What Is Co-Employment and How to Avoid the Risks It Carries

Entering a co-employment relationship? In the following article, you'll learn everything about such arrangements and how to avoid the risks they carry.

Stefana Zaric
Written by Stefana Zaric
December 14, 2021
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Do you need someone to join your team, but you can't hire them as a full-time employee? Then, the most convenient solution might be to hire an independent contractor. 

According to the IRS, ''The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.'' 

If this employment arrangement sounds manageable, the next thing you should consider is the hiring process. Many companies, especially startups and small companies, opt for co-employment.

Are you not familiar with the term? The following article will give you all the information to determine whether it is the best solution for your business, so keep reading. 

What is co-employment?

Co-employment includes two or more parties sharing specific legal responsibilities and obligations towards an employee or an independent contractor.

Simply put, it is a contractual relationship between a client (company) and a co-employer in which the company engages an independent contractor, and a co-employer takes over administrative work, payroll, etc. 

In addition, companies looking for qualified temporary employees can choose between staffing agencies and Professional Employer Organizations (PEOs), depending on their needs.

  • Staffing agencies hire employees on the client's behalf, so they focus on the hiring process and tasks that go with it.  
  • A Professional Employer Organization or an employer of record also focuses on particular HR tasks. In this constellation, the company hires, while PEO is in charge of administrative tasks, such as payments and tax responsibilities.

If a company hires an independent contractor on a full-time contract, the arrangement with the co-employer ends, making the company the exclusive employer.

How does co-employment work?

Once the company and PEO come to a verbal agreement, they sign a written contract, called a Client Service Agreement or CSA. This contract comprises their responsibilities and establishes that both entities (company and PEO) are employers. 

The client's responsibilities

Companies partner with co-employers to save time and focus on business-related tasks rather than on HR and administration. But, the CSA also comprises the client's responsibilities, and the list includes: 

1. Delegating assignments, conducting evaluations, and measuring contractor's performance
2. Specifying the length of the assignment
3. Providing proper work conditions (if the worker needs to work from a client's office).

The co-employer's responsibilities 

Regardless of the type of a co-employer you choose, the staffing agency or PEO, the co-employer is in charge of:

  • Hiring and firing process
  • Performing work authorization check
  • Assigning workers to jobs 
  • Pre-screening, including background and reference check, drug screening, etc
  • Determining pay rates
  • Paying employees and handling payroll taxes, employment taxes, etc
  • Complying with employment laws and regulations

In addition, as a primary employer, a staffing agency, for instance, should also ensure all workers possess adequate skills. It should be in touch with every employee, provide feedback when necessary, and be willing to help whenever a worker comes across a particular job-related problem or concern.

Is co-employment the same as joint employment?

One of the misconceptions regarding co-employment is that it is the same as joint employment or employee leasing. Although these arrangements share some similarities, they are not synonyms, and the significant difference between them revolves around employers' responsibilities. 

Joint employment

Joint employment is a partnership where both companies share the same employer responsibilities. It means both sides contribute to a worker's wage, schedule, and supervise their performance, whereas, with co-employment, a client company is in charge of workers' daily activities and hiring process, PEO doesn't have a say in these aspects. 

Employee leasing

Unlike co-employment, where a PEO is not responsible for hiring new employees on the client's behalf, employee leasing is an agreement in which a staffing agency finds temporary workers for its client.

So, when a company ends collaboration with a PEO, employees stay with the company. In case of employee leasing, employees return to the agency when its partnership with a client company ends. 

Why do companies use this type of business relationship? 

The strength of every company depends on the quality of its workforce. That's why companies focus on finding and keeping the most talented individuals. 

However, not all businesses can hire someone full-time, or they need a professional just for a limited period to help with a particular project. That's the reason many businesses opt for co-employment. 

Various benefits attract companies to become involved in such a relationship, and these are the most appealing ones:

Available and reliable HR support

Startup companies and small businesses often turn to a PEO for HR support. 

As a partner, your PEO can provide necessary services, both strategic and administrative. In addition, companies that have HR can also consult with a co-employer whenever they need additional advice or expertise.

Talent management 

Co-employment can be a profitable strategy for attracting skilled workers when looking at benefits packages that come with such an arrangement. It can also help you adapt to new work trends and approach contract workers. 

Some staffing agencies offer additional services, such as employee training, ensuring the new (temporary) member of your team is well-prepared to hit the ground running as soon as they join the team.

Also, staffing agencies can give you a hand with an onboarding process and performance management. 

Compliance professionals

Compliance presents a hard-to-handle challenge for many companies. Another reason companies partner with a PEO is the compliance expertise such an organization provides. They focus on workplace policies, tax reporting, etc.

PEOs have risk managers and compliance professionals who can help create a strategy to avoid penalties.

Outsourced payroll

As mentioned above, one of the PEO's responsibilities is to manage payrolls. It is convenient for businesses that can't handle this process independently. A PEO can take over this task, calculate salaries, pay the workers, manage withholdings, collect necessary documentation, and complete other tax-related responsibilities. 

Workers' compensation insurance

Another thing that often causes stress to many business owners is managing workers' compensation coverage. Here's where a PEO steps in again and takes over benefits administration. The organization ensures coverage for each client, handling any claim that might occur. 

In addition, the most experienced agencies launch different initiatives like training programs and webinars for employees to help companies prevent accidents. 

Fortune 500®-caliber benefits

Last but not least, cost-effective yet high-quality healthcare insurance is why businesses opt for a co-employment agreement. In addition, many PEOs go beyond the essential benefits of dental and medical insurance and offer additional benefit plans, such as retirement savings plans. 

The risks of co-employment

No one can overlook the benefits co-employment brings. However, benefits come with obstacles, so if you’re considering this type of hiring, make sure you take all risk mitigation measures.

According to Statista, In 2019, temporary and contract staffing employment amounted to approximately 16 million, so it is manageable to find workers open to short-term engagement.

But there's a catch. Many workers accept such an arrangement because they need to, even though they are employee-minded and hope to get a full-time contract. 

You may encounter a risk if a temporary worker thinks they should be treated as employees. Then, they can take legal action, especially if they prove you treat independent contractors as regular staff without providing the same employee benefits. When that happens, both you and a staffing firm could face penalties.

This is why it’s critical to carefully study the difference between contractors and employees and ensure you’re not facing a misclassification issue.

For instance, if you demand an independent contractor to work the same hours as regular employees, come to the office and use your equipment, it is their right to file a complaint and even sue you.

So, choosing co-employment is often a lottery because you can only hope to hire someone who enjoys such a working arrangement. Otherwise, you risk hiring an unmotivated individual eager to put you at risk if you don't meet their professional aspirations. 

How to avoid co-employment risks

There are ways to avoid unpleasant scenarios. Here’s how you to mitigate potential risks that co-employment carries.

Remember, an independent contractor is not an employee

When you hire an independent contractor, they become part of your team. But, you need to always keep in mind that a contractor and a full-time employee are not the same

A temporary worker may connect with your other team members and start acting like their colleague. That's legit; you can't forbid anyone to hang out with whoever they want regardless of the professional agreement you have and it’s good to foster positive atmosphere in your team, regardless of the type of contract someone has.

Still, it would be best to tell your team members and managers that you are working with an independent contractor, so they can't expect them to perform everything expected of a regular employee. 

The same is with you. If satisfied with your contractor's performance, you may feel tempted to give them additional work or demand something beyond your initial agreement. However, it’s something you shouldn’t do, or you should at least consult with them before making new decisions.

Transparency is the key to prosperous and long-term business relationships. So, if you need an independent worker to work longer or on something besides the project they are engaged in, talk to them, explain the situation, and see if they agree.

Perceive an independent contractor as an independent business

When you hire someone using co-employment, it's like hiring a company.

As you know, every company has its work dynamics, and so does your independent contractor. They know when they should complete the assignment, but you can't tell them, for instance, how many hours per day to work or determine their worksite. 

Some prefer day work, and others are most productive at night, so everything you should do is ensure you agree about who expects what from whom and when you should provide each other feedback.

Proper classification is vital

To avoid headaches, ensure every independent contractor your company engages is adequately classified. That way, you will prevent accusations of employee misclassification.  

It may look complex, but the only way to mitigate any risk is to understand and abide by local and state laws. In addition, if you want to partner with a staffing agency, learn as much as possible about their classification process.

Remember, it is a major red flag if they don't have it. 

The golden rule: partner with a reliable staffing company

We all know how much value human resources bring to every company. But, if you still don't have an HR expert and are unsure whether you can deal with so many aspects of hiring an independent talent, co-employment can be an ideal solution. 

All you need is to take some time and look for reliable partners, specialized service providers that can navigate all the aspects of the hiring process. Otherwise, you risk putting your company and your reputation at risk. And you would not want that, especially if you are growing your business. 

Do what's best for your company

Running a company doesn't allow skipping the steps. Yes, it can be overwhelming and challenging at times, even dull, but every responsible business owner respects rules, employees, and partners. Remember, mutual respect is the key to success, especially if you plan to hire internationally. 

You need to think of so many things: payrolls, health insurance, additional benefits, and staying compliant with local and state laws. We know, and we are here to take it off your plate. We can help you go through every hiring process as smoothly as possible. 

Deel covers everything, from helping you hire contractors and employees all around the globe, running your payroll, and managing compliance. So reach out to us today and book a demo because nothing is impossible with the right partner by your side.

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