What is Co-Employment? Meaning, Laws, Risks and Benefits

Co-employment refers to a situation where there are two or more employers that share or have an equal duty and responsibility of handling the specific employee. This usually entails a direct client, which is the business organization that is hiring the services of the employee, and a worksite employer like a PEO, or a third party employer such as a staffing agency that provides various services in the area of human resource management (HRM). It means that the primary employer can now concentrate on its major sources of business, as the secondary employer takes responsibility for constant interaction with employees.

In this blog, the concept of co-employment, legal frameworks governing co-employment, its liabilities, and advantages, are described in detail making this analysis a complete guide on co-employment.

Also read: Co-Employment Do’s and Don’ts

The Working of Co-Employment Model With Example

A situation known as co-employment occurs when two organizations split an employee’s duties; one employs and manages the worker, while the other handles payroll. The first employer controls the employee’s schedule and activities throughout the day and the second employer handles all employment-related activities including but not limited to; payment of wages, medical benefits, and providing quality services for the recognition of various employment laws.

This division of favor enables businesses to access the expertise by enhancing efficiency and compliance.

For instance, a company might deal with a staffing agency to offer contractual workers for a particular job. While these employees report to the company and the company oversees the work and responsibilities of these employees, the staffing agency is usually responsible for their remuneration, insurance, and other personnel-related issues concerning employment legislation.

This shared responsibility model of force management makes it easier for businesses to plan for their workforce thus increasing the satisfaction and retention rates of its employees.

The primary employer always enjoys the power of authority when it comes to the kind of work given how often, when, and how it is done, and assessment of workers. The secondary employer oversees employee records, payment of wages, insurance, and other policies and procedures concerning employment and/or the labor force.

It reduces most of the administrative problems of the primary employer due to a clear separation of duties in the human resource management function.

Also read: Guide on Global Employer of Record

Co-Employment Laws

Co-employment is governed by various federal and state laws, ensuring that both employers meet their responsibilities:

  • Fair Labor Standards Act (FLSA): The two employers have to demonstrate compliance relative to minimum wage, overtime, and recordkeeping. The FLSA requires every employer that falls under the act to pay the employees not less than the federal minimum wage and that the employee has to be paid overtime rates for employment in any workweek that goes over forty hours.
  • Equal Employment Opportunity (EEO) Laws: Both employers are expected to prohibit discrimination based on race, color, religion, sexual status, sex, nationality, attainment of age, disability, and /or genetic characteristics of the workers. These laws are enforced by EEOC and necessitate employers to make the workplace free of discrimination and sexual misconduct.
  • Family and Medical Leave Act (FMLA): Any qualified employee should be allowed to take the leave and his or her position and other employment privileges should be guaranteed while on the leave. Presumably, both employers are indeed in charge of making sure that the employees who qualify for such a leave get what they are entitled to and more to the point, their job and position should remain secure when they are away on such a leave.
  • Occupational Safety and Health Administration (OSHA): The employer and the employee both must ensure that the workplace is free from any hazard, keep abreast of OSHA standards, and report any workplace hazards. This entails ensuring employees have the needful training and equipment for safety in addition to safety checkups.
  • State and Local Laws: State and local employment laws need to be abided by which may add on protection and provisions. These laws can be very general or quite specific and cover standards such as wages and hours of work, independent contractors vs. employees, and specialized industries. It is for this reason that these laws should be respected and complied with by the employers to avoid legal consequences as well as for the employees to be treated fairly in their workplace. Non-compliance has severe consequences like penalties, and legal cases and affects the image of the company.

Co-Employment Risks

While co-employment offers several advantages, it also comes with certain risks:

  • Liability Issues: Employers are equally responsible for upholding the employment laws at the workplace. Even though both parties don’t need to secure the promises they made, if one of them defaults, they can both be taken to court. This shared duty can delay legal issues and increase the chances of penalties and fines.
  • Misclassification Risks: Untimely classification of workers may lead to various legal proceedings, hefty penalties, and the requirement to compensate for the missed wages and allocated premiums. This risk is even more apparent when making between independent contractors and employees because misclassification results in noncompliance with wage and hour laws, taxes, and the portion that entitles an employee to benefits.
  • Compliance Challenges: Whether it relates to employment laws or otherwise, information is quite dynamic, and not a readily easy thing to provide. Employers need to ensure that they actively run to awareness and ensure they are legally correct on the procedures to follow and the risks of penalties. This means that constant updates in the knowledge of HR personnel and legal advisors on the current frameworks that should be adopted are necessary.
  • Control Conflicts: There may be problems in decision-making concerning who should be controlling, or performing specific duties, and these issues may reach situations of conflict and confrontation. To reduce this risk and for better co-employment relationships, there is a need to maintain open communication and clearly defined responsibility among the co-employers.
  • Privacy Concerns: Transferring some of the data and particulars of the employees between the co-employers is a privacy and data security risk. This is through the integration of strong measures in data protection and acquiring permission from the employees for data release.
  • Benefits Administration: Coordinating benefits between two employers is not an easy thing. The accuracy of information that you give to your employees is very important in the matter of their benefits. Long and/or complex pay structures, when the rookie benefit administrators get it wrong, the employees may be dissatisfied and may proceed to the legal channels.

To manage these risks, there has to be proper documentation of co-employment arrangement, identification of employees’ roles and responsibilities together with the sharing of audit responsibilities and open communication between the co-employer parties. It is useful to draw extensive contracts and policies, which would specify the tasks and expectations of each subject, as well as mitigate the risks of possible litigation and adherence to the legal guidelines.

Also read: Benefits of PEO

Co-Employment Benefits

Despite the risks, co-employment offers significant benefits: Nevertheless, there are certain advantages for employers as well as employees in the form of co-employment:

  • HR Expertise: Working with a PEO or a staffing agency helps to have professional human resource management skills on demand, which means it is managed better. Such organizations may also be frequently in contact with the employment laws within the country and other parts of the world, which will improve the flow of work, and productivity and reduce over-activeness.
  • Cost Savings: The outsourcing of the Human Resource functions is good as it would sometimes result in cost benefits whereby for example; outsourcing of the payroll processing, employee benefits processing, and costs of compliance would be very sensible. For this reason, overhead costs of any business can be worked down or other resources can also be used well in case one partners the business and the secondary employer.
  • Compliance Assistance: Employees do conform to the legal provisions that pertain to the employment of services of secondary employers to avoid legal consequences. This can prove very useful for the kind of small business that cannot afford to hire its lawyer or HR personnel.
  • Enhanced Employee Benefits: Employee leasing scenarios allow employees to access better plans including medical care features and retirement plans which could be a dream come through for small business entities when they are forced to sort out for themselves in circumstances where they have to embark on it alone. Improved benefits make it even possible to attract the right talent into organizations and therefore improve the general quality and stability of the employee group.
  • Scalability and Flexibility: Co-employment also has a flexibility that enables a business to easily increase or decrease the number of employees in its business making it ideal for organizations that go through fluctuations in demand most of the time. It is especially beneficial to firms with frequent traffic in employees resulting from seasonal changes or motivated by high growth rates because they eliminate the formalities of hiring and firing processes to regularly alter the number of employees in a firm.
  • Focus on Core Business: In support of this we find that by subcontracting some of the activities in human resource management to the secondary employer, the prime employer can perhaps be able to devote time to some more critical business innovation. This leads to better efficiency because the premier employer can devote time and effort to those critical areas that would increase revenue generation or client contentment.

For instance, a small business that hires the services of the PEO focuses on activities such as core business, growth, and management while the PEO processes payroll, issues benefits, and ensures full compliance with employment laws so that the workers are much benefited and paid. The structure can compound into the higher motivation of its staff and therefore the rates of turnover shaving contributing to higher business success.


What is Co-Employment? 

Co-employment in essence entails that there are two employers of an employee and each can have claims and responsibilities on the said employee. This can involve the worksite employer where employees perform most of their activities and another employer such as a PEO or a staffing company where they are responsible for forwarding the employees’ payroll and other administrative services among others.

How Does Co-Employment Work? 

When using co-employment, although the first employer focuses more on the employee’s job oversight and performance evaluation the second employer handles everything to do with payroll, the employees’ benefits package, compensations, all the compliance issues, and the rest of the human resource issues. It is such division of responsibilities that is the best in the sense that it allows each of the parties to focus on certain aspects.

Does Co-Employment Attract Other Emergency Laws?

Some of the most related emergency laws include: The typical legal standards include FLSA, EEO, FMLA, OSHA, and state and local statutes. The following are the risks associated with co-employment; Employment law risks entail joint and several liabilities in compliance, threat of the employee being misclassified, compliance risks, contentious issues concerning control and accountability, violation of the employee’s privacy, and issues concerning the provision of benefits/compensation among others.

The steps that should be taken to prevent and reduce such risks include the development of a clear scope of work, and parties’ obligations and rights, paying careful attention to effective working relations, conducting routine reviews, open communication, and being legally informed.

How the Co-Employment Model Is a Win-Win for Both Employers and Employees?

The co-employment model is a win-win for both employers and employees due to the following:- It is possible to consult with a professional regarding HR issues, which saves money on staffing and the staff of the HR department; legal support; possible enhancement of the proposed employee’s incentives and privileges; and the development of the potential capacity to respond for efficient management of upper-level demands regarding a needed type of staff; and, finally, the shifting of the concerns to core organizational processes.

How Could Co-Employment Be Considered a Viable Solution for Business Companies of Any Type?

Co-employment is expected to benefit many organizations due to the following reasons; The organizations that are going to benefit from co-employment most of the time are the firms that are small to medium and do not have enough supply of persons who have specialized in human resource management. Nonetheless, it does not turn out good for each sort of business and such a decision to enter the co-employment relation should be taken after measuring the most crucial parameters matching the particular firm.

How Co-employment Arrangements Have an Impact on the Employee Benefits?

 This relationship may also grant the workers direct access to health care, pension, and other eros schemes, which perhaps wouldn’t be possible for a company or employers of limited means. It can also lead to improved satisfaction and loyalty of the employees and the worker respectively.

What Does the PEO Do in Co-Employer Arrangements?

For the co-employment model, a PEO is supposed to administer the Human Resources services for the client’s company such as Payroll processing, benefits administration, and employment legal obligations among others. By so doing it ensures that the ‘‘primary employer’’ does not get involved with responsibility for the management of the employees, who are actually at a lower level of the business organizational framework. If you get in touch or work with a PEO or staffing agency that possesses the current legal requirement then it anyway safeguards your business.