Understanding co-employment: The benefits, risks, and best options

For growing businesses, co-employment is increasingly becoming a viable work model. By passing on the HR load to a trusted partner, you can save costs, protect your organization, and focus on achieving your growth goals.

But while this model has numerous advantages, it also comes with some downsides.

In this article, we’ll explain how exactly co-employment works, what the pros and cons are, and if it’s the right approach for your business.

So, let’s jump straight in.

What is co-employment?

Under a co-employment model, your company partners with an entity (like a professional employment organization (PEO)) to share employer responsibilities.

This means that your business maintains control over day-to-day operations, employee roles, and workplace culture, while your partner handles administrative and compliance-related responsibilities, such as:

• Payroll management, including payroll processing, deductions, and record-keeping.

• Benefits administration such as health insurance and retirement plans. This is particularly useful if your partner has access to competitive packages.

• Regulatory compliance across different jurisdictions, reducing your legal risk.

• Tax filing, including compliance and payment of employment taxes.

Who is co-employment for?

Co-employment is particularly beneficial for startups, small businesses, or indeed any company that is aiming to expand internationally, and wants to hire global talent.

It’s also a useful model for smaller businesses that want to provide better benefits and streamline their HR operations.

How does co-employment work?

When you hire someone under this model, you and your co-employment partner — usually a PEO — are responsible for different areas of the employment.

Typically, you take care of the main business work. You define the job role, dictate how and when work gets done, and manage your employees in the same way you would normally. It’s important to note that, in most cases, you are the legal employer of that person.

Meanwhile, your co-employment partner handles legal and HR tasks, like calculating and sending their paycheck, managing their benefits, and ensuring compliance with relevant tax and labor laws. You can think of your co-employment partner as an outsourced HR department, taking on the tasks that your internal HR team would otherwise be responsible for.

Your employees work under your guidance but likely receive their benefits and manage their HR needs through your co-employer.

How is the co-employment agreement defined?

Legally, the co-employment is based on a clear service agreement. This agreement governs the relationship between you and your co-employment partner and ensures everyone knows their responsibilities.

As a starting point, your agreement should cover some of these key areas:

• Employment law compliance: A co-employment agreement spells out how you and your co-employer will stick to all relevant labor laws, including treating employees fairly, avoiding employee misclassification, and keeping the workplace safe.

• Taxes and benefits: The agreement should cover how to handle employee taxes and manage health insurance and other benefits.

• Obligations: The agreement should clearly define the relationship and obligations between you and your co-employment partner

• Dispute resolution: The agreement should contain rules for resolving any workplace grievances that might arise between you, your co-employer, or your employees.

What’s the difference between co-employment and outsourcing?

Although you can think of co-employment as like outsourcing, the legal framework of a co-employment partnership is a lot more defined and structured.

Co-employment refers to a shared employment relationship between you and your co-employment partner regarding the same employees, whereas outsourcing typically involves contracting out specific functions or tasks to external service providers (without shared employment responsibilities).

Your business can choose one or both models based on your specific needs and the nature of the services required.

What are the advantages of co-employment?

Co-employment can offer significant advantages for both your business and your employees, such as:

Efficient resource management

Co-employment allows you to optimize your company’s resources by dividing HR tasks. As a result, you can focus more on core business activities, such as generating growth, hiring the best talent, and delivering exceptional service.

Compliance expertise

Your business can benefit from your co-employer’s knowledge of employment laws and regulations, saving you time and money. This is especially useful if you operate across multiple jurisdictions.

A reduced administrative burden

Co-employment lowers the complexity and workload of HR management. You can rely on your co-employer to manage time- and resource-intensive tasks like payroll processing, tax filing, and benefits administration.

Competitive benefit plans

If you’re a smaller company, co-employment can allow you to offer competitive benefits that are usually only available at larger companies, such as better health insurance coverage, retirement savings options, and other perks. This can make your compensation package more attractive, allowing you to recruit and retain top talent.

What are the risks and challenges of co-employment?

While co-employment offers numerous benefits, it also comes with challenges.

Differences in co-employment laws

The laws and regulations surrounding co-employment differ by country and can often be complex. What works for you in one country may not work in another. Non-compliance with these laws — accidental or otherwise — can lead to legal issues and disputes around employer liabilities and employee rights.

Regulatory compliance

In co-employment, adherence to employment regulations such as wage laws, working hours, and safety standards is a shared responsibility. If your partner makes a mistake, you may also face penalties and reputational damage.

Contractual clarity

Establishing a clear contractual relationship between you, your co-employer, and your employee is essential. Any ambiguity or lack of clarity around the roles and responsibilities of each party can lead to conflicts and potentially legal action.

A poor employee experience

If your co-employment partner is not providing a satisfactory experience for your employee (i.e., they are being paid late or inaccurately), your employee may become frustrated and even potentially look to leave. Some employees or prospective hires might also be confused about the nature of the agreement, and be unsure over who is responsible for what.

Communication gaps

In a co-employment relationship, communication gaps can lead to misunderstandings and inefficiencies, but with more people involved, it’s difficult to keep everyone on the same page.

Decisions can also take a long time to make when communication channels aren't set up well, affecting day-to-day operations.

For example, if the roles and responsibilities of different HR teams are not clearly defined, tasks related to compliance, benefits, payroll, and other areas may be mismanaged or ignored.

Additionally, improperly handling employee grievances due to a lack of communication can cause problems in the workplace, such as legal conflicts or strained relationships.

Before entering into a co-employment arrangement, clarify each party's responsibilities and ensure that everyone is aligned.

Financial risks

In co-employment arrangements, particularly with PEOs or staffing agencies, service fees can end up making the relationship too expensive. Extra costs, like training, compliance audits, or dispute resolution, can strain your company's budget.

The correct withholding and filing of taxes is the shared responsibility of the parties involved in the arrangement. Tax authorities may levy back taxes, interest, and fines for any mistakes that you or your co-employer makes.

Employee misclassification

Problems with employee misclassification can have serious legal, financial, and business effects.

Misclassification happens when workers are mistakenly labeled as independent contractors instead of employees or when employees are mislabeled in terms of their job duties, benefits eligibility, or current employment status.

Misclassification of employees can expose employers to penalties, interest, and back taxes, including Social Security and Medicare. Regulators such as the IRS and the Department of Labor enforce strict compliance.

When classifying workers, use clear criteria and documentation to back up your decisions. You should differentiate employees from independent contractors according to their job functions, level of control, and relationship with the company.

What are the different laws that impact the co-employment relationship?

Labor, tax, and employment laws all impact the co-employment relationship. And when hiring abroad, it’s important to be aware of the laws in all countries you’re active in.

Here's a rundown of laws you and your co-employer should collaborate on:

US co-employment laws

The IRS recognizes PEOs’ role in co-employment. According to the IRS third-party payer arrangements, a PEO is a type of third-party payer.

In the US, it is your responsibility as a common law employer (CLE) to pay taxes and file returns, even if the payroll is outsourced.

Also, if a third party like a PEO is a primary employer, they must pay the employment taxes on the wages they’re in charge of.

The Fair Labor Standards Act mandates record-keeping requirements for employers, establishes minimum wages, and governs overtime wages. Both the employer and co-employer need to follow these rules.

Further, all employee benefits, such as health insurance, pensions, and retirement plans, are regulated by the Employee Retirement Income Security Act (ERISA). ERISA establishes the minimum requirements for private sector retirement and health plans to safeguard individual members.

Co-employment laws abroad

In Germany, a written employment contract isn’t required by law, but it is standard practice to include one when hiring.

When it comes to labor law, the European Union (EU) establishes minimum standards to supplement policy initiatives made by individual member states. Its member states implement the directives that it passes into law. In fact, various EU countries can offer even higher levels of protection if they want to.

Additionally, there is a clear set of rights and duties in the workplace under EU labor law, which protects workers' health and encourages long-term economic growth.

The Canadian Labour Code (CLC) governs health and safety at work, working conditions, and labor relations in Canada's privately run businesses. And the Canadian Human Rights Act (CHRA) broadens the law to ensure equal opportunity for individuals who may be victims of discriminatory practices.

Even with co-employment, keeping up with the numerous laws and regulations when hiring remote workers is not easy. However, with an EOR like Remote, you can easily maintain compliance with the local laws of the specific countries you hire in.

How do you reduce co-employment risk?

Here are some ways you can mitigate co-employment risks:

Prioritize operational excellence

Prioritizing operational efficiency can significantly minimize legal risk by fostering an organized, efficient, and compliant co-employment agreement. Operational excellence involves continuously improving systems, processes, and practices to achieve a streamlined co-employment partnership.

Additionally, clarifying roles, responsibilities, and processes can help your company and co-employer avoid confusion and disagreements.

Pro tip: Ensure that both sides of your co-employment arrangement follow the same standard operating procedures to reduce the risks of inconsistencies and mistakes.

Work with a reputable EOR

In most cases, you can reduce co-employment risk by working with an EOR. This is because, as mentioned, the EOR is the legal employer.

This is almost like a shield for your business. If something goes wrong, the EOR provider takes legal responsibility, giving you peace of mind and ensuring that your partner is fully committed to complying with all relevant laws.

With an EOR, you also benefit from local knowledge and experience. At Remote, for example, we have in-house, on-the-ground experts in tax, compliance, and benefits for every country we operate in. Their expertise and knowledge safeguard our partners against potential legal pitfalls.

To see some examples of how co-employment can work with an EOR provider like Remote, check out some of our customer success stories.

Are EORs co-employers, too?

As mentioned, many co-employment providers are PEOs. But you may have heard about employers of record (EORs), and are wondering if they offer the same service.

While many people use these two terms interchangeably — and there are a lot of similarities between them — it’s important to understand the key differences.

Is an EOR a co-employer?

In a way, yes. Like a PEO, an EOR handles the local labor laws, payroll taxes, and benefits specific to your employees’ countries, with the same benefit of streamlining workflows, saving time and money, and providing more access to talent.

The main difference lies in the legal and employment structure. EORs directly employ workers on your behalf, taking on the legal responsibilities. PEOs, on the other hand, involve a shared employment relationship where both you and your co-employment partner have employer responsibilities.

In summary, EORs are focused on legal and administrative compliance for a global workforce, while PEOs offer a comprehensive HR outsourcing solution with a shared employment relationship.

Should you use an EOR or a PEO?

As mentioned, EORs and PEOs generally provide the same services — but they are not the same thing. When deciding between the two, location is important.

Generally, PEOs are for businesses that already have a legal entity in a country and want to share the administrative burden of payroll and HR.

Conversely, with an EOR, you can hire people anywhere without having to set up a new legal entity because the EOR is the legal employer. If you’re planning to hire in different countries in the future, then this might be the preferable option.

To learn more about the differences between EORs and PEOs — and which might be the best option for you — check out our in-depth guide.

Hiring globally with Remote

As you can see, co-employment is an increasingly practical strategy, especially for growing businesses. It enables companies to share responsibilities and save on costs — all while remaining compliant.

With such a large element of trust involved, though, it’s absolutely crucial to find the right partner.

Whether you want to work with a PEO or an EOR, Remote can help.

We provide dedicated global payroll, benefits, and HRIS services, allowing you to easily manage your people across the globe.

We also offer EOR services, enabling you to focus on expansion without worrying about administration and compliance issues.

Whatever your global HR needs, Remote has you covered, helping you to stay ahead of the competition and unlock new opportunities for growth.

If you’re unsure which approach is the right one for your business and you want to learn more — including how Remote can help — come and speak to one of our friendly experts today.

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