PEO 201 – Co-employment or Employee Leasing … Which Is It?

Widespread Misconception

Is a professional employer organization engaged in a co-employment or employee leasing relationship with its clientele?  The answer seemingly depends on who you ask.  There are many within as well as outside of the industry that consistently refer to what a PEO does as employee leasing.  This may have been true at the onset of the industry; however, those who currently refer to a PEO’s engagement with its clients as employee leasing are off the mark. In today’s marketplace, every organization that calls itself a professional employer organization is engaged in a shared or co-employment model.

It’s not difficult to understand why some are confused over the distinction when, in their own client service agreements, many professional employer organizations refer to the model in which they deliver their services as employee leasing.

Adding to the confusion is that many state statutes addressing the PEO industry have not updated their verbiage to reflect the change in the model over the past decades.

Early Days of the PEO Industry Contributes to Confusion

To understand how we’ve arrived at this point of misconception, it bears a review of the industry’s history.

According to the National Association of Professional Employer Organizations (NAPEO), the industry’s largest trade association, PEOs first came into existence approximately 30 years ago. At inception, its primary driver was to provide companies struggling to procure affordable workers’ compensation insurance with the ability to find reasonably priced coverage.  At that time, companies providing this solution operated under an employee leasing model, where they effectively hired the clients’ employees and then leased them back.

Under the leasing model, the PEO had complete direction and control of the employees as they were fully employed by the PEO.  Through this arrangement, the employees indirectly relied on the client company for their wages, benefits, and workers’ compensation coverage.

Evolution to Co-Employment

Over time, the industry evolved from an employee leasing model to a co-employment model that is not as rigid and limiting to the client company.

Under a co-employment arrangement, the client remains the operational employer tasked with deciding which employees to hire, their job function, wages, day-to-day activities, and maintaining a safe work environment.

The PEO or co-employer enters into this relationship and becomes the administrative employer responsible for payroll processing, tax remittance, benefits administration, workers’ compensation coverage, unemployment claims management, and employment law compliance.

Critical Distinction

Perhaps the most critical distinction between the models is that, in contrast to employee leasing, where the client relinquishes all direction and control of its employees, the client remains the primary employer under co-employment.  This nuance in construct dictates that should the relationship cease between the client and the professional employer organization, the shared employees immediately revert to being fully employed by the client.  Therefore, it’s the client who ultimately determines the employment fate of their employees and not the PEO.

Just as the PEO industry has evolved throughout the years to offer its clients a more robust human resources and services platform beyond the narrow insurance focus of its infancy, so has its model evolved.  In doing so, the model now provides a more flexible and equal distribution of rights and responsibilities to all parties involved.

For more insight into the professional employer organization industry, sign up for the free eBook “The Truth About PEOs.”

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