Co-Employment

What co-employment means

Co-employment is an arrangement in which two organisations share the legal responsibilities of employing the same people. The common form is a professional employer organization (PEO) and its client: the PEO runs payroll, payroll tax reporting, benefits and HR compliance under its own registrations, while the client keeps hiring, firing, day-to-day direction and pay decisions. The split is written into a service agreement between them.

The PEO arrangement described here, and the figures and legal tests on this page, are the United States ones. In practice it assumes the client already has a legal entity in the country where the staff work, and it organises the employment back office rather than creating a presence abroad. If you want to employ someone in a country where you have no entity, you need an employer of record, which is a different arrangement. The EOR vs PEO comparison sets out the differences.

How the responsibilities are usually divided

The PEO

• Runs payroll and handles payroll tax reporting and deposits. A certified PEO files aggregate returns under its own employer identification number, as explained below.
• Arranges and administers employee benefits.
• Provides HR administration, compliance assistance and guidance on employment rules.

The client

• Decides who to hire, how to assign work and when to end a working relationship.
• Directs the day-to-day work and manages performance.
• Sets pay and runs the workplace and the business.

Both

Legal exposure is shared in practice. The contract allocates duties between the two employers and does not change the statutory obligations that each of them still carries. Treat a PEO as a service provider that takes on administration, not as a shield from claims.

How common it is

The industry body NAPEO says there are 502 PEOs in the United States serving more than 233,000 businesses and employing 5.4 million people, and that 14 percent of employers with 20 to 499 employees use one (page updated September 2026). Those are the association's own figures. They describe the US market only, as do the legal rules cited on this page.

Co-employment and joint employment

The two terms are related but not the same. Co-employment describes the contractual arrangement between a PEO and a client. Joint employment is a legal question: whether two organisations are both treated as employers of the same worker under a particular law, whatever the contract says. Each law can use its own test.

For collective bargaining under the National Labor Relations Act, the test has changed more than once. A 2023 National Labor Relations Board rule was vacated by the US District Court for the Eastern District of Texas on 8 March 2024 and never took effect. On 27 February 2026 the Board published a final rule that replaced the text of the vacated 2023 rule with the 2020 rule, effective the same day. Under that standard an entity may be a joint employer only if it shares or codetermines the employees' essential terms and conditions of employment, and it must possess and exercise substantial direct and immediate control over one or more of them.

The rule defines essential terms as wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction. It treats indirect control, and authority reserved by contract but never used, as relevant only to the extent that it supports evidence of direct and immediate control. The party asserting joint-employer status carries the burden of proof. A PEO client usually decides hiring, discharge, supervision and direction itself, which is exactly the kind of control the standard looks at, so co-employment still carries shared exposure under it.

That rule concerns one statute. Do not assume it answers questions under wage-and-hour, anti-discrimination, safety or tax law, which are separate regimes. Ask an employment lawyer how each applies to your arrangement.

Certified PEOs and federal employment tax

Under section 7705 of the Internal Revenue Code the IRS runs a voluntary certification programme, created by the Tax Increase Prevention Act of 2014, for PEOs. The IRS describes the CPEO programme and its eligibility rules: a certified professional employer organization (CPEO) must be a business entity with at least one physical business location in the United States and should have a history of financial responsibility, organisational integrity and tax compliance.

The IRS explains for customers that a service contract with a CPEO is reported on Form 8973, and that generally the CPEO is solely liable for paying the customer's employment taxes, filing returns and making deposits for remuneration it pays to worksite employees. A CPEO and its customer may both be liable for remuneration paid to non-worksite employees. The CPEO files aggregate returns under its own employer identification number. Ask any PEO you consider whether it is certified, and check the IRS public listing of CPEOs, which also publishes suspended and revoked certifications rather than relying on the provider's own statement.

Co-employment compared with other models

• Employer of record. An EOR becomes the sole legal employer, usually of someone in a country where you have no entity. In co-employment you keep your own entity and share the employer role. See employer of record.
• Staff augmentation. The provider employs the worker and supplies them to you, so the provider carries the employment relationship. See staff augmentation.
• Independent contractor. A genuine contractor is not your employee and not a PEO employee, but the risk moves to misclassification if you control how the work is done. The IRS says that a person working remotely is an employee under common-law rules if you can control what will be done and how. See independent contractor and misclassification.

Co-employment and a remote team

Remote working makes the boundaries matter more. A PEO may be able to support staff who work from home in the United States, but ask whether it can run payroll in each state where your people actually live. It does not extend to people in other countries, who need an employer of record, a local entity or a staffing partner that employs them there. Genuine contractors sit outside the arrangement altogether. If your team mixes these, use the hiring model selector to map each person to a route, keep one record of who is employed by whom, and compare combinations in the Remote Hiring Cost Calculator.

When co-employment fits

• You have a legal entity and a growing team in the same country, but no HR department.
• You want pooled access to benefits and compliance support that a small employer would struggle to buy alone.
• You employ people in several US states and want one provider to handle the differences.
• You have already moved from an employer of record to your own entity abroad and now want the administration outsourced.

When it does not fit

• You are hiring people in a country where you have no entity. Use an employer of record, a local entity or a staffing partner that employs people there.
• You work only with genuine independent contractors or project staff, who need none of the payroll and benefits services.
• Your existing payroll, benefits and HR support already work well, so a PEO fee would duplicate them.
• You need bespoke benefits or arrangements that a standard PEO plan cannot accommodate.
• You expect co-employment to remove your legal responsibility for how you treat staff. It does not.

How PEOs charge

The IRS describes PEOs as typically paid a fee based on payroll costs. Providers commonly quote either a flat amount per employee per month or a percentage of payroll, with benefits and insurance costs passed through. Quotes differ by provider, location and industry and change often, so this page lists no figures. Compare the all-in quote with what you spend now on payroll services, benefits, insurance and HR advice, and model the employee side with the Remote Hiring Cost Calculator.

What to check before you sign

• The service agreement: which duties, indemnities and notices sit with whom, and what happens on termination of the agreement.
• Whether the PEO is a CPEO, using the IRS listing, and what your own liability is if it is not.
• Which states and industries it covers, and whether your industry is excluded or surcharged by its insurers.
• What is included in the fee and what is passed through.
• How you can leave: notice, transition help and portability of your payroll and benefits data.

Staff leasing is a related arrangement, defined in the entry on staff leasing.

Sources

• NLRB final rule, Federal Register, 27 February 2026 (91 FR 9707).
• IRS: Certified professional employer organization.
• IRS: CPEO customers, what you need to know.
• IRS: CPEO public listings.
• NAPEO: PEO industry overview.
• IRS: independent contractor (self-employed) or employee.

References checked on 13 October 2026. Fees and the scope of services change often; obtain current quotes. This page is general information, not legal or tax advice.