What is Co-Employment and is it Right for your Small Business?

When you place a portion of your business in the hands of another organization or company, you’re starting to delve into the realm of co-employment. Entering into a …


coemploymentWhen you place a portion of your business in the hands of another organization or company, you’re starting to delve into the realm of co-employment. Entering into a co-employment relationship benefits both corporations, as one needs your business and the other needs compliance. However, not understanding the fundamentals of co-employment comes with risks.

What is Co-Employment?

Co-employment is what happens when two or more parties enter into a cooperative relationship, but with the added benefit of sharing legal responsibility. A co-employer usually takes over the client’s employment and administrative tasks, but unlike independent contractors who simply just work for you, a professional employer organization (PEO) will share liability.

Companies will hire PEOs to place reputable and qualified workers at the helm of specific operations. When both parties enter into a contractual agreement, the employer won’t have to face financial or legal responsibilities if the PEO makes a payroll, staffing, or tax error.

Co-employment can be full or part-time based on your needs. An organization with over 100 employees would want a full-time PEO, whereas a small business may need one once a week.

Using a Certified PEO (Vs. an Uncertified PEO)

The benefits of onboarding a PEO are numerous, but before we get to how they can help your business, let’s discuss the difference between a CPEO and a Non-CPEO.

CPEOs need to go through a certification program from the Small Business Efficiency Act (SBEA) to become certified, but that won’t stop them from practicing. Without certification, the PEO won’t receive certain financial and legal protections, meaning you won’t either. To pass the test and become certified by the IRS, a PEO will have to learn or submit the following:

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  • Bonding: The applying PEO has to submit proof to the IRS of a bond greater between or equal to 5% of the firm’s federal employment tax liabilities of the past year, or a $50,000 bond exactly. PEOs must pay this fee, or they won’t be certified.
  • Annual Audits: PEO’s must submit audits to the IRS annually without lapse.
  • Annual Fee: A PEO must pay a fee of $1,000 annually to stay certified.
  • Quarterly Attestations: PEOs require quarterly proof of payment for employment tax.

Why is that important? If the PEO isn’t aware of these markers, that guarantees they aren’t certified. Without doing the bare minimum, a PEO won’t be able to give their clients some wage base tax restart eliminations, liability for tax purposes, or federal tax credits.

What Does a Certified PEO Offer Businesses?

Companies that work with a CPEO have significantly increased their core strengths and minimized their downtime. Some of the biggest advantages of hiring a PEO include.

1. Access to Better Benefits

Paying benefits to your employees is expensive and even more so at the highest level. Businesses that hire a PEO will gain access to high-quality, cost-effective health insurance that would have been out of reach for most small companies. PEO’s may also handle the enrollment of these services and educational services that help employees make better package choices.

2. Reduced Liability

A PEO specialist will take a share of your legal liabilities and responsibilities as part of your co-employment agreement. For small businesses, this peace of mind can do wonders for their overall stress levels. If a mishap does occur, a PRO can protect them from legal repercussions.

3. Comprehensive Payroll

Employers that don’t want to handle payroll on their own can hire a PEO to do this work for them. It’s better to hire professionals because payroll mistakes can cost you big-time. A PEO can help pay employees, calculate wages, and will have full knowledge of the ever-changing tax laws. Some PEOs can use timekeeping services to automate part of the process.

4. HR Support

Many PEOs will handle administrative tasks related to HR work, like speaking to employees who have a complaint or hiring and training new workers.

5. Workers Compensation

Worker’s compensation insurance is pricy, especially for startups. However, A PEO can offer coverage for clients just in case an employee is injured on the job. A PEO can also conduct safety audits or training programs that may limit accidents in the future.

6. Lower Cost

Hiring payroll staff in-house can be incredibly expensive, but a PEO will lower your overhead costs. As a positive, PEO’s pay per employee, so small businesses can save more for scaling.

7. Higher Employee Retention Rates

Employees that work for companies with better benefits are more likely to stick around. In addition, a PEO can screen staff more effectively to ensure an employee is fit for the job.

What Are the Risks Involved With Hiring a CPEO?

The risks of hiring a CPEO are few, but if a PEO isn’t certified with the IRS, then the risks are plenty. First, ensure the PEO is certified to limit most of your risks. There are a number of things you can do to protect your business reputation and your clients even further.

  • Speak to a contract lawyer to review or draft a contract.
  • Write on the contract a full list of responsibilities for both the PEO and business.
  • Exclude or require a signature for contract workers if they’re receiving a benefits plan.
  • Prevent clients from overstepping their bounds by exerting control over employer tasks.

As an alternative, you could hire a back office or company that will help you avoid co-employment issues. 

Is Hiring a CPEO Beneficial for Your Business?

Small businesses that need payroll services and also don’t wish to pay for in-house HR staff – who also should follow some best practices – should hire a CPEO. Not only do they keep your business safe from legal issues, but they take on a bulk of your employment, tax, and HR responsibilities. A large business may hire a CPEO to help their in-house HR staff complete tasks at lighting speed. 


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