In terms of the services provided, there’s not much difference between a professional employer organization (PEO) and administrative services organization (ASO). Both can manage your payroll process, make sure your state and federal employment taxes are paid on time, and design a benefits package that can attract top talent. But there’s an important distinction between the two. While an ASO carries out these comprehensive HR services as a vendor, a PEO does them as a co-employer of your employees.
What is co-employment?
The National Association of Professional Employer Organizations defines co-employment as a “contractual allocation and sharing of certain employer responsibilities between a PEO and its client, as delineated in a contract.”
In co-employment, employees have two employers—the business owner for whom they work and the PEO that contracts with that business. But the PEO doesn’t suddenly have free rein over a client’s employees. Daily operations, corporate strategy, revenue generation—that’s all still the business owner’s domain. The PEO assumes responsibility for the administration of time-consuming employee-related tasks that have nothing to do with producing revenue—payroll, benefits, workers’ comp, compliance, employment taxes, background checks, wage and hour, civil rights, and the list goes on.
“I prefer the term ‘shared employment,’” says Chad Parodi, CEO of XMI. “The PEO becomes the administrative employer and the client company is the operational employer. The business owner maintains control of all operations and decisions that are mission-critical to the business. We simply take over the management of employee-related aspects of the business. We’re sharing in the responsibility to govern the worksite the right way.”
Why is co-employment necessary?
Can’t all of this be done by an HR vendor—no co-employment necessary? For the most part, yes, but co-employment provides an added level of protection and risk mitigation for your company. “A PEO allows for the transfer of exposure and liability for the business owner,” Parodi says.
As co-employer, the PEO becomes as liable as the business owner for that list of responsibilities it handles. “On the ASO side, our job is to guide people away from making wrong decisions, but it stops at that point,” Parodi says. “We’re going to make a recommendation and you can choose to follow it or not. On the PEO side, we make the decision together, and we’re not going to allow you to make the wrong decision.”
Another advantage of co-employment is that it allows the PEO to pool co-employees across all of its client businesses and offer Fortune 500-level benefits that most small businesses couldn’t offer on their own, including dental insurance, vision coverage, 401(k), perks, discounts and other voluntary benefits. A PEO also offers employment practices liability insurance, which protects a business in employment-related lawsuits. Despite the fact that employment-related lawsuits are on the rise, a study by Advisen found that only 23% of companies with fewer than 100 employees (and only 34% of employers with 500 employees) have this important coverage.
As the EPLI policyholder, the PEO will actually do the investigation, do the depositions, and recommend the path forward. In a lot of cases, the PEO may actually avoid the lawsuit altogether by rapidly and appropriately addressing sticky employment situations.
Debunking the co-employment myth
Parodi says the No. 1 concern about co-employment is a loss of control. Business owners fear that hiring a PEO means they’ll have less control over their business. Contrary to that belief, co-employment helps business owners gain control in areas such as rising health care costs, regulatory non-compliance, and workforce productivity.
“When we first talk to business owners about XMI, there’s definitely a learning curve about PEOs and co-employment,” Parodi says. “We encourage them to do their own research, talk to their peers who are using PEOs and get comfortable with the concept through their own network and industry. When they take the time to do that, we find that the comfort level increases quickly.”