How to Manage Risks and Maximize Rewards of Co-Employment

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. The American Staffing Association says United States staffing companies hire nearly 13 million temporary and contract employees each year.

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

PEOs

Small and midsize businesses that don’t have an internal HR department can especially benefit from the co-employment relationship that a PEO offers. 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 percent of all small businesses with 10 to 99 employees are partnered with a PEO.

By teaming up with a PEO, companies can outsource HR responsibilities like employee recruitment, administrative HR services, employee benefits administration, payroll processing, risk and compliance and employee training and development.

Mark Berry, a senior human resource specialist with Insperity PEO, noted the distinct difference between what a PEO does and does not do.

“When you enter a co-employment relationship with a PEO, the PEO becomes the professional employer of your workforce, providing the services and benefits,” Berry told us. “It does not, however, provide any of the staff. The operating employer, not the PEO, maintains control of the company decision-making, including managing employees, employee hiring and termination decisions.” 

Berry added that there are different degrees of outsourcing when working with a PEO, so the level of support your business receives depends on your service agreement.

What are the benefits and risks of co-employment? 

There are benefits and limitations associated with a co-employment partnership. Weigh these pros and cons to see if a co-employer is right for you.

Benefits of co-employment

Although the benefits you realize will depend on your specific co-employment arrangement, these are some of the most common advantages of partnering with a co-employer. 

Access to enterprise-class benefits: Co-employers can access competitive employee benefits at affordable rates. This allows smaller businesses (that might not otherwise be able to afford high-level benefits) to offer their employees benefits similar to larger employers. 

“PEOs can be well-positioned to negotiate favorable insurance rates and benefits,” said Glynn Frechette, vice president and general manager of Paychex PEO. “This can help small businesses save on costs and compete more effectively for great talent.”Assistance with HR compliance: It can be tough for small businesses to keep up with the ever-changing labor laws and regulations, especially if they operate in multiple states or jurisdictions. As experts on HR compliance, PEOs can help companies stay up-to-date with these requirements. According to Paychex’s 2025 Priorities for Business Leaders survey, 32 percent of business leaders listed improved regulatory compliance as a key benefit of outsourcing HR. 

“A co-employment relationship helps mitigate risks and responsibilities associated with having employees, such as correctly reporting, collecting and depositing taxes, I-9 requirements, EEO reporting and claim resolution and management of certain employee-related claims,” said Berry. “There are myriad other benefits that fall under reduced risk, such as informing employers of regulatory changes, providing guidance on keeping employees safe and helping employers communicate clearly with employees.” 

HR support and expertise: Along with compliance assistance, co-employers can help businesses with general HR support and expertise. They can cover administrative tasks such as recruitment, job descriptions, employee handbooks, payroll and performance management. The Paychex survey found that this type of arrangement can result in fewer mistakes (51 percent) and increased productivity (43 percent).

“Instead of spending time handling administrative tasks, business owners can focus on more strategic business functions that offer greater potential rates of return, said Frechette”

Time and cost savings: The Paychex survey revealed that 34 percent of business leaders spend more than 10 hours a week on HR administration tasks. This time increases directionally with company size and it costs companies an average of $171,997 annually or $3,308 per week. A co-employer can be advantageous in reducing these costs.

“PEOs can help organizations save time and money through recruiting support, performance management support and strategic HR planning, which helps map out the growth of an organization,” said Berry. 

Risks of co-employment

As with any business arrangement, there are potential risks associated with co-employment. Frechette advises employers to keep the following considerations in mind when moving forward with a PEO:

• Error resolution: A PEO is not on site, so an extended period may be needed to fix errors in outsourced duties.
• Culture and recruitment: A PEO that lacks a keen understanding of a small business’ company culture may be unable to help with recruitment effectively.
• Costs: A business undergoing rapid growth (prompting an urgent need for new hires) could see increased charges from the PEO.

In addition to these considerations, Berry highlighted a few common risk misconceptions to keep in mind, including the fact that PEOs do not control your business or replace internal HR staff. He said that a reputable PEO should not disrupt your workplace. 

“As with any other third-party service, it is worthwhile for employers to do their due diligence when selecting a PEO to ensure that they have a full understanding of the depth of services offered by the PEO and their reputation and level of responsiveness,” said Berry. “PEOs often offer current client testimonials to employers that are looking to utilize their services.”

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. Research your co-employer thoroughly 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.

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. However, 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. 

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. 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.

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 nonowned 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.

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 provider, it’s time to draft a contract. The most crucial part is the indemnification language, which spells out who’s responsible for claims when something goes wrong.

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.

Skye Schooley contributed to this article.