Despite the growth within the PEO industry
and the increased usage of them by small businesses, there are still some misconceptions around PEOs. One myth in particular seems to come up more often than others – a PEO relationship and employee leasing are the same
This confusion most likely stems from the relationship that actually exists between a PEO and its client, called co-employment
. And while many think employee leasing and co-employment
are one in the same, they are actually very different.
In order to clear up the misunderstanding, let’s take a closer look at both employee leasing and co-employment, how they differ from one another, and why PEOs aren’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, it’s the practice of supplying new workers or contractors to a client, usually on a temporary basis. Often times employee leasing is for work on a specific project that has a start and end date.
Employee leasing is most often associated with staffing firms, although it also gets tied incorrectly to PEOs and HR outsourcing.
When a business works with a staffing company that uses employee leasing, the staffing firm provides workers to their client who do their work at the client’s place of business. Once the project, timeframe, or contract is complete, the workers return to the staffing company, who 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 with the client, or future employees who are hired 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
We have already mentioned that one of the biggest myths about PEOs is that the relationship they have with clients is employee leasing. When you take a look at the differences between employee leasing and co-employment (which is how PEOs operate), it becomes clear that this myth is far from the truth.
As a matter of fact, employee leasing and co-employment differ greatly. The biggest difference is that in co-employment relationship through a PEO, the PEO does not provide staff for their client. This responsibility falls on the client, as does any other staff-related decisions. This includes hiring new talent after the PEO partnership is established.
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 very important to keep in mind that in a PEO partnership, small business owners do not lose control
of various aspects of their business, including their employees and hiring/firing decisions. This is another common misconception about PEOs. Business owners retain full-control of their business, while the PEO handles the administrative side of human resources.
Don’t Let This Common PEO Myth Prevent Business Growth and Success
Working with a PEO, especially one that's a CPEO
and has ESAC accreditation
, ensures small business owners that they remain compliant with all HR and employment related laws and regulations. Instead of having to worry about HR, business leaders can focus all their efforts on other activities that can grow the company.
Working with a PEO
also provides small businesses with access to much improved health insurance and employee benefit offerings, greatly assisting with recruiting and employee retention. PEO partnerships allow small 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 times causes small business owners and brokers to dismiss a PEO solution, even though a perfect fit exists. Hopefully this article clears up the confusion surrounding co-employment and employee leasing.
Who knows, perhaps a PEO solution can be a differentiator for your business (or client)!
What’s the difference between co-employment and employee leasing? Check out our eBook, Co-Employment vs. Employee Leasing: The Differences Brokers (and Clients) Should Know, to learn more about how different they really are!