PEO
What Does "Co-Employment" Actually Mean?
By Anthony Beck, . Insurance Wire.
What Co-Employment Actually Means in a PEO Relationship
Co-employment divides employer responsibilities between a PEO and its client. The client runs the business and directs employees. The PEO assumes specific employer responsibilities under the service agreement and applicable law.
That is what separates a PEO from a payroll or HR vendor. A payroll company can process wages and taxes as an agent of the employer. A PEO can assume employer obligations for the same workforce.
Texas Labor Code Chapter 91 defines co-employment as a relationship in which employer rights, duties and obligations are allocated between the PEO and client. Responsibilities not allocated to the PEO remain with the client.
The exact allocation varies based on state law, federal law and the PEO agreement.
Who Controls the Employees?
The client determines employees’ duties, manages their performance and directs day-to-day operations. The PEO can simultaneously have authority over specific employment functions.
Florida Statutes Chapter 468 requires the client to retain sufficient direction and control over leased employees to conduct its business while the employee leasing company retains specified authority involving employment administration, workers’ compensation, risk management and safety.
Operational control therefore generally stays with the client while defined employer functions sit with the PEO.
Who Is Responsible for What?
Day-to-day management: Client
Job duties and performance: Client
Hiring and termination decisions: Generally the client, often with PEO HR support
Payroll processing: Generally the PEO
Payroll tax administration: Generally the PEO, with legal tax liability dependent on the structure
Workers’ compensation coverage and claims administration: Frequently the PEO, subject to state law and the arrangement
Benefits administration: Frequently the PEO
HR administration and compliance support: PEO, with employment decisions generally remaining with the client
Workplace safety: Responsibilities can be shared because the client controls the workplace while the PEO may have statutory or contractual risk-management obligations
Employment claims: Client, PEO or both depending on the applicable law and facts
Payroll Taxes
Processing payroll taxes and being legally liable for them are different things.
A payroll processor can calculate withholding, file Forms 941 and transmit tax payments without becoming the employer responsible for those taxes.
Internal Revenue Code Sections 3511 and 7705 establish a specific federal framework for Certified Professional Employer Organizations. For qualifying worksite employees covered by a CPEO contract, Section 3511 generally makes the CPEO responsible for federal employment taxes on remuneration it pays.
Simply calling a PEO relationship “co-employment” does not create that federal tax treatment.
A PEO saying it administers payroll taxes is therefore not necessarily the same as federal law assigning it the employment tax responsibility.
Workers’ Compensation
Workers’ compensation can move into the PEO’s insurance structure.
Florida generally requires licensed employee leasing companies to secure workers’ compensation coverage for leased employees and gives them responsibility for administering claims and related procedures.
The client still controls the workplace where an injury may occur. The PEO may provide coverage, claims administration and risk-management services while the client retains its own workplace and safety obligations.
A business evaluating a PEO should know whose policy covers the employees, who administers claims and what responsibilities remain with the client.
Employee Benefits
Employees may participate in benefit programs available through the PEO rather than benefits independently sourced and administered by the client.
A business should understand whose plan is being offered, who sponsors or administers it, eligibility and participation requirements, how rates are established and what happens to coverage when the PEO relationship ends.
Those details are more important than simply being told the PEO “provides benefits.”
Co-Employment Is Not Automatically Joint Employment
Co-employment under a PEO relationship does not automatically determine whether the PEO is a joint employer under another employment law.
The Department of Labor’s FMLA regulations specifically address PEOs. A PEO that performs administrative functions such as payroll, benefits administration or updating employment policies is not a joint employer under the FMLA solely because it provides those services. The actual relationship matters, including whether the PEO has rights involving hiring, firing, assignment, direction or control.
Texas law also expressly distinguishes PEO co-employment under Chapter 91 from joint employment recognized under other law.
A PEO agreement therefore cannot determine employer status for every employment claim. The law governing the specific claim applies its own standard.
What Happens When There Is a Claim?
There is no blanket rule that liability moves to the PEO because a company uses one.
The analysis starts with the specific issue. Determine what responsibility the PEO agreement assigns to each party, then apply the law governing that obligation.
A workers’ compensation injury may be covered and administered through the PEO while involving conditions at the client’s workplace. A federal employment tax issue may turn on the PEO’s tax status. An FMLA, wage or discrimination claim may require determining whether the client, PEO or both qualify as employers under the applicable law.
The service agreement allocates responsibilities between the parties, but it cannot override statutory obligations.
The Bottom Line
A business owner evaluating a PEO should know exactly what moves to the PEO and what does not.
Who carries the workers’ compensation coverage? Who has federal employment tax liability? Whose benefit plans are being offered? What HR responsibilities does the PEO assume? What remains with the client?
Those answers define the co-employment relationship far better than the label itself.
Related reading: PEO vs. ASO and PEO vs. traditional payroll.
Insurance Wire provides news and information, not insurance, legal, or financial advice. Consult a qualified professional about your specific needs.