When you partner with a PEO, you enter a co-employment relationship. That relationship offers a lot of benefits to small businesses, including vendor management, benefits administration, recruiting assistance, and more.
But it can also feel intimidating. Will you lose decision-making power? Will you be subject to the whims of a larger entity? Will your business become impersonal?
To answer these questions, let’s take a look at what co-employment actually means. Then, we’ll address some common concerns small business owners have when partnering with a PEO.
Co-Employment: A Mutually Beneficial Partnership
Co-employment means that two employers share responsibility for the same employees. Each one has specific legal obligations to meet and each shares the risk associated with employment. The business owner manages daily duties and job functions, maintains full control of all business decisions, and oversees hiring, terminations, growth activities, and operations. The PEO, as co-employer, manages functions related to HR and personnel, including payroll, taxes, benefits, recruiting, compliance, and workers’ compensation.
Answers To Your Co-Employment Questions
This definition still leaves a lot of questions unanswered for the small business owner. Here are some that we frequently encounter:
Why does HR outsourcing use a co-employment model?
Not every outsourcing model uses co-employment. The PEO is unique in that the PEO provider becomes the employer of record and will file taxes under their Tax ID number. This benefits you as the business owner in several ways:
- Shared Risk – The PEO shares risk associated with compliance, benefits, and workers’ compensation.
- Economy of Scale – Because the PEO acts as the employer of record for many clients, they have access to better benefits and insurance rates that are usually only available to large employers.
- Better SUTA Rates – The PEO may be able to reduce your SUTA rate by paying employees under their experience rate. They also calculate SUTA for you so you don’t have to worry about the different rates and requirements in different states.
- Shared Responsibility – The co-employment model shifts the burden of responsibility for compliance, reporting, tax filing, and dispute management onto the PEO. This frees business owners to focus on growth rather than getting bogged down with legal questions.
Will I lose control of my business?
No. The PEO will assume responsibility for administrative tasks and compliance obligations, but you as the business owner will retain control over daily activities and decisions for your employees and your business. This includes staffing decisions, operations, employee management, marketing, and core job functions.
What functions will the PEO assume?
The PEO will handle wage and employment taxes, collecting and filing taxes, compliance management, reporting, workers’ compensation claims and coverage, payroll, and more. Their role relates to HR administration and personnel.
Do I get any say in hiring and firing decisions?
Yes. The PEO may offer assistance with recruiting and onboarding, but you make the final decision about which employees to hire and terminate.
How does a co-employment relationship affect my workers?
When you partner with a PEO, your workers enjoy increased job security, access to better benefits, insurance and retirement savings plans, professional human resources services, improved communications from the HR department, and increased safety oversight. If you end your relationship with the PEO, workers continue as your employees.
If you employ union workers, the PEO will abide by existing collective bargaining agreements.
Will my existing HR staff lose their jobs?
PEOs often work with your existing HR staff to strengthen the services offered to employees. Most small businesses do not have the personnel or expertise to run a fully functional HR department, and their existing staff benefit greatly from the PEO partnership.
Will my employees have access to someone who can answer their questions?
Yes. The PEO works closely with you as the business owner to ensure that your employees can access the information they need about benefits, insurance, workers’ compensation, payroll, and more. Many PEOs provide a dedicated individual or team who can assist with training and employee information.
What if I don’t want to change insurance providers?
PEOs can usually offer better insurance options than small businesses can. In many cases, they can deliver Fortune 500 level insurance and benefits to employees based on economy of scale. Although you might be required to switch insurance plans, that change is almost always to your benefit.
Will co-employment increase my risk of litigation?
No. In many cases a PEO can decrease your risk of litigation by managing compliance and safety regulations more efficiently. In some cases, they also provide legal assistance to companies who are facing workers’ compensation claims or other legal questions.
These are some of the most common questions we hear about working with a PEO. If you have additional questions, you may want to check out this FAQ from The National Association of Professional Employer Organizations (NAPEO).
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