Co-employment Business Model

Co-employment is a business model used by professional employment organizations (PEOs) to partner with small to mid-size businesses to cost effectively outsource the management of human resources, including employee benefits administration, safety and risk management, regulatory compliances, tax filings, payroll processing, workers compensation and other employee-related benefits and services.

The business organization (client) and PEO co-employment relationship is a contractual allocation and sharing of certain employer responsibilities as defined in a client service agreement. The PEO assumes specific employer rights, responsibilities, and risks by the establishment and maintenance of a relationship with the employees of the business organization (worksite employees).

The roles of the business organization and the PEO depend upon the circumstances as employment responsibilities are assigned in the client service agreement. Each party is responsible for certain employment obligations while both parties share responsibility for other obligations and be an employer but neither party is the employer for all purposes.

Once a business organization contracts with a PEO, the PEO will then co-employ the business worksite employees. The co-employment relationship is established among the PEO, the worksite employees and the business organization. The PEO and the business organization have separate relationships with worksite employees. The PEO engages with worksite employees with respect to specific matters involving human resource management and compliance with employment requirements, while the business organization directs and controls worksite employees in the day-to-day business operations as well as the manufacturing, production, marketing, sales, service, and delivery of its products and services.

The business organization has responsibility to provide the worksite employees with the tools and instruments to perform work in a worksite that is safe, conducive to productivity, and operated under best practices with employment rules and regulations.

Co-employment responsibilities

As co-employer, the business organization retains the management of business operations including employee hiring and termination and the management of the duties and core functions of the worksite employees. As co-employer, the PEO supplies the business organization with benefits and services for worksite employees. In brief, the business organization controls business decisions while the PEO manages employee-related HR responsibilities.

A professional employment organization can assist the business organization in managing employer obligations for wage and salary reporting, payroll processing, employee benefits, HR compliances, risk management, employment taxes, unemployment processing, and workers compensation insurance and claims management. Employee benefits can include medical, dental, and vision coverage, flexible healthcare spending accounts, 401(k) retirement accounts, life insurance, short-term and long-term disability insurance, COBRA, and other employee-related benefits/services. The PEO is the benefits plan sponsor and as such, responsible for management and administration of benefit plans.


The PEO provides compliance support for government tax and reporting forms including employer payroll tax filings, W-2s and 1099s, COBRA forms, EEO-1, and regulatory filings.

The PEO can assume the business organization’s workers compensation risk by providing coverage under a policy sponsored by the PEO. The co-employment agreement allows the PEO to investigate claims, communicate with injured worksite employees and their health care providers, and help with the return to work requirements for the worksite employee. The PEO can assist the business organization with proactive measures such as onsite inspections, safety recommendations, and safety training to minimize workers compensation claims and in defense of liability claims brought against the business organization. Measures such as these can help in reducing costs as well as help to prevent injuries in the workplace.

The PEO provides HR support and planning to help the business organization grow and expand. Growth of the business may require corresponding need for additional worksite employees and HR services. A business organization benefits from co-employment agreement for PEO services to manage new hire paperwork, employee onboarding, develop a baseline compensation/wage framework, develop and implement employee training courses for worksite coaching, development, and online learning; develop organizational charts, assist with performance management, write job descriptions and job duties, and develop recognition and reward employee programs.

The administration of employee benefits and perhaps more importantly, the offering of high quality benefits packages at affordable rates, is attractive to potential job candidates and beneficial to current worksite employees.


The business organization must take several factors into consideration when researching PEO providers. While the cost of a PEO co-employment agreement is usually a decisioning factor for many small businesses, the pricing of a co-employment agreement can vary depending on the number of employees to be covered (minimum required), the plan structure for employee benefits and services (standard or customized), and contract terms and conditions (contract period, cancellation). Generally the pricing structure is one of two options – a charge per employee or a charge based on a percentage of the business’s total monthly payroll. Pricing may also be dependent upon whether the services are bundled in a standard package or customized to the requirements of the business organization.

Considerations also include the time to conduct due diligence to research PEO candidates qualifications including certifications and client recommendations in order to make an informed business decision. A business organization should first review its own business structure, resources, capabilities, and goals to determine the feasibility of a co-employment agreement. The organization will need to analyze current operations and evaluate the potential gain or trade-offs associated with co-employment.

Benefits and limitations of co-employment

In general, businesses that have outsourced HR management to PEOs cite the following benefits of a co-employment partnership:

When HR management and administration tasks are transferred to the PEO, the business organization has time to focus on its business development;

There is less organizational stress due to regulatory compliances being managed by the PEO – federal, state, and local agencies reporting, filing, and payments are scheduled for timely compliance.

The National Association of Professional Employment Organizations (NAPEO) cites study data that:

Businesses in a PEO arrangement grow seven to nine per cent faster than those that do not use a co-employment agreement;

Businesses with co-employment arrangements have a ten to fourteen percent lower turnover ratio of employees;

Businesses that partner with PEOs are fifty percent less likely to go out of business;

Small to mid-size businesses that partner with a PEO are more competitive with larger companies;

More affordable benefits and insurance offerings are attractive to employees and job candidates; and

Improved compliance for regulatory issues help reduce risks.

However, there can be limitations as well in a PEO co-employment arrangement. The flexibility and choice of insurance packages that can be offered to worksite employees may be limited due to fixed, existing contract arrangements between the PEO and insurance providers.

Business organizations may need to adjust to new policies regarding employee relations;, transitioning worksite employees from an in-house HR staff to the PEO’s more formal staffing department for questions regarding benefits and services may take some getting used by the worksite employees.

Contracting with a PEO for co-employment does not eliminate liabilities. The business organization and the PEO have shared responsibility for employment liability and must be aware of potential risks.

A key point to keep in mind is that business organizations retain ownership and control over their business. The scope of employment responsibilities and liabilities for co-employers is defined in the client services contract between the organization and the PEO.

However, utilizing a co-employment agreement with a PEO allows business organizations to focus on growing market share and increasing revenues while providing employee benefits and services in a cost efficient manner, some benefits and services of which may have not been possible using in-house resources.

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