Co-employment is a contractual relationship whereby two parties share legal employer responsibilities of employees.
Co-employment occurs when two companies have rights and obligations as an employer: The client company maintains responsibilities for the employee’s job duties and daily operations, while the partnering company manages administrative and personnel-related matters.
Businesses typically use co-employment to outsource administrative HR tasks to a staffing agency, employee leasing firm, or professional employer organization (PEO).
For example, a PEO provides HR services, including payroll processing, benefits administration, tax filings, and compliance management.
Small companies looking to scale often enter a co-employment arrangement when they need to offload HR functions in the short term. By outsourcing administrative tasks, business leaders can reduce costs, mitigate payroll errors, or free up time to focus on running the core business.
Co-employment vs. joint-employment
Co-employment and joint employment differ in the level of control each party has over the workforce.
With co-employment, one party (the client company) controls hiring and employee work. The client company manages hiring decisions and daily activities of the employees, while the co-employer partner (the staffing company or PEO) manages the administrative HR tasks.
With joint employment, both parties have input and shared control over employees, including day-to-day tasks, hiring, supervision, termination, payroll, and other HR functions. For example, in joint employment, both parties can be involved in vetting and interviewing new hires.
Co-employment vs. employee leasing
Employee leasing is a temporary staffing arrangement where a staffing agency provides employees to a company for a specific project or assignment. The employees return to the staffing agency once the project is complete.
In a co-employment arrangement, the staffing agency does not supplement the client company with additional employees but rather works with the company's existing employees or helps hire new employees.
How does co-employment work?
Co-employment is the contractual agreement between a client company and a services company to share legal employer responsibilities. For example, a company hires a PEO to handle its HR tasks, and each party contractually agrees to the terms and conditions of the shared employee relationship.
The client company makes all the decisions on sourcing talent, hiring, and employee work. The co-employment partner manages HR activities, such as employee onboarding, payroll, benefits, and compliance with local employment laws and requirements. In the above example, the PEO files payroll and payroll taxes under its identification number (EIN).
Co-employment does not mean employers lose ownership or control of their business. In a co-employment arrangement, the client company continues to manage its employees and daily operations while the services company focuses on administrative and HR-related tasks.
Example of co-employment
Let’s say a small business just established a subsidiary in Canada and hired new local talent. Due to funds and workforce restrictions, the business partners with a local PEO to offload its HR and compliance tasks in the short term.
The PEO is the co-employer as it handles administrative tasks and HR-related needs, while the business maintains responsibilities over its employees and daily operations.
Co-employment risks to avoid
Co-employment is an effective short-term solution for small businesses looking to scale on a budget; however, it also comes with risks. Companies must vet for credible and knowledgeable co-employment partners with the expertise to manage HR tasks and ensure compliance with employment laws and regulations.
Some common risks when entering a co-employment arrangement include the following:
Contractor misclassification
When a company seeks to engage contractors for short-term work, it may work with a co-employer to manage tax and HR tasks. However, employers risk misclassification if they illegally categorize employees as contractors based on factors like the worker’s financial relationship with the company or degree of control over their work.
If misclassification occurs, both the company at fault and its co-employer risk audits, fines, back pay responsibilities, and legal issues. Co-employment does not free a client company from misclassification liability, even if the co-employer is responsible for misclassification.
Companies looking to partner with a co-employer to assist with contractor obligations must practice due diligence when vetting co-employers to ensure they understand the misclassification risks. Businesses should only enter a co-employment agreement with a reputable partner specializing in contractor engagement and well-versed in classification laws.
Read our complete guide to employee and contractor misclassification.
Employment liabilities
While your co-employer may take on HR and administrative responsibilities such as payroll processing, benefits administration, tax filings, and compliance, it does not free you from potential risks of non-compliance.
For example, if your co-employer is audited and found guilty of calculating incorrect payroll contributions for your employee in Canada, your company will also be held responsible and required to pay damages.
Taxation errors
Similarly, client companies are responsible for employment taxes, even if their co-employment partner fails to pay them. If the co-employment partner fails to pay employment taxes on behalf of the client company, the client company shares liability.
Client companies may also face tax errors if they enter or leave a co-employment arrangement mid-year, as they could be subject to a restart for certain payroll taxes.
Businesses should only work with vetted and reputable co-employment partners who are certified and experienced in managing employment taxes.
Can a co-employer help hire global talent?
A co-employer cannot help businesses hire global talent because they are not sole employers. Additionally, co-employers do not have foreign entities in other countries. Co-employers such as PEOs can only help with local HR responsibilities.
When is co-employment right for you?
There are advantages to co-employment, especially for companies that do not have the bandwidth to manage their HR needs and functions.
Co-employment might be right for you if:
- You’re a small business with a tight budget but interested in scaling.
- You want to offload HR and administrative tasks to offset costs and hire faster.
- You want assistance managing talent in new markets where you already have entities.
- You want to hire contractors for short-term projects but don’t want to handle pay or taxes.
Alternative to co-employment
An alternative to co-employment is to partner with an employer of record (EOR).
Like a co-employer, an EOR handles various employment and HR responsibilities on your behalf. But unlike a co-employer, an EOR acts as the full legal employer of your supported talent. This important distinction means that an EOR significantly reduces your risk of liability.
Despite this arrangement, you still maintain a similar relationship with your supported employees as you would without partnering with an EOR: You continue to control day-to-day management tasks, like compensation, position duties, projects, and performance management.
Another key distinction is that an EOR enables companies to hire and pay talent in international markets without entities. This means companies can quickly enter new markets and hire top talent without undergoing the arduous process of setting up an entity in that country.
An EOR has comprehensive knowledge of international employment laws and provides local expertise to ensure compliance. An EOR also specializes in HR-related tasks on a global scale, including the following:
- Drafting locally compliant employment contracts
- Managing global payroll and tax withholdings
- Paying international talent accurately and on time
- Crafting and administering competitive and locally tailored benefits packages
- Relocating talent to new markets
- Obtaining appropriate work visas and permits
- Ensuring full compliance with local employment and tax laws
- Providing ongoing HR support for your international talent
Learn more: PEO vs. EOR: Which Is Right for Your Organization?
Legal disclaimer: The information available in this guide does not, and is not intended to, constitute legal advice and is for general informational purposes only. You should contact your attorney to obtain legal advice with respect to any particular legal matter. Only your individual attorney can provide assurances that the information contained in this guide—and your interpretation of it—is applicable or appropriate to your particular situation. All liability with respect to actions taken or not taken based on the information in this guide is hereby expressly disclaimed. The content in this guide is provided "as is," and no representations are made that the content is error-free.
