Co-employment. Maybe you’ve heard this term (or joint employment or employee leasing) if you’ve been thinking about using a Professional Employer Organization (PEO) to help your small business with HR, payroll and benefits. But what is Co-employment?
Co-employment is a contractual agreement between two companies—usually a PEO and a small to medium size business (SMB)—to share employer responsibilities. As a business owner, you maintain control over how and when to hire more employees as well as the day-to-day management, while the PEO controls HR, payroll and benefits for employees.
PEOs don’t own your employees or tell you who to hire and who to fire, but because of the legal construct, the PEO can aggregate your benefits and give you better policies and prices than you’d get on your own. Their teams guide you through laws and regulations that you don’t have time to study. In addition, you have access to their automated processes. You’re able to offer more attractive benefits packages while leaving the time consuming busy work of HR to someone else, which in turn allows you to scale quickly while retaining good employees.
While combining with the PEOs tax ID allows you to get big company perks you should remember that you’re also sharing risk with all the other clients the PEO services.
Who Has Your Back?
Employment Practices Liability Insurance (EPLI) is one area where co-employment through the PEO model might offer a false sense of security. You need EPLI to protect your business in case of litigation, but it can be expensive. While you can get very low price EPLI through a PEO, remember, the PEO might have thousands of other client employers that are very different from you, yet you will all have identical insurance coverage.
Read the fine print to see exactly what your PEOs EPLI covers.
- Is there coverage for any court awarded judgments or settlements of claims outside of the courts?
- Are EPLI claims limited to those where an employee filed a complaint through a government agency? If so, wage and hour claims would not be covered. These types of claims are frequent and costly and the plaintiffs have a winning record.
- Are former employees who were not enrolled in the PEO covered?
- Are claims from 3rd parties covered, like your customers or a vendor who claim to be harassed or discriminated by one of your employees?
When you are facing a legal problem, a PEO has attorneys on staff to help. However, they’re as mindful of their bottom line as you are of yours. If you haven’t followed their policies, procedures and guidelines exactly to the letter, they won’t necessarily support you.
What kind of service do you want from a co-employment relationship? PEOs will provide you with a number to call whenever you have a question about payroll, benefits or HR, but it might not be personal. Occasionally you might have someone specifically assigned to handle your questions and with whom you can develop a relationship. However, more often than not, it’s a team of people who may or may not be familiar with your company.
You certainly shouldn’t expect single call resolution.
Most customer service reps who answer the phone at a PEOs call center just know how to take your information and open a case, not resolve your detailed issues. The problem is they handle too many clients at a time (some as many as 50!), which leads to poor response time and decline in client satisfaction.
Worker’s Comp Hamster Wheel
Your PEO will also provide you with worker’s compensation at the same rate they offer to the thousands of other companies they work with. This is good, because when you’re starting out, you don’t yet have a track record for the insurance company to rate you, so you can get a relatively low rate through a PEO.
However, if, after years of no claims you qualify for a lower rate, you will still be locked in with the PEO’s mid-range rate which puts all companies, (those with no worker’s comp claims and those with lots) into the same basket.
There is no disputing that some aspects of co-employment are helpful. You have access to services, technology and benefits that you wouldn’t otherwise be able to have. You can grow faster and keep better employees.
But you can’t lean on co-employment and think that everything’s taken care of. You should definitely plan on purchasing additional EPLI coverage, and may need to have a dedicated HR person to manage PEO paperwork and act as the link between employees and the PEO.
If you do choose the co-employment route, be aware of how much you are paying, compared to other solutions so you know when it makes financial sense to move on.
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