Outsourcing nonessential competences is a popular choice for organizations of all sizes, since this practice lets business owners and employees concentrate on core tasks. Co-employment, a concept many companies do not firmly understand, can be considered a type of outsourcing. Under this type of agreement, business functions related to human resources, benefits and payroll are handled by a professional employer organization (PEO). When using a PEO, organizations are able to focus less on the risks that come with managing employees and more on their essential day-to-day tasks.

Understanding the Role of PEOs

The National Association of Professional Employer Organizations (NAPEO) describes co-employment as "the allocation and sharing of certain employer responsibilities between a PEO and a business owner as delineated in a contract between the PEO and the client." While the business owner still controls company decisions and daily operations, the PEO provides integrated services to effectively manage critical human resource responsibilities. A PEO delivers these services by establishing relationships with the client's employees and administering certain employer rights, responsibilities and risks as agreed with the client. Under this type of agreement, employees are technically employed by two organizations, and the PEO becomes the employer of record for insurance and tax purposes.

Employee-related tasks handled by PEOs include the administration of employee benefits, payroll and compensation, taxes, training, and development. Many PEOs also provide best practices advice and guidance related to related to risk and safety management, as well as compliance with employee-related regulations.

Benefits of Co-Employment Agreements

Some business owners believe these agreements will lead to a loss of control over their employees and negatively affect the workers concerned. However, there are many benefits to be gained from co-employment.

PEOs offer access to high quality health plans with the clout of a Fortune 500® company. This type of agreement can also help reduce risks to the business owner, since the PEO will handle payroll tax administration, workers' compensation and state unemployment claims, which are complicated and often trip up smaller organizations.

Greater Business Survival Rates

In a recent white paper, NAPEO explains that organizations that partner with PEOs for at least four quarters tend to grow more quickly, have an employee turnover rate of 28 percent to 32 percent — considerably lower than the U.S. average of 42 percent — and are 50 percent less likely to go out of business than companies that handle employee-related functions in-house. The low employee turnover rate is partially responsible for the higher business survival rate. The Society for Human Resource Management notes that the cost of turnover is often cited as between 100 and 300 percent of an employee's salary, and less turnover means more money retained by the company.

As these numbers show, co-employment agreements work well for many organizations. According to NAPEO, there are up to 3.4 million employees in the United States that work under this type of partnership. This doesn't just benefit employees, either. Co-employment agreements also free up business owners from time-consuming human resources tasks and alleviate many of the employee-related risks that organizations face.

Tags: Human Resources PEO professional employer organization Risk Management Co-Employment