By Globalization PartnersFebruary 2020
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Co-employment partnerships with a professional employment organization (PEO) are a unique relationship in the business world. However, the relationship can be confusing, especially when swapped with other terms like “joint employment” or even “employee leasing,” which are not legally the same.
What is the definition of co-employment, and where do PEOs enter the equation? We’re breaking down what is and isn’t co-employment today, plus the benefits of using a PEO partner to provide that co-employment relationship for today’s global workforce.
So What Is Co-Employment?
Co-employment describes the unique contract between a professional employer organization and its client — a separate business organization — to share the rights and responsibilities of a hired employee.
That hired employee works for the client organization, not the PEO. That new employee carries out the designated roles and responsibilities they were hired for while reporting directly to the client organization. The PEO comes into play only as an outsourced management resource handling employee HR, accounting, legal, and tax-compliance activities.
Co-employment is a functional contractual arrangement. For the client organization, the co-employment relationship alleviates considerable administrative burden and compliance risks. For that reason, co-employment contracts with a PEO are immensely popular when companies look to hire full-time workers in other countries but do not want to dedicate resources to opening a subsidiary.
PEOs serve a distinct business niche, allowing organizations of all sizes to conveniently yet compliantly find the talent they need regardless of location. PEOs save client organizations time and money while answering an emerging hiring trend in our modern, globally-connected commercial landscape.
Let’s break down the global co-employment arrangement a little further.
1. What’s the Employer Responsible For?
In a co-employment contract, employers manage everyday activities and core role functions, including:
- The daily roles, responsibilities, and workflows of the co-employed hire
- The co-employed hire’s performance reviews as well as formal and informal appraisals
- The career progression and advancement trajectories of the co-employed hire
- Overall business and employment decisions related to the co-employed hire
What employers don’t need to worry about are the state- or country-specific payroll and commissioning standards surrounding its employees. This is where the PEO steps in, as they are experts across HR, finance, legal, and tax functions and stand ready to share liability and improve your risk management portfolio.
2. What’s the PEO Responsible For?
In the co-employment arrangement, the PEO is responsible for administrative logistics, namely:
- Arranging and administering employee pay, benefits, and insurance
- Arranging and administering employment taxes with the appropriate state and national agencies
- Being the official employer of record for tax and insurance purposes
- Administering workers’ compensation, group benefits, terminations, and unemployment claims, including unemployment insurance and severance, if relevant
Note, again, that the individual employees at hand do not perform work for the PEO. Nor are they outsourced to the PEO at any point in the relationship to conduct even temporary work. Their day-to-day responsibilities lie with their original company — that is, the organization they personally applied to work for or the organization that scouted them out directly.
What Is Not Co-Employment?
Co-employment can be a confusing concept. Even its name triggers misinformation about the nature of the agreement and the expected responsibilities performed by the employee, the PEO, and the client organization.
To clarify co-employment, consider these functions and services which are not involved in a co-employment contract — and are, in fact, entirely separate types of business arrangements.
1. Employment Leasing
Employment leasing refers to an organization providing short-term, project-specific contractors to another organization. These projects have set parameters, including an official start and end date and a project scope with specific, predetermined goals.
Employment leasing is most commonly associated with short-term or specialty staffing agencies. Leased workers perform activities at a client’s site but then return to their staffing agency once a project or contract is complete.
Employment leasing and co-employment differ in several important ways. First, co-employment does not typically operate under a set time frame. Second, PEOs in the co-employment arrangement do not make hiring or staffing selections for the client. Third, in employee leasing, the staffing agency is the only legally responsible employer, whereas, in co-employment relationships, both the PEO and client company share legal responsibility for the employee.
2. Talent Scouts and Hiring Agencies
Many professional employer organizations do not scout and hire employees for you. They also do not maintain a database of “available” talent or any other sort of hiring network for businesses to access.
In other words, a PEO does not automatically participate in any recruiting or hiring negotiations. PEOs step in only after you’ve selected your new candidate. From there, your partner PEO will handle various onboarding logistics, particularly those related to payroll, benefits administration, and tax documentation and filings.
3. Professional Development Instructors
In successful co-employment arrangements, the PEO and the client organization set clear, contractual boundaries between their interactions and dealings with employees themselves.
While both parties do share legal accountability over those individuals, they should not be “double-dipping” into the other’s outlined functions. For example, the PEO is not responsible for employee certifications, clearances, educational courses, or any other formal or informal professional-development instruction. Even though the PEO is the employer of record, they do not assume oversight into employee career progression.
4. Joint Employment
Joint employment and co-employment are often used synonymously. In both situations, two separate organizations share legal oversight and responsibility for an employee or group of employees. However, the two concepts have one crucial difference — the level of input each has on the employees’ day-to-day environment.
In co-employment, only the client organization has direction over the work and responsibilities of its hires — not the PEO. When defining joint employment, though, both entities can give guidance over workloads, daily activities, and employee hours as well as share direct, ongoing control on broader business operations. For example, in a joint-employment contract, a PEO can suggest its partner client hire additional staff, then assist the client in vetting, interviewing, and hiring those new employees themselves.
An arrangement may also be classified as joint employment and not co-employment if it meets the majority of these conditions:
- Both parties conduct employee supervision
- Both parties track employee performance
- Both parties negotiate worker compensation and wages
- Both parties have the authority to discipline and terminate employees
What Are the Risks of Co-Employment?
Like any business arrangement, co-employment opens organizations to new questions and processes. However, these operations can quickly turn overwhelming — and even risk compliance — when mismanaged or neglected.
Consider these top co-employment risks to understand the full nature of using an employer of record service.
1. Tweaking Compliant Internal Processes
The beauty of a PEO-managed co-employment arrangement is the shared division of employee-management duties. For example, PEOs manage payroll and employment taxes, both at the state and federal levels. A PEO can even administer international taxes for employees living and working in foreign countries so its partner clients don’t have to.
However, client organizations are not exempt from tweaking their own administrative processes and paperwork to remain compliant — and in tangent — with their PEO partner, particularly across internal HR and accounting functions. You and your PEO must work together holistically, with your organization maintaining its end of the compliance bargain for the whole to remain compliant.
2. Shared Penalties When Found Incompliant
When PEOs and client companies are operationally out of sync, both can be found liable and face fines, penalties, and even legal repercussions.
The most common instances if incompliance strike around employment law violations — for example, when a hired employee is miscategorized and their taxes aren’t correctly withheld. However, shared penalties also occur in co-employment arrangements when the PEO is not the documented employer of record. Without a clear, in-writing definition of the employer, it’s easier for client organizations to slip into procedures and practices that are actually the PEO’s responsibility and vice versa. Both a PEO and a client organization overlapping responsibilities is one of the quickest ways to muddle a legal co-employment arrangement and open yourself up to incompliance.
For this reason, it’s essential to work with a reputable, well-trusted PEO as well as draw clear language around administrative duties in the co-employment arrangement, starting with an explicit employer of record statement.
3. Improper Onboarding
In a co-employment contract, the PEO is traditionally responsible for the onboarding and administrative orientation of the new hire. During those sessions, the new employee completes all relevant paperwork for smooth HR and accounting tasks, ensuring they’re on the payroll in a matter of days, not weeks like it takes for some domestic and international recruits.
Improper onboarding procedures occur when the client organization performs these administrative hiring logistics rather than the PEO. Mixing these roles, again, opens you up to a joint-employment liability where both parties can be viewed as employers and both be open for lawsuits.
4. Pay and Benefits
Domestic and global PEOs do not set a new hire’s salary. They also do not determine a new hire’s benefits, though they absolutely can advise clients on their legal responsibilities to provide benefit packages to certain classifications of employees.
In particular, global PEOs with an international employer of record platform are instrumental in advising clients on culturally appropriate employee perks and provisions. Global PEOs can help clients navigate a new country’s regulations surrounding employer-side benefits packages, salary expectations, paid-time-off norms, and more. However, these salary figures, benefits, work schedules, assignments, and performance reviews are ultimately the domains of the client organization and part of how they run their business.
5. Domestic Staffing Agency Confusion
Co-employment is a type of business model. As a business model, it’s used across organization types and industries, with one of the largest being today’s burgeoning network of staffing agencies.
According to the American Staffing Association, recruitment firms and other workforce talent agencies are responsible for the placement of 17 million contract, part-time, and full-time employees a year. That’s 17 million individuals whose professional lives operate under co-employment, with their staffing agency acting as the “primary employer” and their host worksite the “secondary employer.”
It’s important to note that a staffing agency co-employment arrangement is not the same as an employer of record. While there are some similarities, employer of record PEOs do not scout talent or serve as a talent liaison for clients. They also do not set an employee’s salary once hired, another key difference compared to staffing agency co-employment. In short, a PEO is not the same as a staffing agency and will not, therefore, support the same kind of co-employment relationship.
How Do PEOs Reduce the Risks of Co-Employment?
Consider how partnering with a PEO delivers all the benefits of outsourced administrative functions — yet reduces the liabilities and loopholes of other co-employment models.
1. Clear Employer of Record
PEOs offer a co-employment arrangement with one of the clearest divisions of duties. That’s because the PEO relationship is built around being the employer of record.
As the employer of record, the PEO is responsible for managing employee taxes, administering payroll and benefits, maintaining insurance certificates, and properly onboarding your hire into their own pre-existing payroll platform. You are not responsible for these activities since you are not the employer of record. Meanwhile, your hire — the one you scouted, vetted, and selected — is assigned to work full-time for your organization, performing the roles and tasks you picked them for.
2. An Expert Business Partner
By using a PEO, your organization can re-focus on core business functions rather than stretch itself thinly across advanced HR, tax, legal, and accounting operations. Outsource those complex and often cumbersome activities to your partner PEO with pre-existing, extensive subject-matter expertise and ready-to-go administrative infrastructure.
From international payroll to deciphering international labor laws to administering competitive benefits packages, the expertise offered by PEOs means risk mitigation and convenience for organizations like yours.
3. Immediate Payroll System
PEO clients have access to an ecosystem of compliant, pre-registered payroll systems already set up in local and even global markets. That means new hires can be expediently onboarded into the system almost regardless of location while still maintaining compliance with employee labor laws.
Access to an immediate payroll platform is particularly beneficial when hiring international employees or expanding globally. Partnering with a PEO alleviates you from the burden of setting up your own foreign subsidiary — and the costs, timelines, legal maneuvers, and financial arrangements inherent in that undertaking.
4. Expedited Onboarding
New hires must be integrated into all your existing finance, payroll, benefits, and scheduling systems. They must also complete all necessary HR-related forms and paperwork, as well as agree to and sign their employment contracts.
While this is relatively straightforward for local in-house employees, what happens when you hire out of state — or out of the country? What if your company seeks to expand operations into a new international market? These onboarding operations become instantly complex, with new employment laws, regulations, tax codes, and contract types to arrange. With a PEO relationship, these complicated and time-consuming activities are taken care of for you.
5. Culturally Competitive Benefits
Global PEOs have both the expertise and the pre-existing platforms ready to offer new hires competitive, localized benefits packages. Amenities from health, vision, and dental insurance to commuter reimbursements, paid holidays, disability, termination pay, and more will vary across states and countries. A PEO shapes package offerings to the employee’s exact location, assuring you support culturally sensitive contracts while adhering to local employment standards and laws.
Partner With Globalization Partners for Your Expansion Resource
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See how we do things differently to make global expansion realistic for businesses of all scales — including yours.
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