Co-employment

Definition

Co-employment is the foundation of every PEO relationship. It is a contractual arrangement in which the PEO becomes the "employer of record" for tax and benefits purposes, while the client business retains day-to-day direction of work — what employees do, who they report to, how performance is managed.

Under co-employment, the PEO handles payroll processing, payroll tax remittance, workers compensation coverage, benefits administration, and HR compliance support. The client business handles hiring decisions, terminations, performance management, work schedules, and operational direction.

Co-employment is NOT joint employment in the legal sense most commonly litigated under FLSA or NLRA — it is a specific federal and state framework recognized in tax law (notably the 2014 Small Business Efficiency Act for Certified PEOs) and most state PEO statutes. The arrangement is documented in a Client Service Agreement (CSA) that defines which party handles which obligation.

Common questions about Co-employment

Related terms

• Professional Employer Organization (PEO) — A company that enters into a co-employment relationship with a client business to handle payroll, benefits, workers comp, and HR compliance.
• Certified Professional Employer Organization (CPEO) — A PEO certified by the IRS, which transfers federal employment tax liability from the client to the PEO.
• Small Business Efficiency Act (SBEA) — A 2014 federal law that created the IRS Certified PEO program and shifted federal employment tax liability to the CPEO.
• Employer of Record (EOR) — A service that legally employs workers on behalf of a client business — typically used for international hiring or contractor-to-employee conversions.

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This is one entry from our PEO glossary covering payroll, benefits, workers comp, HR compliance, and PEO mechanics. Browse all terms.