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Co-Employment Risks and How to Mitigate Them?

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Co-Employment Risks and How to Mitigate Them?
Written by
Mayank Bhutoria,
June 13, 2024

Key Takeaways

Co-employment is a contractual arrangement in which an organization shares an employment obligation with a professional employer organization or PEO. This partnership is known as co-employment. Co-employment minimizes the cost and liabilities of the organization as an employer, as the PEO manages all the HR-related responsibilities while the organization manages the day-to-day operations of the personnel. 

Co-employment has several benefits, including easy payroll management, adherence to compliance and tax reporting, management of all employee benefits, and so on. 

However, there are some common co-employment risks, too. 

For example, misclassification of independent contractors is one of the biggest risks that can cause several inconveniences for any business entity. 

This article will discuss when to opt for co-employment, different co-employment issues, and how to mitigate them.

4 risks businesses be wary of in a co-employment relationship model?

If you, your co-employer, and your employees need help understanding all the terms and conditions of co-employment, different issues can arise. From withholding taxes to not paying employees the due benefits, co-employment can come with its own set of risks.

 Here are some of the most common risks associated with co-employment. 

1. Misclassification

Employee misclassification happens when an employee is misclassified as an independent contractor or vice versa. Misclassifying employees is a huge risk because the organization can face penalties and lawsuits if an independent contractor is misclassified, and the company needs to pay taxes, provide benefits, and provide correct compensation. Quick delivery services like Uber, DoorDash, and GrubHub are all facing lawsuits because of the misclassification of employees. 

2. Compliance failure

Remember, there are several governing bodies, each having its own compliance regulations. For example, the IRS, Department of Labor, Occupational Safety and Health Administration, National Labor Relations Board, and Equal Employment Opportunity Commission are just a few of the governing bodies — and employers must adhere to each of their regulations and guidelines. Failing to meet any of their guidelines can lead to several compliance issues.

3. Taxation errors

If the co-employer is not certified by the IRS and something happens, like the co-employer didn't pay taxes on behalf of the organization or misclassified an employee, your organization can get into trouble, like paying penalties. Such things can happen even if you pay the taxes as a part of the co-employment contract. 

4. Legal liabilities

While the co-employer may share the responsibility of HR requirements, payroll management, benefits administration, tax filings, and compliance, a business can still be susceptible to non-compliance. For example, if an audit happens and it's found that your co-employer has miscalculated the payroll of an employee, your company will still be held responsible, and you will need to pay the penalties. So, you are not freed from legal liabilities even if you partner with a PEO and enter into a co-employment agreement.  

Ways to avoid co-employment risks

Co-employment risks are real. “In 1997, Microsoft was required to pay close to $100M to its external workers after massive litigation.” However, knowing how to navigate them and work with your co-employer can lead to a mutually beneficial relationship. Here are some points to ponder on:

1. Research your co-employer

Gather enough information about your co-employee’s policies and processes. Ensure that they don’t have a reputation for compliance violations. 

Co-employment can bring liability risk, so you must protect yourself from lawsuits. For example, if your co-employer carries workers' compensation insurance, the employees who might get injured during the job should file the claim with the PEO and not your organization. 

You can ask your co-employer to add you as an alternate employer in the compensation policies of the employees. 

  • Spend time understanding how the co-employer reduces the risk or incorporates changes if new laws or regulations are amended. 
  • Check their communication promptness. For example, how long does it take to communicate employment notifications? 
  • What is their compensation and benefits structure? Is it competitive enough to attract and retain top talents? 
  • Knowing their screening and scrutinizing procedure may help you better understand the co-employer's offerings. 

2. Understand local compliance laws around co-employment

No two countries have the same co-employment laws, and hence, it's important to understand the local compliance laws around co-employment. For example, in the US, co-employment is legal, and the IRS supports the PEO community by certifying that it meets all the stringent requirements set by the IRS. 

On the other hand, although co-employment in the UK is not illegal, it is not regulated federally like in the USA. In the UK, such an employment relationship is deemed valid, provided the contract specifies this relationship, or a contract must imply the business reality for the workplace relationship. 

3. Have a contract in place

Once you have found the PEO you want to work with, it’s time to have contracts in place. A contract safeguards the interests of all parties' interests and can be referred to in case any disputes arise later. The contract should clearly state the responsibilities of the client and the PEO and how a dispute should be handled. 

4. Properly classify employees/independent contractors

While working with an experienced PEO is a solution to avoid misclassification, here is some advice to remember.

  • Know the local law that governs compliance where the employees reside. For example, the 1099 misclassification rules in the United States differ from the IR35 rule in the United Kingdom. 
  • Consult with local legal experts.
  • Convert contractors to employees if you notice you have misclassified them.
  • Train your managers on misclassification and how to assign work to contractors.

When to opt for co-employment?

Working in a co-employment also works great for small and medium-sized businesses that are yet to set up a fully-fledged HR team. Partnering with a PEO gives them access to various HR services without investing in additional resources. 

Startups who have yet to run a payroll and want to avoid misclassification issues may consider working with a PEO in a co-employment model. 

PEOs can help you manage several administrative tasks like managing the payroll on behalf of the organization, wage calculation, tax deductions, filing employment tax, etc. PEOs also come in handy for strategic talent management and complete HR support. 

A PEO or an EOR? What does your business need?

Businesses that are expanding globally or need to hire employees across the globe face a lot of complexities like international law, local labor law, and varied compliance requirements of each country. 

Businesses often choose to partner with a PEO or an EOR to hire globally.  

But what's the difference between a PEO and an EOR? More importantly, which one will work best for your business?

A PEO works in a co-employment agreement with its client. A PEO works best when you want to streamline your HR operations, save time on administration, and offer better benefits to your employees. 

On the other hand, an EOR helps you employ talents in a foreign country on your behalf. You don't need to open an entity in that country, and the EOR works as the legal employer who manages the onboarding, payroll, benefits, tax, etc. 

If you want to work with a leading EOR service provider, then Gloroots is here to help. Gloroots is your "all in one" employment stack to hire anyone, anywhere. 

Get in touch to know more about it. 


How does co-employment work?

Once you choose to work with a co-employer, you enter into a written contract known as a Client Service Agreement. This is a legal document that outlines the responsibilities of both the parties. 

What are the benefits of a co-employment relationship?

A co-employment relationship has many benefits. It helps to save costs for the company and outsource its HR-related responsibilities including payroll management, so the company can focus on its core business. Co-employment makes it easy for its client to scale up or scale down as needed, etc. 

Why is co-employment risk important to know?

Co-employment can be complex from a legal point of view and businesses must be aware of the legal compliance requirements, misclassification issues, employees rights and protections, and financial risks to safeguard their business and reputation. 

Is Co-Employment allowed outside the USA?

Co-employment is allowed in many countries outside of the USA, including the European Union, Australia, and Canada. 

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