outsourcing hr

Employee leasing vs. co-employment: what’s the difference?

Employee leasing vs. co-employment: what’s the difference?



When you’re considering outsourcing your HR, you’ll hear plenty of talk -- and advice -- about “employee leasing” and “co-employment.”

In general, these two terms refer to the same concept. In “employee leasing” or “co-employment,” your company manages the day-to-day work of each of your employees. But to tap into the benefits that HR outsourcing offers, the HR company becomes the “employer of record” for each of your employees, which means your employees are linked to the HR company’s EIN for payroll, benefits and tax purposes, along with all of the responsibilities that accompany those.

This relationship is more commonly referred to as “employee leasing” or “co-employment.”

What is employee leasing?

Employee leasing is sometimes used to describe the arrangement between a company and a type of HR outsourcing organization known as a PEO (professional employer organization). The PEO becomes the employer or record for its clients’ employees and is responsible for paychecks, payroll taxes, benefits administration and related administrative requirements. At the end of the year, each of the client’s employees also receives their W2 from the PEO -- and the PEO’s EIN is linked to it.

How is this “leasing?” It’s not -- which is why the term has mostly been replaced with something better (see “co-employment” below).

As a client, your company makes all hiring and termination decisions about employees -- the PEO has zero management contact with your employees. That means your PEO does not have the ability to “reassign” an employee to a different department or employer. The PEO cannot terminate an employee (unless YOU specifically ask them to). And fees charged by the PEO aren’t “rental fees” for an employee -- your business pays for the administrative tasks associated in the same way you’d pay an in-house HR department to perform these tasks, including onboarding, payroll management and reporting requirements, benefits administration, worker’s compensation admin and insurance, and any risk-management services.

Employee leasing isn’t temporary or short-term employment

While the term “employee leasing” is catchy, it has other downsides, too, namely its short-term feel. But your employees aren’t temporary -- they’re full-time, maybe even lifers. Which means your company’s employees in the PEO-relationship will (hopefully) have a long-term relationship with your company, too. If you ever leave a PEO, you take your employees with you.

Fees paid to a PEO in employee leasing

While you will pay a PEO for its services, the fees you pay to a PEO are for the services performed by the PEO. You do not pay a PEO for the use of your employees. If your PEO is managing payroll, you provide the funding for the payroll, just like you would do if you were managing payroll yourself (except with most PEOs, you write just one check for payroll and the PEO divvies it up; if you manage payroll yourself, you’re writing a separate check for each employee).

What is co-employment?

Co-employment is an arrangement in which two organizations -- namely your company and the PEO -- share responsibilities for an employee. The PEO handles the administration responsibilities and any liabilities that go along with those. Your company manages every bit of the day-to-day duties of your employees.

If co-employment sounds identical to employee leasing, that’s because it is; the two terms are oftentimes used interchangeably. There is one exception: co-employment can also be used to refer to short-term or contractor arrangements -- but that’s not what PEOs do.

Hiring and Termination with a PEO’s co-employment arrangement

When you have a co-employment arrangement with a PEO, your company continues to make all hiring, promotion and termination decisions about the people who work for you, while the PEO only handles the administrative tasks, such as onboarding, workers’ comp, and payroll and benefits management. A PEO may also offer an applicant tracking system (ATS) to simplify your hiring process or give you access to reports and visualizations that show you how staffing affects your entire organization, among other services.

PEO and liabilities

With co-employment, the PEO will hold all liability for ensuring your employees and benefits are paid (you’ll still need to write a check to the PEO to fund payroll, however), employment taxes are covered, workers’ comp insurance is current, and any other relevant compliance concerns are met. In short, your PEO assumes liability for all of the services it provides to your company.

There are, however, areas in which you’re still be liable -- particularly in regard to day-to-day operational and management tasks. But in addition to 24/7 access for consulting and advice, many full-service PEOs will assist you with employee and manager trainings, as well as help you develop employee handbooks and policies to protect your organization from potential risks like these and others.

Are PEOs expensive?

PEOs are service providers, so you’ll pay for their services. They will cost more than you personally sitting down at 2 a.m. with a spreadsheet and an abacus to manually calculate payroll. However, the PEO also provides other services like affordable rates on a variety of health insurance and supplemental plans (including large group health plans, which most small businesses aren’t eligible for any other way), as well as other benefits that most small companies can’t access or afford without the services of a PEO.

How much will a PEO cost? Depending on the PEO you work with and the size of your team, your company could get the equivalent of a full-service HR team and tap into Fortune 500-worthy benefit options at the cost of a part-time employee, or even less if you’re a smaller company.

Get advice about co-employment

This isn’t always part of the deal, but the best full-service PEOs are consultants, too -- they offer answers and advice about your HR concerns and will let YOU know when you could be running into potential risks. If you want to see this in action, contact us today. We’ll answer questions, look at your company’s current HR situation, and let you know if it makes sense for you to partner with a PEO or if there’s another arrangement that would fit your company better.

Outsourcing HR, co-employment, employee leasing - they're actually all synonymous. Would you like a really technical description of co-employment? Read this article from NAPEO.

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