What is co-employment

Co-employment refers to a contractual and legal arrangement in which a client company shares certain employment responsibilities with a business service model. It’s most commonly used in partnership with a professional employer organization (PEO).

When your business uses a co-employment arrangement, the business service partner manages HR tasks such as payroll, employee benefits, and regulatory compliance. You—the client company—continue overseeing daily employee activities and business operations.

A co-employment arrangement helps companies limit their employment liability and can protect the business from risk. The PEO provides compliance expertise for US states, workplace safety guidance, and advice for handling employee discrimination, harassment, or termination cases.

How co-employment works in practice

In a co-employment relationship, responsibilities are clearly outlined in a Client Service Agreement (CSA). Here’s a look at the typical division of responsibilities under a co-employment agreement with a professional employer organization (PEO):

Co-employment vs. joint employment vs. employee leasing

Co-employment is often compared to similar employment models, such as joint employment and employee leasing, but they’re not quite the same. Here’s what you can expect from each model:

Benefits of co-employment

With 50 different states in the US, plus local and federal laws to follow, managing employees is an uphill task.

Partnering with a provider under a co-employment agreement will significantly lighten your team’s HR workload, help you attract and retain talent with high-quality benefits, and reduce compliance risks. With a PEO, you can easily hire employees in the US without worrying about managing HR compliance or employee benefits administration.

Administrative relief

Businesses can offload time-consuming HR tasks like payroll processing, benefits management, tax filings, and regulatory reporting. This significantly reduces internal workloads, freeing HR teams to focus on strategic initiatives like talent development and organizational culture.

Better employee benefits

Through strong negotiating power with health carriers, professional employer organizations like Deel PEO provide businesses with access to enhanced employee benefits and Fortune 500 large group medical plans. This includes comprehensive health insurance plans, retirement plans, life insurance, and other perks typically available only to larger companies.

With Deel PEO, you get access to 60+ domestic benefit plans and exclusive access to an Aetna International master plan, which enables US W-2 employees to use the same insurance card and benefits abroad, with no disruption to coverage.

Compliance and risk mitigation

PEOs employ experts dedicated to staying current on labor laws, tax regulations, and workplace safety requirements. This helps reduce your company’s exposure to legal, financial, and compliance risks. They also offer employment practices liability insurance (EPLI) to protect against potential litigation, so your business is financially protected.

Talent attraction and retention

Offering competitive employee benefits, perks, and 401(k) retirement plans improves a company's attractiveness to potential employees. Improved HR administration and employee satisfaction lead to reduced turnover, increased morale, and better overall employee retention.

Scalability

Co-employment arrangements allow businesses to scale their HR resources up or down, depending on organizational growth or contraction. This flexibility is especially beneficial during periods of rapid expansion, downsizing, or geographic diversification across the US. Easily hire US employees in new states and offload the ongoing employment work to a PEO partner.

See also: How to Use PEO Services for US Expansion

Challenges and risks of co-employment

Entering into a co-employment relationship with the wrong partner can introduce legal, financial, and organizational risk. Here’s what to look out for:

Reduced autonomy

Companies entrust essential HR functions such as payroll, benefits management, and compliance tasks to a third party. While this can streamline processes, it may limit a company’s direct oversight and flexibility in managing specific HR practices, potentially hindering responsiveness and customization.

Partner risk

Selecting an unreliable or poorly managed business service model could lead to significant compliance failures, financial liabilities, and reputational damage. Companies must thoroughly vet potential partners to ensure they have a solid compliance framework and reputable client references.

For example: You can read Deel reviews to see why we’re ranked 4.8/5 by over 8,900+ customers. You can also watch the video below to learn how Superfiliate uses Deel PEO to scale their US team.

Shared liability

Even with an employment partner handling compliance, companies retain substantial legal responsibilities, especially around workplace safety, harassment prevention, and overall employment conditions. If compliance lapses occur, both the business service model and the client could be held accountable, emphasizing the need for ongoing diligence.

Misclassification risks

Businesses might mistakenly classify workers as contractors or temporary employees under co-employment arrangements to avoid tax or benefit obligations. Such misclassification can lead to substantial penalties, back taxes, and litigation.

Platform and system integration

Adopting a new system for HR or payroll can be disruptive, especially if it doesn’t work well with your existing tools. Look for a solution that integrates with top HR and platform tools and offers a customizable API for enhanced automation.

Lack of employee support

Unclear or poorly communicated co-employment arrangements can cause employee confusion about their employment status, benefits administration, and HR contacts, potentially impacting morale and engagement. A PEO’s ability to support employee questions about payroll, tax, HR, and other employment topics is key here.

With Deel, you get hands-on support throughout the benefits enrollment and renewal process. We also lead your open enrollment meetings, walking employees through the plans and showing them how to make their elections online.

How to avoid co-employment issues

To mitigate risks effectively, businesses should implement comprehensive compliance strategies:

Clear contracts

Explicitly define each party's responsibilities and liabilities within the CSA. Clearly review areas such as payroll responsibilities, tax filing obligations, compliance oversight, workplace safety protocols, and indemnification clauses to prevent ambiguity and disputes.

Distinct HR practices

Maintain clear boundaries, especially regarding the classification and management of employees. Ensure HR policies clearly differentiate between co-employed employees, direct employees, and independent contractors to avoid misclassification issues and legal ramifications.

Effective communication

Clearly communicate the specifics of the co-employment arrangement to employees, clarifying roles, responsibilities, and contact points for HR matters. Clear and ongoing communication helps employees understand their employment relationship, reducing confusion and potential dissatisfaction.

Routine reviews

Conduct periodic compliance audits and regular meetings with the provider to monitor adherence to contractual obligations, regulatory compliance, and employment standards. Regular reviews and oversight can swiftly identify and address any emerging issues or gaps.

Is co-employment right for your business?

Determining whether co-employment suits your business involves evaluating several critical factors:

Factors to consider:

• Business size: Small to medium-sized companies often benefit significantly from co-employment by gaining access to advanced HR resources and employee benefits typically reserved for larger organizations
• Industry: Companies in highly regulated industries (such as healthcare, manufacturing, and technology) may find substantial value in the compliance expertise provided by PEOs
• Growth stage: Businesses experiencing rapid growth, US market expansion, or fluctuations in workforce size can leverage co-employment for scalability and flexibility

Readiness checklist:

• Do you spend excessive time on HR administrative tasks?
• Are you concerned about staying compliant with changing employment laws?
• Would enhanced employee benefits help attract and retain talent?
• Is your business undergoing rapid growth or expansion?
• Can you benefit from external HR expertise without significantly sacrificing control?

Alternatives to co-employment

Companies exploring alternatives to co-employment can consider several viable models, each with unique benefits and considerations:

In-house HR

Businesses handle HR internally, maintaining full control over employment processes, policies, and management practices. This model is beneficial for organizations with sufficient HR resources and a preference for complete autonomy, but it requires significant internal investment in HR expertise, technology, and compliance management.

Employer of record (EOR)

An employer of record acts as the sole legal employer for workers. They manage all employment-related obligations such as payroll, employment taxes, benefits, and compliance. This approach is particularly advantageous for international expansion, allowing companies to establish a presence in foreign markets without forming local entities, simplifying compliance with complex international labor laws.

Independent contractors

Engaging independent contractors provides flexibility for project-specific or temporary labor needs without creating employer-employee relationships. However, businesses must carefully manage contractor relationships, ensuring strict compliance with labor laws to avoid potential misclassification issues and associated liabilities.

With Deel, you can manage payroll and HR your way. From PEO and US payroll to EOR and Contractor of Record services—and more—you’re able to select the services that best fit your needs. Book a personalized Deel demo to learn more about your options.