What is co-employment? How it works and benefits

Last updated: January 29, 2026

Co-employment is a contractual relationship, in which a business and a professional employer organization (PEO) share certain employment responsibilities. Specifically, the client oversees the workforce and daily business operations, and the PEO handles HR-related matters, such as payroll and employment-related tasks. This arrangement is advantageous to organizations that want to mitigate some of the costs and responsibilities associated with being an employer.

Co-employment key takeaways:

• Clients in a co-employment relationship maintain control of their business and their employees while the PEO helps manage HR, including payroll and employment-related regulatory compliance.
• Many PEOs provide access to competitive benefits and workers’ compensation insurance and can help support a business’s talent strategy.
• Co-employment is a type of HR outsourcing, but it is not the same as joint employment, employee leasing or employer of record.

How does co-employment work?

Despite some misconceptions, co-employment does not mean employers cede ownership or lose control of their business. In actuality, the relationship is a division of responsibilities as follows:

Responsibility	Client	PEO	Explanation
Business operations			Client directs core, day-to-day business activities.
Workforce management			Client makes hiring decisions and manages talent.
Payroll processing			PEO runs payroll and compensates employees based on the pay data provided by clients.
Employment taxes			PEO is responsible for accurate and timely payroll tax filings.
Benefits administration			PEO manages open enrollment and insurance claims.
Regulatory compliance			PEO provides HR compliance guidance and expertise.
Workers’ compensation			PEO provides coverage and manages claims.

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What are the benefits of a co-employment relationship?

High-quality, forward-thinking PEOs like ADP’s use data insights, evolving technology and skilled advisors to help clients respond strategically to HR-related regulatory changes and workforce trends, thereby allowing them to remain competitive and maximize growth. Other benefits of co-employment include:

Access to Fortune 500®-caliber benefits

One of the main reasons small and midsized businesses enter into co-employment arrangements is the high-quality, cost-effective health insurance that it affords them. In addition to supplying the coverage, PEOs typically manage enrollment, claims and other aspects of plan administration. Some even offer benefits beyond medical and dental insurance, like retirement savings plans, savings plans, mental health benefits, pet insurance, commuter benefits and more.

Full-service payroll

Employers who are struggling to find time to run payroll or are being penalized for mistakes often find welcomed respite in co-employment. PEOs may administer aspects of payroll on the client’s behalf, including paying employees, and filing employment taxes with applicable government agencies. Many are also capable of integrating payroll with timekeeping, which limits repetitive data entry and reduces errors.

Compliance expertise

HR compliance may seem like a daunting challenge, but co-employment can provide peace of mind, especially for businesses that aren’t prepared to handle employment-related regulatory oversights. PEOs have HR and risk and safety experts who keep up with evolving HR and worksite safety regulations. They work with clients to develop proactive strategies that can help protect them from fines and penalties. Areas of focus include employment tax reporting, unemployment and workers’ compensation claims, and HR workplace policies.

Workers’ compensation coverage

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 claims that may arise. They also can conduct safety reviews and recommend employee training programs to help limit workplace injuries and employer liability.

HR support

Businesses that don’t have or want to hire dedicated internal resources for HR can use a PEO for HR issues. In co-employment arrangements, clients may have a dedicated HR expert or team, depending on the level of support required, that provides strategic and administrative services. If, on the other hand, employers have their own resources, they can continue to use them and may partner with the PEO whenever additional expertise or assistance is necessary.

Talent management strategy

The benefit packages that come with co-employment can help businesses appear more attractive to prospective talent, but that’s just the beginning. PEOs might also assist with onboarding, employee training and performance management, though specific talent-related services differ by provider. Employers should check if a PEO has these offerings and if there are added fees.

How can you avoid co-employment risks?

Employers can avoid co-employment risks by partnering with PEOs that meet the rigorous background, financial and reporting requirements necessary for certification with the IRS and the Employer Services Assurance Corporation (ESAC). Certified PEOs (CPEOs) offer these advantages:

• CPEOs are responsible for the payment of their client’s federal employment taxes
• Businesses can join or leave a CPEO at any time of the year without facing a wage-base tax restart
• CPEO clients can continue to claim any tax credits for which they would normally be eligible if they were not in a co-employment arrangement

Co-employment vs. employee leasing vs. joint employment

Co-employment is sometimes mistaken for employee leasing and joint employment, but they are not one and the same. The key distinction between them lies in how the employer responsibilities are allocated.

Key distinctions: Co-employment vs. employee leasing

• Leasing agencies provide employees for temporary assignments.
• Co-employment does not supplement a client’s workforce with additional labor.
• Leased employees return to the staffing agency when their assignment is completed.
• Active employees remain employees of the client once a co-employment relationship ends.

Key distinctions: Co-employment vs. joint employment

• In a joint employment relationship, two distinct employers govern the same employees.
• Clients in a co-employment arrangement retain sole oversight of their workforce.
• Joint employers both have input on hiring decisions, employee compensation, schedules and performance.
• PEOs may provide HR guidance, but they do not get directly involved in talent acquisition or talent management.

PEO co-employment vs. employer of record (EOR)

PEOs and EORs differ in three key areas – risk management, service coverage and benefits.

1. Risk management: PEOs share certain employment-related responsibilities with their clients. EORs assume full liability of the client’s workforce and become the legally-recognized employer.
2. Service coverage: Some PEOs have international travel and expatriation limitations, which means they’re often better suited for companies with US domestic operations. EORs are designed to help global businesses and those expanding rapidly across borders.
3. Benefits: PEO clients may have some say in the type of benefits offered to their employees. Benefit options available through an EOR generally are not flexible.

PEO co-employment vs. HR outsourcing

HR outsourcing is a strategic relationship. Depending on the vendor, businesses receive partial or full HR administrative support.

Co-employment, in contrast, is a partnership with shared employment responsibilities. So, while a PEO will assist with HR administration, it also provides expert HR and workplace guidance on risk and safety issues that can help businesses drive scalability and improve competitiveness. In fact, businesses using a PEO grow over twice as fast as comparable non-PEO firms (4.3% vs. 1.9%), according to the NAPEO.¹

Why choose ADP for co-employment?

ADP TotalSource® is the largest PEO in the United States and has proven expertise in all areas of human resources. Our products and services are designed to help businesses adapt to changing workplace trends and improve their bottom line. Some of the strategic solutions that sets TotalSource apart from the competition include:

• Data insights and reports
  While some PEOs offer limited data, TotalSource provides benchmark analytics that allow employers to see how their business compares to others in their industry.
• Custom success plans
  TotalSource develops personalized HR plans covering benefits, risk and talent optimization that align with a business’s strategy and growth objectives.
• Protection
  ADP helps its clients mitigate their risk by providing guidance on workplace safety, terminations, employee discipline and mandatory leave laws.
• Strategic talent management
  TotalSource goes beyond basic recruitment technology and provides full talent support, including performance management, compensation analysis, supply and demand reports, and engagement and coaching strategy.

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Frequently asked questions about co-employment

¹ PEO Industry Data & Statistics, NAPEO, “Impact of a PEO,” Sept. 1, 2024.

² The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to https://www.irs.gov/.

This article is intended to be used as a starting point in analyzing co-employment and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice, benefits, or other professional services.