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What Is a Co-Employment Model?

Updated Sep 22, 2023

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  • Co-employment allows small and midsize businesses to access payroll, human resources, and compliance support by working with a professional employer organization (PEO).
  • Co-employment can help small businesses provide employees with better benefits, including health coverage.
  • The business still oversees hiring, firing, and day-to-day employee management, but the PEO is responsible for payroll and benefits.
  • This article is for small business owners interested in leveraging co-employment to reduce their administrative burden or improve their benefit offerings.

Partnering with a professional employer organization (PEO) in a co-employment model can help small businesses access HR tools and resources to better support their employees. Keeping up with the compliance, payroll and HR requirements of a growing business can be a challenge. Co-employment can offload some of those responsibilities.

We’ll explore the benefits and challenges of co-employment and explain some alternative employment models. 

What is co-employment?

Co-employment is an employment model in which a business and PEO share employment responsibilities. The PEO acts as the employees’ employer of record, but the business owner and leadership team still make employment decisions and retain managerial oversight.

The PEO provides employees with payroll, HR and benefits support, while payroll and payroll taxes are filed under the PEO’s employer identification number (EIN). The business’s owner and leadership team handle all other typical employer responsibilities.

Key TakeawayKey takeaway

Under co-employment, a PEO acts as your staff’s co-employer, but as the business owner, you still make all the employment and business decisions.

What are the benefits of co-employment?

Co-employment offers many benefits, particularly for small businesses without the bandwidth to manage HR functions independently. Here are some of the top benefits of partnering with a PEO:

Health insurance and benefits

PEOs can typically secure better rates and benefits offerings than small businesses would be able to find directly. This is because PEOs negotiate rates on behalf of all their clients and employees. Instead of negotiating rates and employee benefits packages for your 20 employees, they’re negotiating on behalf of hundreds or even thousands of employees covered under the PEO through various co-employment contracts.

Payroll processing

Many businesses outsource payroll due to its urgent and time-consuming nature. Making a payroll mistake or encountering payroll processing delays can lead to significant issues with your employees and the law.

In a co-employment model, the PEO typically takes care of payroll and its associated processes, often processing payroll under its own EIN. Small business owners can relax knowing that payroll is being processed on time. Not having to worry about payroll frees up hours of their time each week.

HR support

Through co-employment, your business offloads HR tasks to the PEO. The PEO also acts as a resource for your business and employees when HR questions or concerns arise. The responses may be delayed compared to in-house HR teams, but PEOs provide access to knowledgeable HR support staff. For small businesses that aren’t ready to build their own HR team, this is a huge benefit.

Compliance support

Navigating business laws, regulations and other compliance issues requires expertise. PEOs have compliance specialists who are up-to-date on the latest laws and regulations. This helps prevent accidental violations that can occur because of constantly changing laws.

Did You Know?Did you know

Labor laws businesses may be breaking without knowing it include the Family and Medical Leave Act, the National Labor Relations Act, and OSHA’s workplace safety rules.

Workers’ compensation

Meeting state requirements for workers’ compensation insurance is one less headache for businesses in co-employment arrangements. PEOs provide coverage for their clients and handle any claims that arise. They also conduct safety audits and recommend employee training programs to help limit workplace injuries and employer liability.

What are the drawbacks and risks of co-employment?

While co-employment comes with excellent benefits, there are also some potential risks and drawbacks. 

Risk of tax issues and liability

PEOs offer excellent support for payroll, HR and compliance. However, these critical roles are ultimately your responsibility. If your PEO doesn’t do its job correctly, you may face liability and compliance issues. 

If a PEO isn’t IRS-certified and fails to pay taxes on behalf of your business correctly, your business can be held responsible and penalized – even if you already gave the PEO the tax funds to pay on your behalf. To protect your business, work with an IRS-certified PEO with a good reputation.  

Delayed responses

PEOs have multiple clients, so you and your employees can’t always be their No. 1 priority. This split focus can impact how quickly you can get answers to pressing questions about paychecks, insurance and other HR issues.

Shop around to find a PEO that will be attentive to your employees and provide prompt and friendly support. 

Potentially impersonal HR service

Even the best PEO can’t replicate the experience of an in-house HR team. An in-house team will reflect your company’s organizational culture and align with your core values and how you communicate. Additionally, a PEO won’t be as familiar with any changes or initiatives within the company as an in-house HR team would be. 

Did You Know?Did you know

The best PEO service providers are accredited by outside agencies, mainly the IRS, the Better Business Bureau and the Employer Services Assurance Corporation.

What are some alternatives to co-employment?

Signing some of the rights and responsibilities over your staff to a PEO may sound intimidating. If you’re not ready to make that leap, explore these alternative employment models.

In-house HR

The most obvious co-employment alternative is an in-house HR department. An in-house HR team provides the most personalized and prompt experience for employees while allowing business owners to be more hands-on in their company’s HR operations. An in-house HR team will embody the company culture and give employees their full attention.

Some small businesses get by with hiring a full-time HR person. However, one full-time staff member isn’t always enough to cover all HR responsibilities, so you may still need to outsource specific HR functions until you build a full-service HR team.

Human resources outsourcing

A human resources outsourcing (HRO) company can help you outsource HR functions while keeping your employees on your company’s books. 

Like PEOs, HROs offer a broad range of HR services. However, the best HR outsourcing companies allow you to pick and choose from a service menu and contract for only the services you need. If health insurance is your primary concern, use an HRO to administer employee benefits and handle other HR functions in-house. 

An HRO’s flexibility is ideal for small business owners who need help in specific areas but prefer to stay relatively hands-on when it comes to HR issues.

Here’s an at-a-glance comparison of PEOs vs. HROs:




Partnership arrangement

Co-employment: The PEO handles HR and payroll processes, while you retain employee management and hiring oversight.

Standard third-party services agreement: The HRO is a vendor, and your business is the sole employer.

Included services

Set services typically include HR, payroll, benefits and compliance support.

You choose the HR services you need rather than a set package.


It may cost more upfront but less overall.

It may cost less upfront but more overall.

Benefits flexibility

The benefits for the core offering are inflexible, but some PEOs offer add-on services.

You have the flexibility to choose the services you need from the HRO’s menu.

Administrative services organization

An administrative services organization (ASO) is another HR outsourcing option. Like HROs, ASOs offer outsourcing services without a co-employment agreement. 

An ASO can help you perform HR functions such as payroll and benefits administration while filing all taxes and employee information under your company’s umbrella. ASOs provide administrative support for these functions without taking ownership of them in a co-employment relationship.

ASOs can help you choose, set up and manage employee benefits. However, PEOs may still offer better rates and options on health insurance due to their broader negotiating power.

Here’s an at-a-glance comparison of PEOs vs. ASOs:




Partnership arrangement

Co-employment: The PEO handles your HR and payroll processes, while you retain employee management and hiring oversight.

Vendor agreement: The ASO runs your payroll or benefits under your business’s EIN.

Included services

Set services typically include HR, payroll, benefits and compliance support.

You can choose from the ASO’s service offerings. Payroll and benefits support is typically available, but many ASOs do not offer workers’ comp.


Typically higher

Typically lower

Benefits flexibility

The benefits for the core offering are inflexible, but some PEOs offer add-on services.

You have the flexibility to choose the services you need from the ASO’s menu.

HR consultants

If you aren’t ready to hire an in-house HR team but don’t want to outsource to an HRO or ASO, hire an HR consultant to work with your team. HR consultants can be independent contractors with their own businesses, freelancers from sites like Upwork, or members of consulting firms. 

An HR consultant can work with your team to help your business meet compliance requirements, set up HR processes and procedures, and more. They can also perform HR administration tasks for you on a contract basis.

Employer of record

Another PEO alternative is an employer of record (EOR). While a PEO acts as your co-employer, an EOR acts as the full legal employer of the employees. You’ll still retain managerial oversight, but employees will be completely off your books.

Here’s an at-a-glance comparison of PEOs vs. employer of record setups:




Partnership arrangement 

Co-employment: The PEO handles your HR and payroll processes, while you retain employee management and hiring oversight.

The EOR is the full legal employer of the staff. The employees perform work for your business but sign their employment forms or contract with the EOR.

Included services

Set services typically include HR, payroll, benefits and compliance support.

The selection of services is typically smaller, but the services themselves are more extensive.


Typically high upfront and long-term costs

Typically high upfront but lower long-term costs


The benefits for the core offering are inflexible, but some PEOs offer add-on services.

The services are somewhat flexible.

Joint employment 

When researching co-employment, you may come across the term “joint employment.” This model is often confused with co-employment, but they are not the same. 

A joint employment model involves two distinct employers sharing the same employees. Both employers typically have input on management, scheduling, compensation and employment decisions. On the other hand, with co-employment, the PEO is a co-employer for insurance, payroll and HR purposes only, and does not influence business or employment decisions.

Some startup founders have multiple separate businesses growing at once. In this case, joint employment may make sense, as you could hire an HR manager to run both HR departments if the businesses aren’t large enough to justify individual HR support.

Kaylyn McKenna
Contributing Writer at
Kaylyn McKenna is a freelance writer specializing in business, tech, and leadership. She received her MA in Industrial-Organizational Psychology from Touro University, and enjoys using her industrial psychology background to share management, HR, and organizational effectiveness tips with small business owners. She has covered topics related to business law, compliance, employee retention, company culture, and management strategies.
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