What is Co-Employment? How to Avoid Co-Employment Risks
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What is co-employment?
Co-employment is a contractual arrangement in which a client company shares certain employment responsibilities with a professional employer organization (PEO). As the co-employer, a PEO provides human resources services and shares some legal liabilities of employment.
PEOs are the main type of co-employer. But businesses interested in co-employment should also know about similar arrangements for employment and HR outsourcing:
- Employer of record (EOR): a service that offers additional legal protection and support for international hiring
- Employee leasing: a staffing agency that provides non-employee temporary workers
- Joint employment: a set up where two companies employ and manage the same workforce
But more on each of those later. First, let’s dig deep into co-employment.
How does co-employment work?
Once a business chooses to work with a co-employer, it signs a written contract called a Client Service Agreement or CSA. This contract makes both entities (company and co-employer) legal co-employers and outlines the responsibilities of both parties.
Co-employer responsibilities: the legal nuts and bolts of compliant hiring
A co-employer can:
- Hire and fire employees and independent contractors
- Perform work authorization checks
- Assign workers to jobs
- Pre-screen employees, including background and reference checks and drug screenings
- Determine pay rates
- Pay employees and handle payroll taxes and employment taxes
- Complying with employment laws and regulations
Company responsibilities: day-to-day management of workers
The client company manages the day-to-day work of its employees. They:
- Coach and support employees
- Delegate assignments
- Conduct evaluations
- Measure workers’ performance
- Specify the length of the employee contract
- Provide proper work conditions and equipment
Benefits of co-employment
A co-employment relationship provides HR services to the client company, saving them costs and time.
Reliable HR support
The co-employer takes care of all of your company’s HR needs, depending on the level of support needed.
Building an internal HR department can be expensive and time-consuming. Start-ups and small businesses with limited resources may find co-employment especially appealing. Companies with an existing HR department can hire co-employers to gain access to HR experts and expand their HR offerings.
Co-employment can help client companies attract skilled workers. Co-employers are often aware of the latest work trends, such as the increasing prevalence of contract workers and distributed teams.
If you want to source fresh talent, co-employers can give great advice and help you take steps to hire strong workers. Once you’ve found new talent, a co-employer can assist with training, onboarding, and performance management, and help you provide competitive employee benefits packages.
Co-employers can assist with compliance and regulatory oversight. PEOs have risk and compliance experts who keep on top of evolving HR regulations and develop protection strategies to avoid fines and penalties.
A co-employer can assist with:
- Employee classification
- Labor laws
- Tax reporting
- Unemployment and workers’ compensation claims
- Workplace policies
If a legal issue arises, co-employers will only take some of the legal liability. Since both company and co-employer are legal employers, both are responsible for the employee and can be held liable for misclassification, for example. This arrangement differs from an EOR, which acts as the complete legal employer of the company’s employees and therefore takes full responsibility if a legal issue should arise.
As mentioned above, co-employers are also responsible for managing payroll. Companies can outsource payroll to hand off calculating salaries, paying workers, managing withholdings, collecting documentation, and completing employment taxes. Delegating these responsibilities eradicates errors and penalties so you can enjoy peace of mind.
Workers’ compensation insurance
Another responsibility that often causes stress for many business owners is managing workers’ compensation coverage. Co-employers can take the reigns of benefits administration, ensuring coverage for each client and handling any claims.
In addition, the most experienced agencies launch different initiatives like training programs and webinars for employees to help companies prevent accidents.
Last but not least, providing benefits like cost-effective yet high-quality healthcare insurance is another reason businesses opt for a co-employment agreement. Many co-employers go beyond the essential benefits of dental and medical insurance and offer additional benefit plans, such as retirement savings.
Co-employment risks: tax errors and misclassification
Suppose your co-employer is not certified by the IRS and something goes wrong; for example, the co-employer fails to pay taxes on behalf of your company or misclassifies a worker. In that case, your company could be held partially liable and face some penalties.
Fortunately, there are some pretty straightforward ways to avoid a scenario like this, as you’ll see below.
How to avoid co-employment risks
There are simple ways to avoid risky scenarios with co-employers. Here’s how you can mitigate potential risks:
Use a certified co-employer
If you’re considering working with a co-employer, you must ensure they are certified by the IRS and the Employer Services Assurance Corporation (ESAC). These governing bodies run thorough background checks and set reporting requirements to ensure co-employers are reliable and worthy of certification.
If the co-employer is certified, the company is secure in the following scenarios:
- Your company is not accountable if the co-employer fails to pay your federal employment taxes
- Your company can terminate the co-employment agreement at any time of the year and won’t face a wage-base tax restart
- Your company could continue to claim tax credits for which they would typically be eligible if they were not in a co-employment arrangement
Be diligent about independent contractor classification
Worker misclassification is the act of compensating a worker as an independent contractor (IC) when they perform the duties and responsibilities of an employee.
Classifying new hires correctly can be challenging. However, knowing all the differences between types of workers is essential to avoid the penalties and legal consequences of misclassification.
Misclassification is problematic because the company is not paying enough taxes or providing the correct worker benefits, compensations, and insurance. Misclassification has negative repercussions on workers, state and federal governments, and the company.
Fortunately, certified co-employers are experts in worker classification and can help you avoid these employment issues.
Common myths and misconceptions about co-employment
Myth 1: Co-employment is bad
There is nothing bad about co-employment or partnering with a co-employer. These relationships only cause problems if either entity is uncertain of their respective roles and responsibilities or fails to comply with employment law requirements. Be sure to partner with a certified company that communicates and conducts itself openly and transparently.
Myth 2: Co-employment is risky if you intend to hire independent contractors
Bringing on independent contractors such as freelancers while in a co-employer agreement is not risky as long as they are classified correctly. The primary responsibility of co-employers is to support your full-time employees: for example, most co-employers will not pay your independent contractors even if they manage employee payroll.
However, great co-employers will offer knowledge and recommendations regarding any independent contractors you hire. They will also help you navigate independent contractor classification and share liability in the case of misclassification.
Myth 3: Using a staffing agency removes the risk associated with co-employment
Not necessarily. When a company engages a staffing agency to find skilled workers for specific roles, both entities are viewed as employers and have obligations to the worker. The agency remains the workers’ primary employer, which means they are responsible for HR functions such as recruiting, hiring, and payroll, while the company handles the work agreement. If the staffing firm fails to comply with employment laws, both parties will be held liable.
For example, If a worker decides to take legal action because they think they should be treated as an employee, both your company and the staffing agency can be held responsible and have to pay damages.
Myth 4: Co-employment replaces my HR team
No, co-employment manages some of the most technical and legally complex aspects of employment. But many companies that use co-employers also have HR teams focused on employee experience, company culture, and performance management.
If you have an HR department or personnel, a co-employer can augment the HR team’s capabilities and provide additional expertise and initiatives. A co-employment partner can safely guide and support your business as it grows, freeing up more of your HR team’s time to divert their efforts to learning and development to ensure everyone grows alongside the company.
Co-employment is sometimes mistaken for employee leasing or joint employment. Although these arrangements share some similarities, they are not synonymous. The significant difference between them revolves around the employers’ responsibilities which we explain below.
Co-employment vs. joint employment
Joint employment means that two separate employers govern the same worksite employees. Both parties contribute to a worker’s wage, schedule, and supervise their performance. Whereas, with co-employment, the company is in charge of the hiring process and the workers’ day to day work.
Co-employment vs. employee leasing
Employee leasing is an arrangement where a staffing agency provides a business with temporary workers. Once a temporary employee has fulfilled their duties, they return to the staffing company.
On the other hand, co-employers are not responsible for sourcing new employees on the company’s behalf. If a company decides to stop working with a co-employer, the employees remain with the company.
Can a co-employer help me hire international workers?
Co-employees cannot hire international workers. Employers of record (EORs), also called international PEOs, are similar to PEOs but allow international hiring and additional legal protection.
PEOs are co-employers of people who work for you. They are not the sole employers nor do they have foreign entities in other countries, which you need wherever your employees reside.
EORs, on the other hand, employ the people who work for you, so partnering with an EOR lets you hire workers wherever the EOR has established a local entity or partnership. Deel, for example, has local entities and partners across the US and in over 150 other countries. With Deel as your EOR, you don’t have to set up a branch office in a new country to hire there.
In addition, EORs:
- Provide better employee benefits and insurance
- Help improve employee experience
- Handle all international compliance and legal responsibilities
- Have no minimum employee requirements (PEOs typically require you have 5-10 employees minimum)
Learn more about the difference between PEOs and EORs.
Choose the solution that meets your longterm needs
Many companies investigate co-employers, such as PEOs and EORs, because they plan to expand. We recommend choosing a solution that will accommodate your plans for international growth years down the line, not just a short-term HR fix.
If you want assistance with your HR responsibilities and want to open the door to growth and global expansion, choose an EOR.
In addition to payroll, health insurance, additional benefits and perks, and staying compliant with local and state laws, EORs can help you expand across state and national lines without establishing local entities or worrying about local compliance. This capability is especially valuable in the remote work landscape, where companies are now competing for the best talent globally.
However, a PEO could be better if you plan to stay local and retain full legal responsibility for your small contingent workforce. PEOs are an excellent solution for businesses that only want to offload HR responsibilities to focus on other aspects of the company.
Open the door to growth and expansion with Deel
Struggling to find the time and resources to assemble a robust HR department, let alone build a talented international team? As a business owner, you have so much to think about: payrolls, health insurance, additional benefits, and staying compliant with local and state laws.
Deel helps businesses tackle international growth by covering everything from running your payroll and managing compliance to hiring global talent, cost-effectively and with minimal effort.
Focus on building your best business. Take a look at the valuable resources on our blog or book a demo to see how we can help today.