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What Is Co-Employment and How Does It Work?
What if you could grow your workforce while offloading the added, time-consuming HR work and shirking some of the liability off to someone else?
Well, you can; it’s called co-employment.
Co-employment, also called joint employment or shared employment, is a contractual relationship in which two organizations manage and share responsibility over a group of workers. In this scenario, employees have two employers, each with some influence and control over their employment terms, conditions, and management.
The secondary organization in this arrangement, which takes over the administrative HR functions for the core business, is called a professional employer organization (PEO).
A PEO provides comprehensive HR solutions to growing businesses in transactional, routine areas like processing payroll, managing benefits, enrollment, tax administration, and compliance activities. This arrangement benefits organizations that want to mitigate some of the costs and risks associated with being a growing employer.
Co-employment is not the same as employee leasing, in which a staffing agency hires employees who work for the agency’s clients temporarily. In an employee leasing arrangement, the staffing agency provides businesses with workers, and the staffing agency directly employs the workers.
In a co-employment relationship, employees are directly hired by the business, and their management is shared; day-to-day management plus hiring, firing, and compensation decisions remain largely in-house while administrative tasks get outsourced to the PEO.
Benefits of Co-Employment
Co-employment arrangements offer small to midsize businesses several advantages, including:
- Cost sharing. Co-employers pool their resources and share the financial burden of providing benefits, such as healthcare, retirement plans, and insurance. This leads to cost savings for both employers, making it a more attractive option for small and medium-sized businesses.
- Expanded expertise and resources. Co-employers have varied strengths and bring different areas of expertise and resources to the table. This collaboration leads to improved employee support and development opportunities, as each employer can focus on what they do best (i.e., payroll for PEOs, training for the primary employer).
- Legal compliance. Sharing employment responsibilities helps companies reduce costly compliance and legal risks. PEOs keep up with regulatory changes at all levels, which helps ensure compliance and reduces HR’s workload.
- Scalability. Co-employment provides flexibility to businesses as they grow. Companies can easily adjust their workforce size up or down without the challenges associated with traditional employment arrangements, such as layoffs or a lengthy hiring process.
- Better benefits. Employees working under a co-employment arrangement often have access to a broader range of benefits and resources than they might in a single-employer scenario, including better healthcare options and retirement plans.
Downsides of Co-Employment
Companies use PEOs to manage their growing workforces better and mitigate the risk of that growth. Still, despite the benefits, PEOs can open up businesses to greater risk than reward:
- Lack of control. Co-employers may have to compromise on certain aspects of control over their workforce. This shared control can lead to disagreements over decisions related to benefits, hiring, firing, promotions, and day-to-day management. Plus, outsourcing key HR functions means that most, if not all, of valuable employee data is housed outside of company systems, making it difficult to access it when needed most.
- Gray areas. Co-employment relationships require clear and well-defined agreements between all parties involved. Lack of clarity in a contract can lead to confusion, conflict, and mismanagement––potentially harming employee morale and productivity.
- Legal risks. PEOs are responsible for ensuring their clients comply with various employment laws and regulations (i.e., wage and hour laws). Still, if the PEO fails to fulfill these obligations correctly, it can expose the business to significant legal and financial risks.
- Culture threats. Co-employers often have conflicting interests and priorities when managing their shared workforce. For example, one employer may prioritize cost savings, while the other may emphasize employee well-being. Plus, PEOs often offer a one-size-fits-all approach to HR services and benefits packages, which can be limiting for unique organizations with specific cultural standards.
- Missing value. PEOs typically charge fees based on the company’s employees and the services provided as a percentage of payroll or a flat fee. In some cases, however, the cost of using a PEO may outweigh the benefits, especially for cash-crunched businesses. It’s crucial to perform a cost-benefit analysis to determine if the financial investment in a PEO is right for the organization.
For expert insights into co-employment agreements and how they function practically in the real world, watch or listen to this week’s episode of America Back to Work.
We sat down with Brent Tilson, the founder and CEO of TilsonHR, a national PEO providing a comprehensive suite of business solutions to help businesses grow and thrive, to get his take on the risks and rewards of outsourcing HR in today’s employment landscape.