Last Updated: February 08, 2023

How Does Co-Employment Work? Reviewing PEO Co-Employment Laws message: Let us do the work for you. Answer a few short questions & get cost estimates for your needs from trusted employee leasing companies who service your area. Our service is 100% free!

Partnering with a professional employer organization allows you to focus your efforts on the revenue-generating portions of your business, because your PEO partner handles HR-related tasks such as payroll, benefits, and regulatory compliance. You and the PEO form a co-employer relationship with your employees. As with everything labor-related, laws and regulations guide you and your PEO. Your client service agreement (CSA) defines the roles and responsibilities of each partner.

What Is Co-Employment?

When you enter into an agreement with a professional employer organization, you become co-employers, meaning that your employees have two employers – you and the PEO with which you partnered. You are the Worksite Employer and control your employees' daily duties. The PEO is the Employer of Record and controls all functions typically handled by a human resources department. This includes payroll services, benefits management, and more, depending on the services agreed to and outlined in the CSA. The Worksite Employer (you) maintains control of the business itself, making all decisions affecting the company. However, decisions directly related to personnel, such as terminations, are made jointly between the two co-employers.

Companies choose to enter into partnership with a PEO for a variety of reasons.

However, two items stand out. The first is the ability to outsource a time-consuming function that requires highly specialized knowledge that the average employer does not have. This allows you to channel your energies into managing and growing the business while the PEO handles the time-consuming administrative tasks inherent in HR, such as collecting and depositing taxes and handling federal and local compliance issues.

The second reason many companies enter into a co-employment relationship with a PEO is that it allows them to offer employees comprehensive benefits packages typically unavailable to smaller businesses. This helps attract top talent in your industry, further increasing your competitiveness and ability to grow your business.

How Does Co-Employment Work?

You and the PEO each have distinct roles and responsibilities as co-employers, but there will also be shared duties. These roles and responsibilities vary according to the contract signed and the PEO services you choose. For example, some PEOs offer full-service HR support, including handling the recruitment process, annual reviews, and terminations. Typically, though, this is an extra feature, not part of a standard package. It is up to the Worksite Employer to determine which HR services it wants to continue to perform and which responsibilities it prefers to transfer to the PEO.

The business owner provides his or her employees the resources needed to do the job, such as a desk, computer, or relevant tools. While the business provides the workspace, the PEO may offer assistance in ensuring the worksite is safe and compliant with regulations. This is an example of a shared responsibility. PEO responsibilities typically include providing benefits, processing payroll and distributing pay, providing workers ' compensation and unemployment insurance, and handling these claims.

Complying with Employment Laws

The CSA must clearly delineate the responsibilities of each party in order to remain in compliance with labor laws. As co-employers, you each have responsibilities toward your employees. The regulations pertaining to each partner vary according to the terms of your agreement and which responsibilities you share and which belong to only one party. For example, the Worksite Employer must follow OSHA (the Occupational Safety and Health Act) guidelines to guarantee a safe workspace for its employees. But, depending on the agreement, the PEO also follows OSHA guidelines, or at least offers assistance to the business owner in interpreting and following these guidelines.

Common labor laws include:

  • Title VII of the Civil Rights Act of 1964: Prohibits employers from discriminating against employees based on sex, race, color, national origin, and religion
  • The Equal Pay Act: Intended to abolish wage disparity based on sex or gender
  • The Americans with Disabilities Act of 1990 (ADA): Prohibits discrimination against people with disabilities in all areas, including employment
  • The Occupational Safety and Health Act (OSHA): Ensures worker and workplace safety
  • Federal Labor Standards Act (FLSA): Creates minimum wage and hour protections for employees, with states having the right to set higher standards than the federal guidelines
  • Family and Medical Leave Act (FMLA): Requires employers to provide employees job protection and unpaid leave for qualified family and medical reasons
  • The Uniformed Services Employment and Reemployment Rights Act (USERRA): Establishes the rights and responsibilities of service members and their civilian employers

This is not an exhaustive list of all of the regulations surrounding employment, particularly as it does not include regulations found within state statute.

In addition to ensuring the business owner remains compliant with the above-referenced laws, the PEO also monitors compliance with all things payroll, including withholding and paying taxes. The PEO must also ensure that all medical insurance packages offered are compliant with the Affordable Care Act. In addition, it acquires the requisite insurance policies, such as workers' compensation and liability insurance.

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