor can disrupt the payroll system. PEOs ensure this does not happen.

Expertise in Regulatory Compliance

An essential advantage of co-employment lies in PEOs' expertise in regulatory compliance. These organizations have experts who oversee regulations for your business. PEOs help companies navigate HR rules, creating strategies to avoid fines. Further, they handle compliance in areas like taxes, policies, and unemployment and workers' compensation claims.

Also Read: Administrative Services Organization- ASO vs PEO

Potential Risks with Co-employment

Co-employment also comes with a few risks— loss of some degree of control over HR, failure to meet compliance regulations, employee concerns, and more. However, the advantages associated with co-employment outweigh these potential risks. Nonetheless, here are a few risks to be aware of: 

  • Firstly, if a PEO isn't IRS certified and doesn't pay employment taxes, the co-employer could be responsible for penalties, even if they paid the PEO for taxes.
  • If a business leaves a co-employment deal mid-year, it might need to recalculate payroll taxes.
  • Often, employees might be confused about which co-employer to get in touch with and who their “real” employer is. This confusion might foster communication challenges and impose job security concerns. 
  • There may also be some contractual disputes. While the contract outlines the arrangement between the company and the co-employer, there may be disagreements and misunderstandings.
  • As co-employment is a shared arrangement, co-employers typically share legal liabilities for all employment-related matters. If they fail to fulfill their responsibilities and obligations, the hiring company also gets affected due to the co-employer’s liability. 

While it's evident that the downsides of co-employment pale in comparison to the benefits, exercising a touch of caution can readily sidestep these issues.

Suggested Read: Factors to Consider Before Choosing an EOR or PEO

Ways to Avoid Co-employment Risks

To avoid avoidable risks, if you're contemplating engaging a PEO within a co-employment context, adopt preventive measures from the outset.

  • Get a legal expert to create and review contracts with the firm, clarifying responsibilities for both parties. Put these responsibilities in the contract to make the agreement solid.
  • After hiring an employee, make sure they understand their employment terms. Formalize a contract with them, showing they know their primary employer.
  • Stay updated on co-employment rules and discuss classifications with staffing agencies beforehand.
  • Train your staff to work well with freelancers and inform them about sharing internal information with contractors.
  • Evaluate why you're considering co-employment to find the right partnership. Outline your needs and explore top co-employment services, making a list of options.
  • Talk to potential partners, address questions, and choose one. Propose a contract after selection.
  • When making a contract, emphasize indemnification language, which clarifies responsibility for claims in case of issues. This part is crucial.

Co-employment vs. Employment Leasing

Co-employment and employment leasing are different ways to manage a workforce.

In co-employment, a business partners with a PEO to share responsibilities for benefits, payroll, and compliance while the business remains in charge of daily operations.

With employment leasing, a staffing agency becomes the legal employer of the workforce, managing administrative tasks while the business still controls operations.

Co-employment vs. Joint Employment 

Co-employment and joint employment differ in how control is managed. 

Joint employment involves both the main business and the co-employer sharing supervision of tasks and work details. In joint employment, they collaborate on team expansion and candidate evaluation. 

Co-employment, however, lets you, the business owner, make hiring decisions and task assignments while the co-employer handles administrative duties.

Partner with Skuad as your global PEO partner

Co-employment offers many benefits by allowing employers to onboard people from a vast global talent pool without any administrative burden. It's a valuable strategy, especially when you want to expand across borders without setting up separate entities in different countries. You can learn more about it and savor co-employment benefits by partnering with Skuad, a reliable global PEO platform.

Skuad's unified platform offers comprehensive services like hiring, onboarding, payroll and compliance with local employment laws in more than 160 countries.

This is achieved without setting up physical offices or legal entities in those locations. Skuad enables businesses to expand their workforce internationally while staying 100% compliant. Book a demo to learn more!


1. What is the relationship between a PEO and co-employment?

A PEO (Professional Employer Organization) and co-employment have a close connection in workforce management. In co-employment, a PEO collaborates with a client company to manage HR tasks. The PEO handles payroll, benefits, and compliance while the client keeps control. This lets businesses focus on their core tasks, using the PEO's HR expertise.

2. What is a co-employment agreement?

A co-employment agreement outlines the terms and responsibilities within a co-employment relationship. It specifies the division of tasks between the client company and the PEO. This agreement clarifies each party's role, encompassing employee compensation, benefits, tax obligations, and more. It aims to establish a clear framework for collaboration while ensuring legal compliance.

3. Is co-employment illegal?

Co-employment is legal. It's a valid setup where a business partners with a PEO for HR management. But it must follow laws. Correctly classifying employees and sticking to rules are crucial for a lawful co-employment setup.











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