A Guide For HR Leaders Weighing PEO Co-Employment

Human resources leaders wear many hats. You handle talent acquisition, onboarding, compensation, benefits, compliance, workplace issues, and so much more. With limited time and resources, it can be tempting to hand over some of these burdens to a Professional Employer Organization (PEO). But is PEO Co-employment right for your company?

This guide examines key considerations around PEO risks, protections, and partnership approaches to empower HR leaders in evaluating co-employment decisions.

The PEO Promise: A Treatise on the Benefits of Co-Employment

PEOs offer consolidated payroll, benefits, compliance, HR services, and other support under an efficient, outsourced model. Rather than manage it all in-house, your company enters a co-employment arrangement with the PEO as a joint employer of your workforce.

This transfers HR administration burdens, while providing access to:

  • Bulk-priced employer-sponsored benefits
  • Integrated payroll processing  
  • HR technology systems
  • Compliance expertise
  • Workplace safety programs 
  • Training resources
  • Pre-employment screening
  • And more

By tapping the economies of scale a PEO offers across hundreds or thousands of worksite employees, your company can optimize budgets and free up HR leaders for more strategic initiatives.

PEO / Co-Employment Risks of IRS Refund Diversion

But PEO co-employment also comes with financial entanglements that can carry unintended risks. In 2023, an IRS Office of Chief Counsel private letter ruling sent shockwaves by confirming the IRS can redirect tax refunds owed to a PEO’s client companies to instead pay that PEO’s own unpaid tax obligations.

PEOs file taxes and claim credits and refunds in aggregate under their own EIN across all client companies. So if a PEO has outstanding tax debts, the IRS treats tax refunds claimed by that PEO as assets of the PEO entity itself, regardless of the underlying client allocation. The IRS can therefore redirect those refunds to pay the PEO’s balance due rather than issuing refunds for the PEO to distribute to its clients.  

While a legal matter between the PEO and its clients, this ruling underscores the financial entanglements and loss of direct control inherent with PEO co-employment. As an HR leader exploring a PEO partnership, you must weigh these risks closely.

Illuminating the Safeguards: Prudently Evaluating PEO Risk

Reputable PEOs do implement important safeguards to mitigate IRS refund redirect and other risks for their clients, including:

IRS Certification – Validates PEO compliance across payroll, tax payments, filings, and assumed obligations. Reduces client compliance worries.  

Surety Bonds and Insurance – Contractually transfers PEO tax liability and benefits administration risks. Limits client company exposure.

Longevity and Transparency – Established PEOs in business 10+ years with client reporting offer stability and visibility. 

State Licensing – Active licenses and bonding in all operational states confirms legal compliance. 

Industry Certifications – Adherence to ethical and fiduciary best practices.

Protective Contract Terms – Comprehensive liability transfer and access/transparency provisions.

Vetting these protections upfront, requiring their maintenance, and incorporating ongoing visibility provisions in the co-employment agreement can help safeguard your company’s interests.

But initial due diligence is only half the battle. Ongoing PEO vetting strategies are equally important:

  • Validate renewals of all credentials and coverage annually
  • Review financial statement audits periodically 
  • Spot check state agency records for citations  
  • Reassess contracts as laws and risks evolve
  • Monitor for changes increasing liability exposures

By taking proactive measures to confirm protections stay in place throughout the PEO partnership, HR leaders can mitigate financial co-mingling surprises.

Exploring Alternate Partnerships

If your company isn’t ready to fully co-employ your workforce with a PEO, alternate partnership structures may help secure support without the same degree of risk:

MES Providers – Act as outsourced HR department without co-employment.

Hybrid PEOs – Only co-employ for health plans to maximize coverage efficiencies. Client retains other HR obligations directly. 

Bundled Services – Payroll-HRIS platforms offer additional HR services a la carte without co-employment.

While not ideal for all situations, these emerging models allow you to access vital support without necessarily introducing co-employment compliance and liability concerns.

Empowered Decisions

As an HR leader exploring PEO partnerships, arm yourself with knowledge. Vet provider protections, recognize IRS refund redirect and other financial risks, require contractual safeguards, and consider alternate structures. 

While co-employment offers notable support efficiencies, your fiduciary duty remains to act in your company’s best interests. Take proactive measures to secure those interests in any PEO partnership. With the right provider relationship, a PEO can alleviate administrative burdens and empower you to focus on more strategic people priorities.

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