If you run a business, maybe you’ve heard of the term co-employment. Chances are you came across it while looking at HR solutions or options for providing your team with access to benefits. Professional Employer Organizations, or PEOs, are structured on the co-employment model.
A healthy relationship between a business and a PEO or co-employer can play a part in significantly alleviating day-to-day administrative burdens, as well as help businesses mitigate employment tax risk.
Before we get into how co-employers do this, let’s define co-employment.
Psst… Want to learn more about PEOs? Download our free ebook that explains Why PEOs are Advantageous for Small Businesses.
What Is Co-Employment?
According to the National Association of PEOs, co-employment is “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).”
In English? Co-employment allows small- to medium-sized businesses to outsource certain HR and payroll functions to a PEO.
Get the guide on how PEOs work for small businesses.
How Does Co-Employment Work?
If your business decides to work with a PEO, you’ll enter into a co-employment arrangement. That means you’ll continue to employ your employees, but a PEO will become a co-employer with you to help administer certain employer-related responsibilities and ease the burden of payroll, benefits, and HR administration.
In particular, co-employers will help your business with the following:
Running Payroll Functions
Think automated deposits, one-off payments, and payroll tax filings. Co-employers will help administer payment to full-time and part-time employees (salaried and hourly), and sometimes vendors and contractors, as well. For this reason, your employees will see the PEO’s name, e.g., Justworks, on their paychecks. In sum, a PEO handles the nitty gritty of payroll administration, so you can focus on running your business.
Employment Laws & Tax and Reporting Forms
A co-employer will usually offer compliance support for certain employer taxes, employee tax forms, and reporting forms. That might include specified forms, such as:
Employer payroll tax filings on Forms 940 and 941
Forms W-2 and 1099
Forms related to R&D Tax Credits
...and the list goes on. Taking these bureaucratic tasks off your plate often helps employers focus more on the core functions of their business.
Managing Employer Risks
Every day, employers take on risks — even if their business is in a quiet, white-collar office environment. An co-employer will help manage risks like unemployment claims and workers’ compensation. They’ll also help provide you with additional safeguards for your business, such as access to Employment Practices Liability Insurance, or EPLI.
Generally, EPLI covers employment claims alleging wrongful termination, discrimination, harassment (including sexual harassment), and retaliation. Depending on the program, EPLI may also provide coverage for other employment-related claims such as defamation or invasion of privacy.
Having a co-employer to help manage certain risks can assist in keeping your company safe in the long-run in case something unexpected should arise.
Related article: A Starter Guide to Addressing Sexual Harassment in the Workplace
Administering benefits can be a whole job — or department — in and of itself. A co-employer helps with different types of benefits administration, such as benefits onboarding, claims, and other benefits-related paperwork.
A co-employer can also help with access to high-quality benefits for your team that you may not otherwise be able to afford. That’s because the co-employment model typically aggregates the employees of many small business together to harness the buying power normally reserved for much larger businesses.
Advantages of Co-Employment
There are plenty of reasons employers opt for a co-employment arrangement. They include having:
Access to top-notch, affordable benefits usually reserved for much larger corporations
More time to focus on the actual business, and not its payroll and benefits administration
Trusted support for HR and compliance issues
Higher levels of employee retention than companies that don’t use a PEO
A level playing field to compete for talent with other businesses
Disadvantages of Co-Employment
If you don’t want your payroll, benefits, HR, and compliance support centralized in one place, it might not be the right fit for you. However, most small business owners find a high level of convenience in consolidating certain HR functions so they can focus on the real work of running their business.
Risks of Co-Employment
Because co-employers and PEOs are so closely involved with employers’ payroll taxes, one of the greatest risks is entering into a co-employment relationship with a PEO you can’t trust. That’s where a Certified Professional Employment Organization (CPEO) comes into play.
The IRS certifies some PEOs that meet tax status, background, experience, business location, financial reporting, bonding and other rigorous requirements. According to the IRS, “Generally, the CPEO is solely liable for paying the customer's employment taxes, filing returns, and making deposits and payments for the taxes reported with regard to remuneration it pays to work site employee.”
In other words, by not teaming up with a CPEO, you are possibly leaving your organization responsible for employment tax responsibilities that could otherwise be alleviated by a CPEO co-employment relationship.
Justworks Can Help
We built Justworks as a PEO because we believe the co-employment model works better for entrepreneurs who are serious about taking care of their teams and the IRS has deemed us as a Certified Professional Employer Organization.
To service you best, we’ve built simple, fast and automated software that you and your team can access online anytime.
Learn more about how we can help your business at Justworks.com.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.