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How to Manage Risks and Maximize Rewards of Co-Employment

Tania Fiero
Updated Nov 21, 2022

Following these tips will help you reduce the potential risks co-employment poses to your business.

As a small business owner, you may find it difficult to manage all your human resources (HR) functions on your own. To alleviate some of that burden and responsibility, many companies choose to outsource their HR tasks through a co-employment model. Co-employment is a popular solution because it brings many benefits to small businesses, including giving you the time to focus on other aspects of your organization.

But you might be wondering if it’s risky to share ownership of your employees with an outside company. Yes and no. When it comes down to it, hiring shared employees is no riskier than hiring regular full-time employees – as long as you take the necessary steps to manage the risks and maximize the rewards.

What is co-employment?

Co-employment is a business relationship between a company and another organization, such as a professional employer organization (PEO) or staffing agency. In this relationship, both parties share legal responsibilities and liabilities regarding the company’s employees. There are different laws and guidelines around each type of co-employment relationship, and the type of co-employer you choose will depend largely on what kinds of services you need from them.

Staffing agencies

Organizations of all sizes have benefited from co-employment relationships with staffing agencies, which hire for them temporary employees to increase production levels, fill in for leaves of absence and help meet crucial deadlines, to name a few uses. In fact, the American Staffing Association says U.S. staffing companies hire 16 million temporary and contract employees each year.

Although these hires work in a wide range of fields, the most common include industrial (36%), office-clerical and administrative (24%), professional-managerial (21%), engineering, IT and scientific (11%), and healthcare (8%).

Professional employer organizations

Small and midsize businesses that don’t have an internal HR department can especially benefit from co-employment relationships. There are nearly 500 PEOs in the U.S., serving hundreds of thousands of small and midsize businesses and employing 4 million people. According to NAPEO (National Association of Professional Employer Organizations), more than 15% of all small businesses with 10 to 99 employees are partnered with a PEO.

By teaming up with a professional employer organization, companies can outsource HR responsibilities like employee recruitment, administrative HR services, employee benefits administration, payroll processing, risk and compliance, and employee training and development. The level of support the businesses receive depends on their service agreement.

TipTip: If you’re unsure whether you need a PEO, check out these warning signs that you need to outsource your HR.

How do you choose a co-employer?

If you’ve decided that a co-employment relationship is right for your business, here are four basic steps you can take to choose the right co-employer:

  1. Decide what type of co-employer you want to work with. As noted above, some of the most popular options include staffing agencies and PEOs, although they each serve very different purposes. Once you assess your reasons for needing a co-employer, the type of partnership that would be best for you should become pretty clear.
  2. After determining the type of co-employer relationship you want, create a list of the top co-employers you want to consider. For example, you can get started by checking out our list of the best PEO service providers on the market.
  3. Schedule a demo or intro call with your top vendor choices. This is your chance to ask them any questions you have about their services and employment arrangement. For example, when talking to a staffing agency, you might want to ask about worker benefits and confirm that the vendor provides comprehensive options. Some PEOs provide all-inclusive service packages, whereas others offer a-la-carte models, so you’ll want to get a clear breakdown of what they provide and how much it will cost you.
  4. Once you’ve chosen a vendor, it’s time to draft a contract – the most crucial part being the indemnification language, which spells out who’s responsible for claims when something goes wrong. See more on this below.

But be picky when setting up a co-employment relationship. There are always risks when hiring employees, but the main difference when hiring shared employees is the relationship you enter into with the joint employer, whether it’s a staffing agency, PEO or another entity.

How do you manage co-employment risks and maximize rewards?

Use these co-employment risk-mitigation tactics to ensure you partner with the right joint employer and maximize all the rewards such a relationship provides.

1. Thoroughly research your co-employer before signing on the dotted line.

Make sure to talk at length with your co-employer about their policies and procedures to ensure all responsibilities will be handled correctly and in accordance with local, state and federal laws.

Avoid co-employment liability by protecting yourself from lawsuits. For example, if staffing agencies carry workers’ compensation insurance, workers who get injured on the job in most states are limited to filing a claim with the agency and not your company. If you’re in a state that doesn’t recognize the exclusive remedy rule, ask your partner to add you as an alternate employer in its workers’ compensation policy. [Read related article: 9 Workplace Safety Tips for Business.]

Before entering any kind of agreement, learn what steps the co-employment vendor takes to reduce risks for itself and its clients. How does the organization prepare for new laws being implemented? How does it communicate required employment notifications? Are its compensation and benefits competitive enough to attract the types of employees you need? Find out what the agency’s screening and testing process looks like, and ask detailed questions to make sure the co-employer truly understands your needs.

2. Know where your responsibilities begin and end.

Understanding the co-employment do’s and don’ts for both sides is key. Business owners need to ensure their co-employer has a plan for several possibilities. Here are a few issues to ask about, but make sure you go into the conversation aware of your own legal responsibilities for these matters.

  • Immigration: Will your co-employer handle I-9 forms, which verify a worker’s identity and ability to work legally in the United States? Will it respond to immigration audits and work eligibility issues?
  • Discrimination/harassment: If the organization is not aware of its role in mitigating claims of discrimination or harassment, your business could be at risk. The co-employer should partner with you by taking the complaint, conducting a preliminary investigation (within their abilities) and communicating about the incident. The agency should then determine which company is in the best position to conduct a thorough investigation.
  • Upset workers: If you’re working with a temporary staffing agency, will it counsel an upset worker and reassign them to another employer if that worker is a bad fit for your company? If you’re partnering with a PEO, the responsibility of an upset employee might be better handled by one of your in-house HR staffers.
  • California overtime law: Organizations that use the services of a temporary staffing agency can be held accountable for the staffing agency’s negligence if it doesn’t pay overtime to a worker who has earned it in California.
  • Family and Medical Leave Act (FMLA): With FMLA absences, a staffing or payroll partner will take the lead. But the company employing the worker will share in helping to find the worker a job when they return to work. [Learn how the FMLA applies to your small business.]

The specific responsibilities of the business owner and the co-employer depend on your unique relationship and service agreement. Have an upfront conversation with your co-employer about who is responsible for what. This will help prevent anything from falling through the cracks and reduce the possibility of legal consequences down the road.

3. Discuss benefits with your co-employer.

Talk to your co-employer about worker benefits, and confirm that the vendor provides comprehensive benefits. Because of the Affordable Care Act, many staffing and payroll agencies offer health insurance options, which typically include high-deductible plans paired with health savings accounts (HSAs). Agencies can avoid paying tax penalties to the IRS by offering these plans and can keep rates affordable for you.

PEO, staffing and payroll agencies that must attract highly skilled workers for your business, such as IT and engineering professionals, should be able to offer more comprehensive plans. These can be two to three times more expensive than high-deductible plans. Companies using staffing firms should expect to pay either a monthly premium or an increased markup for access to comprehensive health plans. Highly skilled workers also seek dental plans, short-term and long-term disability plans, and 401(k) plans.

Because of anti-discrimination rules, staffing firms typically offer only one or two plans to their workforce, making it difficult for companies to customize benefit offerings. However, some have a selection of benefit classes, which provide more variety. In contrast, PEOs have more flexibility to customize to specific needs.

To reduce the risk that contract workers are eligible for your company’s benefit plans, businesses should:

  • Review benefit plan documents for 401(k) and all health and welfare plans and talk to the providers of those plans. The documents should define employment status, identify which employees are eligible and define which workers are excluded.
  • Define all categories of workers in your company’s employee handbook. Define which workers are eligible for benefits and which subset of employees is excluded.
  • Review your offer letters and ensure they include a paragraph regarding benefit eligibility or exclusion of benefits.
  • Have legal counsel and HR experts review these documents.

Did you know?Did you know? PEOs can provide small businesses with competitive benefits packages that are typically afforded by large organizations only.

4. Seal the deal with a contract.

Set rules and ensure both parties know where they stand in the contract. The most important part is the indemnification language, which spells out who is responsible for claims when something goes wrong. The co-employer should indemnify your company from any claims that are a result of their responsibilities. Each state’s rules are different, so be sure the language meets the legal requirements where you employ workers.

The agreement should clearly define each party’s duties and responsibilities, including obvious items such as background checks and drug screenings, wages, tax withholding, and day-to-day supervision. Some less obvious issues that should be spelled out in the contract are employee training, provision of safety equipment (particularly important in the industrial, agricultural and healthcare sectors) and payment of any relevant sales taxes.

It is also wise to address potential areas of dispute, such as what happens if you want to hire a worker directly. Discussing those issues before they arise will help avoid confusion, strained business relationships and even costly lawsuits down the line.

You should also request certificates of insurance from the co-employer that include coverage for general liability, hired and non-owned automobiles, professional liability, workers’ compensation, crime and cyber insurance.

There are always risks associated with hiring any employee, but following this guidance will help you reduce the unique risks that come with the co-employment model while providing your small business the help it needs to manage personnel.

Skye Schooley contributed to the writing and reporting in this article. 

Image Credit: Fizkeys/Getty Images
Tania Fiero
Tania Fiero is vice president of human resources at Innovative Employee Solutions, a leading nationwide employer of record that specializes in human relations and payroll services. Founded in 1974 in San Diego, California, IES has grown into one of the city's largest women-owned businesses and been named one of its "Best Places to Work" for ten years in a row. An expert in joint employment and the Affordable Care Act, Tania helps employers embrace contingent workers in their staffing strategy and culture. She is a Society of Human Resources Certified Professional (SHRM-CP) and a certified Professional in Human Resources (PHR) via the Human Resources Certification Institution. Tania previously served on the Board of Directors for the National Human Resources Association of San Diego. She was recognized in 2016 by the San Diego Human Resources Forum Board of Directors at its HR Executive of the Year event and in 2011 by the San Diego Business Journal as San Diego's HR Professional of the Year.