Small and medium-sized businesses often find themselves caught up in complicated HR-related management and administration. Businesses may end up compromising on their operational efficiency and productivity by managing their HR activities on their own. However, for any company, minimizing risks and maximizing their human resources potential must be a priority for growth. To achieve this, some companies are shifting towards co-employment services offered by Professional Employer Organizations (PEOs).
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What is Co-Employment?
Co-employment means that two different organizations divide employer responsibilities between themselves. Often, co-employment involves a client business and a Professional Employer Organization (PEO).
Usually, this type of co-employment arises via a client service agreement in which the PEO agrees to become the co-employer or employer of record for its client. In such an arrangement, both the company and the PEO hire the employees. The company manages performance, targets, and control over employee roles. On the other hand, the PEO handles the administrative and compliance tasks associated with the employees. This is similar to arrangements also known as ‘employee leasing‘.
Co-employment is a common operating model for national PEOs operating in the US.
In summary, the control over the following functions remain with the original company:
- Business operations
- Daily tasks and performance of job activities
- Communication over the employee’s targets.
The PEO takes care of the co-employment tasks related to the backend management of the employee. This includes:
- Locating and recruiting employees (upon request)
- Managing payroll and other employee benefits
- Maintaining the employee database.
- Deducting applicable taxes
- Complying with the local tax and regulatory laws
- Performing employee surveys and exit interviews.
Benefits of Co-Employment
An expanding company that opts for co-employment services can benefit in multiple ways by hiring a PEO as its employer of record. One of the primary benefits of co-employment is that the PEO assumes the company’s legal and administrative responsibilities towards employees, freeing it to focus on core business. Let’s look at some of the other benefits of co-employment:
- Streamlined HR Management
- With a PEO, the company can streamline HR management of employees. As an HR specialist, a PEO enables small and medium-sized enterprises to compete with large organizations in terms of HR quality. It also effectively allows client companies to draw on the economies of scale of a large organization and provide more competitive packages of employee benefits.
- Commonly, a PEO can provide and source the following additional employee benefits: Medical, dental and health insurance, retirement/pension schemes, accidental and life insurance, disability benefits, traveling benefits, educational allowance, rent allowance.
- Since a PEO has an extensive network of local vendors, it can create an appropriate and affordable employee benefits package for the company in any country, state or region it seeks to expand into. The PEO can also handle the negotiations with benefits providers, manage employee enrolments and registrations, and ensure timely execution of such benefits. This way, a client company can attract top-quality talent similar to its large counterparts.
- Efficient Payroll Management
- With co-employment, the company can also make its payroll planning and management more efficient. The PEO takes care of the employee compensation and paychecks, along with the proper reporting of salaries. It also manages employee income and payroll tax compliance on behalf of the company. This leaves the company room to focus on improving its own core business.
- As part of its payroll management, a co-employer PEO can also help the company accurately identify its employees and independent contractors and categorize them correctly. Misclassification of even a single contractor can impact the entire payroll system of the company.
- Employee Benefits Coverage and Claims
- In a co-employment arrangement, the PEO handles all the claims relating to workers’ compensation, retirement benefits, leaves, holidays, etc. It also protects the company as it gets coverage under the policies applied by the PEO. When it comes to employee claims, a PEO can take care of the wrongful termination claims, investigations, workplace harassment claims, on-the-job injury, etc.
- These events may even result in a legal suit against the company if not handled properly. A PEO can also take all the preventive measures to ensure that no compensation claims or complaints go unanswered. A PEO does this while also ensuring that the costs for the company remain low.
- HR Planning and Strategy
- Co-employment also means that the PEO will help the company formulate a robust and effective HR strategy. A PEO can suggest the right policy measures that can help the company expand its human capital and grow. Along with planning, the PEO also helps with the paperwork and onboarding formalities, and enables the company to design its HR policies and processes.
- The PEO also helps the company to implement efficient leadership development and training programs, and curate knowledge material for the employees.
- From succession planning to conducting exit interviews, from building employee recognition plans to performing relationship-building exercises, a PEO offers a wide variety of co-employment services.
Myths About Co-Employment
Many companies are confused about what to believe about co-employment and what it means to hire a PEO. Here are some of the most common myths about co-employment:
- Co-employment Means Losing Business Control
- One of the most common misconceptions about a PEO is that co-employment will lead to the company losing control over its HR functions. However, in reality, the company is only delegating its employment responsibilities to the PEO while still controlling core business decisions. It should be noted, as well that the scope of a PEO’s co-employment responsibilities are limited by the engagement agreement with the client company.
- Employees Do Not Accept Co-employment
- Many business owners think that their employees will be unhappy if an outsider manages their employment. However, with a PEO, the payroll, leaves, benefits, etc. are processed more promptly, improving the employee-company relationship.
- There are no effects on an employee’s productivity or core job functions since the PEO only takes care of the administrative part of their employment.
- Co-employment Replaces In-house HR
- Some HR professionals may think that a PEO will take their place and render them unemployed. However, for a PEO to work effectively, large and mid-sized companies need an internal HR department. A PEO can align its activities with the in-house HR team to ensure uninterrupted management of the workforce. This way, the HR team no longer requires to perform repetitive HR tasks and can focus on the holistic growth of the human capital
Choosing the Right PEO for Co-Employment
Managing the multifaceted HR functions can be challenging for a company, especially a young startup or a small enterprise. A PEO can simplify the HR responsibilities of the company by becoming its co-employer.
Horizons offer an array of personalized co-employment and market entry solutions for all your HR and expansion requirements. Contact us today to learn more about our peerless co-employment solutions for your business expansion and management.
Frequently asked questions
Co-employment risk (or ‘co employment risk’) is the risk that a company will be classified as a co-employer by the authorities, without any desire from the company to be classified in that way.
The best way to mitigate this risk is to have a clear agreement with a PEO which sets out the responsibilities of each party
Co-employment issues may arise where there are three parties involved in an employment situation (such as an employee, the company that employee works in (the client company), and a third party contracting agency). It is possible for the authorities to interpret both the client company and the contracting agency as co-employers and liable for employer obligations.
The best way of managing potential co employment issues is to have a legally compliant agreement between the client company and the third party clearly establishing the responsibilities of each.
