Co-employment
What is co-employment?
Co-employment is a business arrangement where an employer partners with one or more external entities through a contractual agreement to share equal responsibilities regarding employee management. Together, they manage key HR functions like calculating payroll, tracking attendance, managing benefits, and maintaining compliance.
How does it work?
The primary employer oversees the employees' day-to-day activities, such as assigning workload, enforcing workforce policies, making major business decisions, and overseeing performance. The secondary entity—most often a professional employer organization (PEO)—helps the primary parties manage and carry out administrative tasks, such as tax filings, benefits management, legal compliance, and more.
This type of business arrangement is common among small and medium-sized businesses (SMBs) looking to reduce administrative burdens, minimize compliance risks, and improve compensation and benefits management.
What are the benefits of co-employment?
Some core benefits of co-employment include:
Reduced HR burden
Co-employment allows employers to offload administrative tasks and focus more on strategic decision-making and high-priority activities.
Smooth payroll calculation
It ensures on-time and accurate payroll, including tax withholdings, reimbursements, and other employee claims.
Compliance assurance
This setup keeps the organization aligned with labor laws, tax regulations, and benefits mandates across jurisdictions. It's especially helpful for companies operating in multiple states or countries.
Enhanced employee benefits
SMBs can offer competitive benefits (e.g., health insurance, retirement plans, wellness programs) by leveraging the co-employer's larger client base.
Scalability
Co-employment facilitates smooth onboarding, documentation, and HR support during business expansion or workforce restructuring.
What are the risks involved in co-employment?
Co-employment has many benefits, but it is not without associated risks if not handled with care:
Unclear job descriptions
Vague job description can result in legal conflicts like discrimination lawsuits, wrongful termination, or job safety issues.
Brand impact
A third-party PEO may provide a less customized employee experience, which can impact company culture and brand image.
Loss of management autonomy in HR policies
In certain contracts, employers can be forced to implement standardized policies that are not in line with their organizational principles.
Misclassification risks
Incorrectly classifying the co-employment arrangement may result in legal issues and fines.
Tips to handle a successful co-employment
- Define roles in detail
- Clarify responsibilities in the service agreement to prevent legal and operational confusion.
- Ensure open communication
- Maintain regular check-ins between internal HR and the co-employer for assured alignment.
- Do a complete background check
- Look for PEOs with a strong compliance record, client references, and industry certifications.
- Educate employees
- Clearly explain the co-employment model so staff understands who handles what.
What's the difference between co-employment and joint employment?
Joint employment refers to a situation where two or more employers share control over an employee's work. On the other hand, co-employment most often involves the primary employer making decisions that the co-employer implements.
When should companies consider co-employment?
Consider co-employment when:
- Entering rapid growth phases without HR infrastructure
- Facing complex multi-state compliance challenges
- Wanting to offer high-quality benefits to retain top talent
- Seeking cost-effective alternatives to in-house HR expansion
A contractual relationship between an employer and firm where they share certain responsibility of an employer. Unlike joint employment, co-employment involves the employer making a decision and the other business party implementing that particular decision.