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How to Manage Risks and Maximize Rewards of Co-Employment

Tania Fiero
Sep 03, 2019

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

  • Hiring shared employees can provide much-needed flexibility for small businesses.
  • Talk to staffing agencies to make sure you can trust them before signing on the dotted line.
  • Understand the co-employment do’s and don’ts for both sides.
  • Talk to the staffing agency about worker benefits, and confirm that the vendor provides comprehensive benefits.
  • Write up a contract — the most important part being the indemnification language, which spells out who’s responsible for claims when something goes wrong.

Many businesses are wary of co-employment, when two or more businesses hire the services of an employee, as many failed to adopt clear policies on the matter in the past. But those that avoid this arrangement are missing out on the benefits that hiring a shared employee can bring.

In fact, more companies than ever are using temporary and contract workers to their advantage. In 2018, U.S. businesses employed more than 3 million shared employees each week, setting a record for this type of employment, according to the American Staffing Association.

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. And it can provide some much-needed flexibility for small and midsize businesses.

Choosing a joint employer

Organizations of all sizes have benefited from hiring temporary employees to help increase production levels, fill in for staff leaves of absence, and meet crucial deadlines, to name a few.

Small and midsized businesses that don’t have a human resources department can also benefit. By partnering with an employer of record (EOR) or professional employer organization (PEO), companies can outsource HR responsibilities. The level of support the company receives depends on the service agreement and should be clearly explained.

But be picky when entering into 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 a staffing agency, or joint employer. [Want to know more about PEOs? Check out our reviews and best picks.]

4 ways to reduce the risks that come with co-employment

Use these co-employment risk-mitigation tactics to ensure you partner with the right joint employer:

1. Know that you can trust your staffing vendor before signing on the dotted line.

Make sure to talk to staffing agencies about their policies and procedures to ensure all responsibilities are being handled correctly. 

Avoid co-employment liability by protecting yourself from lawsuits. 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 staffing vendor takes to reduce risks for itself and its clients. How does the agency prepare for new laws implemented? How does it communicate required employment notifications? Are its compensation and benefits competitive enough to attract the type of employees you need? Find out what the agency’s screening and testing process looks like, and ask questions to make sure the vendor truly understands your needs.

2. Know where your responsibilities begin and end.

Understanding co-employment do’s and don’ts for both sides is key. Employers need to ensure their staffing agency has a plan for several possibilities. Here are a few to ask about, but employers should read up on their legal responsibilities upfront:

  • Immigration: Will your staffing vendor handle I-9 forms, which verify the identity of a worker and his or her ability to work legally in the United States? Will it respond to immigration audits and work eligibility issues?
  • Discrimination/harassment: If the staffing agency is not aware of its role in mitigating claims of discrimination or harassment, your organization could be at risk. The agency should partner with you by taking the complaint and conducting an investigation (within their abilities) and communicating with you about the incident. The agency should then determine which company is in the best position to conduct a thorough investigation.
  • Upset workers: If you are working with a temporary staffing agency, will it counsel an upset worker and reassign him or her to another employer if that worker is a bad fit at your company?
  • 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: With FMLA absences, a staffing or payrolling partner will take the lead. But the company employing the worker will share in helping to find the worker a job when he or she returns to work.

3. Discuss benefits with your employment partner.

Talk to your staffing agency about worker benefits, and confirm that the vendor provides comprehensive benefits. Because of the Affordable Care Act, many staffing and payrolling agencies offer health insurance, which typically includes 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 to you.

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

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

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

  • Review benefit plan documents for 401(k) and all health and welfare plans and talk to 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 and which subset of employees are excluded
  • Review your offer letters and ensure they include a paragraph regarding benefit eligibility or exclusion of benefits
  • Have legal counsel and HR review these documents

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.

EORs and PEOs should indemnify the company from any claims that are a result of the EOR’s/PEO’s 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 included are employee training and 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. Addressing those issues upfront will help avoid confusion, strained business relationships and even costly lawsuits down the line.

You should also request certificates of insurance from the staffing agency that includes coverage for general liability, professional liability, hired and nonowned automobiles, workers’ compensation, crime and cyber insurance.

There are always risks associated with hiring any employee, but following these steps will help you reduce certain risks that come with the co-employment model while providing your small business with the help it needs to get the job done and reach your goals.

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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.