What is co-employment?

Managing HR and payroll can be daunting, especially for small and medium-sized businesses that don’t have a separate department to handle tasks like running payroll and registering new employees with the respective authorities. 

Errors in payroll and HR administration can expose businesses to severe compliance risks, which is why these aspects of managing a workforce must be approached with extra care. The problem is that business owners and leaders in SMBs often don’t have the time nor the headspace to deal with the complexities surrounding payroll and employment.

Spending time and capacities of the leadership team on administrative HR tasks instead of the development of new ideas to drive the business forward can have a negative impact on business growth. This is where co-employment comes into play. But what exactly is co-employment? How does it work? And what are the risks and benefits associated with it?

In the most basic sense, co-employment describes a situation where a company shares the employment liabilities and responsibilities for one or several employee(s) with a third party, usually a Professional Employer Organization (PEO). The respective employees are then co-employed by the business and the PEO, the latter acting as the official co-employer.

Co-employment is quite popular in the United States where it is offered as an employment outsourcing solution by PEOs—often used by businesses that want to mitigate risks when hiring employees in different states. In the context of international hiring and recruiting, however, co-employment can be tricky—we’ll dive deeper into this at the end of the article.

Co-employment vs. joint employment

Co-employment shouldn’t be confused with joint employment. In a joint employment arrangement, two businesses jointly oversee the daily activities and workload of an employee and make decisions regarding compensation, performance, and more. 

Both businesses hold the role of the employee’s employer. However, one of the businesses acts as the direct employer, hence taking on more legal responsibility, while the second business takes on the role of a joint employer. 

The main difference between co-employment and joint employment is that in a co-employment arrangement, only one of the parties has the right to make labor-related decisions. In joint employment, on the other hand, the decision-making power regarding all aspects of the employment relationship is divided between the two businesses.

A co-employment arrangement between a client business and a PEO is based on a contract, typically a client service agreement (CSA), that clearly outlines which responsibilities and liabilities are transferred to the PEO. The agreed distribution of responsibilities usually sees the client business (i. e. the actual employer) remaining in charge of day-to-day operations which includes managing the employee’s workload, tasks and more, while the co-employer (i. e. the PEO) takes over a major part of the business’s HR responsibilities and administrative tasks (see next section for more details). 

Many businesses are concerned that they might lose control over their employees when entering into a co-employment arrangement. However, this is not the case, since operational control remains in the hands of the client business.

Co-employment first and foremost means sharing liabilities and responsibilities. But which responsibilities remain with the actual employer? And which ones go over to the co-employer?

Responsibilities of the co-employer relate to HR, payroll and administration topics, including:

• Legal onboarding and offboarding,

• Benefits management,

• Payroll processing,

• Regulatory compliance tasks,

• Record keeping,

• Tax administration (reporting, collecting and depositing of income and payroll taxes with the respective authorities),

• Providing additional insurance, and

• Paying wages, salaries and more.

Responsibilities of the actual employer include operations, day-to-day management, workforce decisions, such as:

• Managing employee workload,

• Project management,

• Overseeing operations,

• Performance management, and

• Hiring decisions.

Co-employment offers businesses a series of advantages. But as always, there are also some drawbacks to consider.

Advantages of co-employment:

• Risk mitigation: Outsourcing heavily regulated HR and payroll processes to a PEO with the necessary expertise considerably reduces compliance risks.

• Business growth: A co-employment arrangement frees business leaders from employment administration tasks, which means they have more time to focus on business growth.

• Access to first-class employee benefits: Employee benefits are a great way to attract talent. In the US, however, top-tier employee benefits are only accessible to large organizations. Working with a PEO can give SMBs access to these benefits.

• Streamlined processes: With managed payroll and HR services, processes can be optimized and streamlined, which increases efficiency and leaves less room for errors.

• Additional support: Depending on the PEO, the provider might even offer support in designing HR strategies and policies.

Disadvantages of co-employment:

• Additional costs: PEOs don’t offer their co-employment services for free, which means additional costs the business needs to calculate for.

• Accountability: If the PEO fails to deliver (for instance by missing a deadline for tax payments), the client business can be held responsible.

• Exit difficulties: Ending the co-employment arrangement can be difficult (e. g. possible risk of wage-base restart for federal payroll taxes due to use of a new federal employer identification number (FEIN)).

Co-employment risk describes the risk for a business to be considered a co-employer for another business’s employees without having concluded a proper co-employment agreement with the other business and without ever having intended to enter such an arrangement. In the worst case, the supposed co-employer could be held liable for employer obligations along with the real employer of the employees.

When looking at co-employment through the lens of international hiring, however, the risks linked to co-employment change. While the concept is well-established and completely legal in the United States, the same can’t be said for other countries. In fact, many businesses looking for solutions to hire talent in other countries through an intermediary wonder: Is co-employment illegal? The answer must be: It depends on where in the world the organization wants to use PEO services.

Co-employment is a legal gray area in many jurisdictions; in some countries, sharing employer responsibilities is even likely to land the business in a co-employment lawsuit. That’s why an Employer of Record (EOR) is usually the better option for hiring employees abroad. An Employer of Record hires workers on behalf of the client business, which means that the EOR takes on the role of the employee’s official employer in the eyes of the law. This allows the client business to avoid setting up a legal entity in the country where the employee is based, which saves time and money.