Quick look: A PEO partnership can help small businesses grow, stay compliant, offer competitive benefits, and retain valuable employees. However, some organizations shy away from a PEO out of fear that a co-employment relationship is the same as employee leasing. Here’s how and why they differ, and why a PEO may be just what businesses need to succeed.
Despite the growth within the PEO industry and its increased usage by small businesses, there are still some misconceptions about PEOs. One myth in particular seems to come up more often than others: a PEO relationship and employee leasing are the same.
This confusion may stem from the relationship between a PEO and its client, called co-employment. And while many think employee leasing and co-employment are the same, they are very different.
To clear up the confusion, let’s take a closer look at both employee leasing and co-employment, how they differ, and why a PEO isn’t the same as an employee leasing company.
What is employee leasing?
First, let’s define employee leasing. Also known as a temporary employment arrangement, employee leasing is the practice of supplying new workers or contractors to a client, usually temporarily. Often, employee leasing is for work on a specific project with a start and end date.
Employee leasing is most often associated with staffing firms, although it also gets tied incorrectly to PEOs and human resources (HR) outsourcing.
When a business works with a staffing company that uses employee leasing, the staffing firm provides workers to their client who work at the client’s place of business. Once the project, timeframe, or contract is complete, the workers return to the staffing company, which is their actual employer.
Employee leasing is a popular option for business owners who need new workers for a set time frame and don’t want to worry about the HR administrative and regulatory tasks associated with hiring contract or temporary workers.
What is co-employment?
The National Association of Professional Employer Organizations (NAPEO) defines co-employment as “the contractual allocation and sharing of certain employer responsibilities between the PEO and the client.” Essentially, in a co-employment relationship, employees are employed by two different entities—the client and the PEO.
However, the PEO does not supply workers to their client. All employees are either currently employed by the client or will be hired in the future by the client.
In a co-employment relationship, a PEO assumes certain employer rights, responsibilities, risk, and other HR administrative tasks. These can include:
- Remitting wages and withholdings of the clients’ workers
- Issuing Form W-2 for compensation under its Employer Identification Number
- Reporting, collecting, and depositing employment taxes with local, state, and federal authorities
Meanwhile, the client retains control over the hiring and firing of its employees, and business leaders continue to make the day-to-day operating decisions for their company.
Co-employment through a PEO and employee leasing are not the same
One of the biggest myths about PEOs is that their relationships with clients are employee leasing. When you look at the differences between employee leasing and co-employment (which is how PEOs operate), it becomes clear that this misconception is far from the truth.
In fact, employee leasing and co-employment differ greatly. The biggest distinction is that in a co-employment relationship through a PEO, the PEO does not provide staff for their client. This responsibility falls on the client, as do any other staff-related decisions. This includes hiring new talent after the PEO partnership is established. However, if needed, some PEOs offer comprehensive recruiting services, including job advertisement creation, interview assistance, offer letter creation, and more.
Instead of being a leased or temporary worker, employees end up having two employers: the company who hired them and the professional employer organization. The PEO becomes the company of record for HR, payroll, benefits, employment taxes, and other HR-related purposes.
It’s important to remember that in a PEO partnership, small business owners do not lose control of various aspects of their business, including their hiring and firing decisions. Business owners retain full control of their business, while the PEO handles the administrative side of HR.
Don’t let this common PEO myth prevent business growth and success
Working with a trusted PEO, especially one that’s an IRS Certified PEO (CPEO) and has Employer Services Assurance Corporation (ESAC) accreditation, ensures small business owners remain compliant with all HR- and employment-related laws and regulations. Instead of having to worry about HR, business leaders can focus their efforts on other activities that grow the company.
A PEO partnership also provides small businesses with access to improved health insurance and employee benefit offerings, which can assist with recruiting and employee retention. PEOs allow business owners to maintain control of their company and hire new employees as they see fit.
It’s a misconception that PEO and employee leasing are the same, which often causes organizations to dismiss a PEO solution and miss out on the benefits that it can offer. A nationally recognized PEO, like ExtensisHR, offers the following business-boosting features:
- Benefits administration and management, including many Fortune 500-level benefit plan offerings
- Payroll and tax services
- Comprehensive risk and compliance services
- In-depth HR guidance
- Full-cycle recruiting services, included at no additional cost with our PEO solution
- PEO Premier®, a fully outsourced, white-glove HR solution
- A mobile-first Work Anywhere® platform
- A variety of industry credentials, including IRS CPEO, ESAC accreditation, Certification Institute (CI) certification, and SOC 1 Type II Certification (note: only 1% of PEOs hold CPEO, ESAC, and CI certifications)
- And more
Want to discover how a co-employment relationship with ExtensisHR can help you reach your business goals? Contact our HR experts today.