What Is Co-Employment? (and How to Avoid Risks)
Co-employment was shadowed by so much confusion and myth over the years that many businesses avoided the topic altogether. But that’s getting tougher to do.
It’s getting tougher because more businesses are relying on independent professionals, such as freelancers, to get work done. Co-employment risks usually surface when businesses don’t understand how they can and can’t work with these external professionals.
But once you understand the fundamentals, you’ll be able to maintain peace of mind when tapping into the wide array of skills and experience offered by independent professionals.
If you want to get the help you need without worry and just focus on getting work done, this is what’s helpful to know:
- What is co-employment?
- How does co-employment work?
- The difference between co-employment vs. joint employment
- Co-employment myths
- Benefits of a co-employment
- How to avoid co-employment issues and risk
What is co-employment?
Co-employment is when two organizations agree to share responsibilities related to an employee, but each employer performs separate roles. Usually, the division looks like this:
- You, the client business, make all the decisions about where you source talent, who you hire, and the work they do.
- The co-employment partner manages the HR-related activities including onboarding, paying, and administering benefits and W-2s.
Essentially, you’re paying another organization to handle your HR tasks. The most common co-employment scenarios are where one employer is a business and the co-employer is a staffing agency, professional employer organization (PEO), or administrative services outsourcing company (ASO).
How does co-employment work?
In co-employment, a client business signs an agreement with a co-employer partner that may cover specific employees, such as people provided by a staffing agency, or all of the employees in a business.
For example, let’s say you’re a business owner who engages a mobile app developer for a 6-month, full-time project, and you determine that the details of the engagement creates an employment relationship. So you call a staffing agency who sends a few candidates for you to interview and you hire one. Throughout the project, you meet with the developer weekly to discuss project details and check on their progress.
But the app developer came to you through a staffing agency and is only working for you until the project is completed. So when it’s time to get paid at the end of each week, the developer submits their timecard to the staffing agency.
In this arrangement, the agency is also their employer, or co-employer. But the staffing agency doesn’t get involved in the day to day details of your business or the mobile app being built. That’s your domain.
The staffing agency is only responsible for personnel-related tasks like payroll, filing taxes, and handling benefits. Once your project is complete, your relationship with the app developer will come to an end, but the staffing agency is likely to have an ongoing relationship.
The difference between co-employment vs. joint employment
The difference between co-employment and joint employment is that in joint employment, both the business and co-employer jointly control and supervise the duties and daily details of an employee’s job. For example, a joint-employer could suggest adding headcount to help meet the business’s growth goals, and be involved in vetting and interviewing new hires.
In a joint employment relationship, generally speaking, both parties have control over all of the areas of employment such as day to day direction, supervision, pay and HR functions.
In co-employment, you, the business owner, make all the decisions about who you hire and the work they do and the co-employer handles the administrative tasks related to the employment.
Common co-employment myths
There’s a lot of confusion and fear around co-employment, so it may be helpful to dispel a few common myths:
Myth 1: Co-employment is a bad thing
There’s nothing wrong with co-employment by itself, and it’s not something you commit. There’s no issue with being a co-employer of another company’s employees so long as each company understands their respective role and complies with all employment law requirements. Just make sure you partner with a company that knows the rules and you work together to ensure appropriate decision-making and conduct.
Myth 2: Using independent contractors puts you at co-employment risk
Utilizing independent contractors (IC), such as freelancers, doesn’t create co-employment risk if they are properly classified. Properly classified ICs have no employer or co-employer as ICs act as their own business.
Myth 3: Staffing agencies protect you from co-employment risk
Staffing agencies do not always protect you from risk. If you control sufficient terms of a worker’s employment, you may be a co-employer or even a joint employer subject to complying with all employment laws. And if you use a staffing firm that does not comply with employment law requirements, your organization may be held equally liable as well.
Myth 4: Co-employment replaces my HR staff
If you have an HR staff, a co-employment partner can augment the HR team’s capabilities and provide expertise when developing HR initiatives. And a co-employment partner can safely guide and support the business as it grows.
Benefits of co-employment
Conversations around co-employment often talk from the perspective of how it helps businesses, but employees can benefit from the arrangement too. Here are some of the ways co-employment benefits businesses and employees:
PTO, sick days and vacation days
Get help designing programs and policies. Plus help calculating, tracking, and reporting days off and qualifying employees for benefits such as the Family and Medical Leave (FMLA).
Health benefits: medical, dental and visual
Co-employment partners may consolidate all of their clients for greater buying power, enabling a smaller business to offer big-business benefits. So, employees may gain a wider array of options and sometimes at a lower rate.
Healthcare spending accounts
Not only can smaller businesses qualify for healthcare spending accounts, but they may have help choosing which plan to offer: HSA, FSA, or HRA? Your partner can provide guidance on choosing the right option and set it up for you.
Set up a customizable plan that establishes specifics including: 401(k) eligibility requirements, vesting, and tax-deductible matching. If you’re considering a co-employment partner’s 401(k), you may want to compare their plans to third party plans to ensure you’re getting the most competitive package in terms of fees and services.
This is another benefit that smaller businesses may not qualify for on their own. A co-employment partner can also assist employees in choosing a plan so that you’re not fielding questions yourself.
Long term disability
A co-employment partner handles the headache of providing state workers’ compensation insurance and handling claims. They can also conduct safety audits and recommend employee training programs to help limit workplace injuries and employer liability.
How to avoid employment issues and risk
Employment risk mitigation centers on understanding how to work with independent contractors, including freelancers. Following these tips may help you avoid common mistakes that can put you at employment risk:
1. Get classification right
Co-employment aside, worker classification is the most important step anytime you engage independent contractors. Because getting classification wrong can result in significant penalties and fines.
You may think, “I’m only hiring them for a project, so it’s clear they’re an IC and not an employee.” As you’ll see in the chart below, it’s not as clear cut as that.
Below is a quick-glance chart showing the general differences between an independent contractor and an employee in the U.S. Note that factors can vary since classification is determined by an overall balance of several factors.
10 questions to ask when deciding if a worker may be classified as an independent contractor or employee
Note that a yes or no to a single question does not determine classification status.
If you engage independent professionals on a regular basis, it’s often more cost-effective to use a reputable classification service. It’s safest to choose a service that classifies talent for every project, such as Upwork Enterprise.
If you have wide-ranging needs, consider a service that classifies in every location where you may engage ICs as laws may vary by state and country.
2. Treat independent contractors like businesses
Independent contractors work as their own businesses. An IC works on a project-by-project basis, determines their own rates and how they’ll get the work done. This can include subcontracting parts of the project out to others.
You don’t control when, where, or how the work is done. You simply tell ICs what you need done (e.g., create a mobile app with specific functionality), agree to a price and deadline, then step aside, provide additional information as needed, and wait for the deliverables.
3. Get the right partner
If you need more protection from co-employment risks or plan to contract more independent professionals, you may want to get help. You can partner with the Upwork Enterprise to classify independent talent for every project and indemnify your business from misclassification risk. Not only are you more protected, but you may also save costs compared to hiring legal counsel or using your in-house legal team. The process can also be faster through Upwork as we classify 95% of engagements within three days, which means you can get projects started a lot sooner.
Sometimes, you may need to have more control over the work, which may result in classifying the independent talent as employees. That’s okay because you still have help. Upwork Payroll services provides access to vetted staffing providers that handle all of the HR-related work for you. They take care of everything from employment agreements, wage payment, and benefits compliance.
Co-employment can provide a lot of advantages for workers and businesses, so it shouldn’t be feared when you properly classify your workers as employees. You just need to ensure that all employment laws are followed. However, proper classification is paramount, especially when working with independent talent. You could protect yourself by knowing the fundamentals around how to work with independent contractors and getting help from the right partners when needed.
Get more tips from the free Upwork guide: Hiring and Working with Independent Talent.
This article provides general information only and does not constitute legal or tax advice. No statement should be construed or relied on as legal or tax advice. Every business situation varies, and readers should seek advice about their particular circumstances from their own advisors.