Co-employment

Co-employment, also known as joint employment, is a work arrangement where two or more entities share employer responsibilities for the same worker. While not a legal term in itself, co-employment typically arises in staffing agency contracts and PEO (Professional Employer Organisation) agreements, where different parties take on different aspects of employment, such as payroll, HR administration, and compliance.

While co-employment offers benefits such as reduced administrative burdens, better compliance, and access to competitive employee benefits, it also comes with risks like misclassification and legal disputes. To manage co-employment effectively, businesses should clearly define responsibilities, conduct regular audits, and partner with a trusted EoR.

A reputable workforce solution provider like CXC ensures that businesses remain compliant with local labour laws while providing seamless payroll, tax, and HR support.

What is an example of co-employment?

Co-employment is common in straffing agency contracts. A staffing agency hires and pays the worker, but the client company directs their daily work. Both the agency and the client company may share liabilities for worker rights, pay, and compliance.

For example, in the finance sector, firms often need to bring in compliance experts, auditors, or risk management specialists on a temporary basis to meet new regulatory requirements or conduct internal reviews. Co-employment allows them to access this specialised talent quickly without adding to their permanent headcount, helping them stay agile in response to industry changes.

It is also used for PEO/EoR agreements. A business typically partners with a PEO to outsource HR functions such as payroll, tax filings, and benefits administration. The business still maintains control over daily operations, while the PEO assumes certain employer obligations, creating a co-employment relationship.

A tech startup, for example, uses a PEO to manage payroll, benefits, and HR compliance for its remote employees. The startup remains responsible for job roles, promotions, and performance reviews, while the PEO ensures legal compliance and employee administration. This reduces risk for the startup while allowing it to offer competitive benefits.

Co-employment is a shared employment arrangement where two entities share employer responsibilities for the same worker. Typically, one party—such as a staffing agency, PEO (Professional Employer Organisation), or EoR (Employer of Record)—manages HR functions, payroll, and compliance, while the client company controls daily tasks, job performance, and work assignments.

How does it when working with staffing agencies, PEOs, or EoRs?

Staffing agency co-employment
The staffing agency hires, pays, and manages payroll taxes for temporary workers.The client company assigns tasks, sets schedules, and oversees job performance.

Both parties may be jointly liable for compliance with labour laws, such as wage and hour regulations.

PEO/EoR co-employment
The PEO/EoR handles payroll, benefits, tax filings, and HR compliance. The client company manages work responsibilities, promotions, and terminations.

This arrangement allows businesses to offer better employee benefits and remain compliant without directly managing HR administration.

How does co-employment affect worker benefits?

In a staffing agency model, workers typically receive benefits from the staffing agency rather than the client company. Benefits may be limited compared to permanent employees at the client company.

In some jurisdictions, companies using staffing agencies must ensure temporary workers receive equal pay and benefits after a certain period (e.g., the Agency Workers Regulations in the UK).

Meanwhile, employees under a EoR usually receive benefits through the EoR, such as health insurance, pensions, and paid leave.

Since PEOs manage multiple employees across different clients, they often negotiate better benefits packages than small or mid-sized companies could offer alone. In most cases, co-employed workers have access to the same statutory benefits as direct hires in their country.

Co-employment provides businesses with a way to outsource employer responsibilities while maintaining control over day-to-day operations. This model, commonly seen in staffing agency contracts and PEO/EoR agreements, offers several advantages for businesses looking to manage risk, reduce administrative burdens, and enhance workforce flexibility.

1. Compliance with employment laws
Co-employment helps businesses stay compliant with complex and constantly evolving employment regulations. When you partner with an EoR, PEO, or staffing agency, they take on the responsibility of managing payroll, tax filings, and employee classification in line with local laws. This is particularly valuable when expanding into regions with unfamiliar regulations.

For instance, in Germany, companies must comply with strict worker protections and tax regulations. An EoR handles these legal intricacies, reducing the risk of non-compliance. Similarly, in the U.S., PEOs manage tax withholdings and ensure compliance with the Affordable Care Act (ACA), shielding businesses from potential fines and legal disputes.

2. Reduced administrative burden
Co-employment significantly reduces the time and effort required to manage HR processes. The co-employer handles payroll, tax filings, and benefits administration, freeing up internal teams to focus on core business operations. With payroll, they oversee salary disbursements, tax withholdings, and compliance reporting across different jurisdictions.

On the benefits side, they manage employee perks such as health insurance, pensions, and leave entitlements. This is particularly valuable for small and mid-sized companies with limited HR resources, as they gain access to enterprise-level support without building it internally.

3. Access to better employee benefits
By partnering with a co-employer, businesses can offer more competitive employee benefits. EoRs and PEOs often negotiate group rates for healthcare, wellness programs, and retirement plans, which smaller companies typically can’t access on their own. This allows them to offer benefits comparable to larger organisations, improving their ability to attract and retain top talent.

For example, a startup partnering with an EoR can provide comprehensive health coverage and retirement plans, making them more appealing to skilled professionals. In some regions, like the EU, co-employment also ensures that temporary workers receive equal pay and benefits after a certain period, promoting fair treatment.

4. Faster market entry and workforce expansion

When expanding into new regions, setting up a legal entity can be time-consuming and costly. With co-employment, companies can bypass this step, as the EoRs/PEO becomes the legal employer of record. This allows businesses to enter new markets faster without dealing with complex administrative requirements.

Co-employment allows companies to tap into the staffing agency’s existing talent pool, giving them quick access to qualified candidates in the new market. This speeds up the hiring process and reduces the time it takes to build a local workforce.

Moreover, co-employment makes it easy to test new markets by hiring temporary or contract workers. This reduces the risk of large-scale investments by allowing businesses to assess market viability before committing to full-scale operations.

5. Greater workforce flexibility
Co-employment gives businesses the flexibility to quickly scale their workforce up or down without the complexities and administrative hurdles of direct hiring. This makes it easier to respond to shifting business demands, whether it’s expanding a team for a new project or downsizing after a seasonal peak.

In renewable sector, for example, co-employment offers flexibility for project-based staffing. For instance, when a company is constructing a new solar farm or wind power facility, they may need to ramp up their workforce with project managers, engineers, and technical specialists. Partnering with an EoR allows them to hire skilled contractors for the project duration while ensuring compliance with local labour regulations. Once the project is completed, the workforce can be scaled back without the administrative burden of offboarding full-time employees.

6. Shared employer responsibilities
One of the biggest advantages of co-employment is the shared responsibility between the business and the co-employer. While the company maintains control over daily work operations, such as assigning tasks, managing employee performance, and fostering company culture, the co-employer takes on administrative and HR-related liabilities.

This includes managing payroll, handling tax filings, administering employee benefits, and ensuring compliance with local labour laws. The co-employer also assumes the risk for potential HR issues, such as worker misclassification, payroll errors, or non-compliance with labour regulations. This reduces the legal and financial exposure for the client company.

In finance, where data privacy and compliance are critical, the co-employer handles strict background checks, right-to-work verification, and tax filings. This ensures that the company remains compliant with financial industry regulations without having to manage the complex administrative processes in-house.

By offloading these administrative burdens, companies can focus on their core business activities, such as driving innovation, expanding their service offerings, and delivering value to clients, without being weighed down by complex HR tasks.

While co-employment offers many advantages, it also comes with potential risks that businesses must carefully manage. These risks primarily revolve around misclassification, legal disputes, and compliance complexities, especially when hiring across multiple jurisdictions. However, with the right precautions, businesses can mitigate these risks and ensure a smooth co-employment arrangement.

How can businesses avoid co-employment risks?

1. Misclassification risks

Risk: If a business incorrectly classifies a worker as a contractor instead of an employee—or fails to define responsibilities properly in a co-employment arrangement—it can lead to tax penalties, back pay claims, and legal liability.

How to avoid it:

• Clearly define employment status in contracts to distinguish between contractors, employees, and temporary workers.
• Ensure that the PEO, EoR, or staffing agency follows local labour laws when classifying employees.
• Regularly review worker classifications to align with changes in employment laws.

2. Legal disputes

Risk: Disputes may arise over who is responsible for employee rights, wrongful termination claims, or workplace policies, leading to lawsuits or fines.

How to avoid it:

• Have a clear contract outlining each party’s responsibilities, including hiring, termination, and compliance duties.
• Ensure consistent HR policies between the company and the co-employer to avoid discrepancies.
• Consult legal experts to draft agreements that align with labour laws in each jurisdiction.

3. Compliance complexities (especially hiring in different jurisdictions)

Risk: Employment laws vary widely by country, covering issues like payroll taxes, benefits, termination rules, and worker protections. If the internal HR team lacks the necessary expertise, the business may unintentionally violate local laws.

How to avoid it:

• Work with reputable PEOs or EoRs that specialise in local labour laws.
• Stay informed about employment law updates in relevant countries.
• Conduct regular audits to ensure compliance with tax laws, wage regulations, and benefits requirements.

4. Loss of control over HR decisions

Risk: Some businesses worry that outsourcing HR functions to a PEO or staffing agency may lead to a loss of control over hiring, terminations, or workplace policies.

How to avoid it:

• Choose a co-employment partner that allows the company to retain decision-making power over job roles and company culture.
• Clearly define which responsibilities remain with the business and which are handled by the co-employer.
• Maintain open communication with the co-employment provider to align on HR policies and employee management.

Managing co-employment successfully requires clear agreements, compliance oversight, and strong partnerships with the right workforce solution providers. When done correctly, co-employment can help businesses expand globally, streamline HR functions, and reduce risk. Below are key strategies to ensure an effective and compliant co-employment arrangement.

1. Define employment responsibilities in contracts

A poorly defined co-employment arrangement can lead to misclassification risks, legal disputes, and compliance violations.

How to do it:

• Clearly outline who is responsible for payroll, taxes, benefits, hiring, and termination decisions.
• Define compliance obligations for both parties to prevent misunderstandings.
• Specify dispute resolution processes in case of legal issues or disagreements.

2. Conduct regular audits

Employment laws change frequently, and compliance gaps can result in fines, penalties, or reputational damage.

How to do it:

• Perform routine compliance audits to ensure adherence to tax laws, labour regulations, and worker classification rules.
• Review employee classifications to confirm that workers are correctly categorised as employees or independent contractors.
• Monitor HR policies and benefits administration to align with evolving regulations.

3. Work with a trusted EoR or workforce solution provider like CXC

Choosing the right Employer of Record (EoR) or workforce solution provider ensures that your business remains compliant while reducing administrative burdens.

How to do it:

• Partner with a reputable global workforce provider like CXC that specialises in employment law compliance, payroll management, and HR support.
• Ensure your provider has expertise in your target countries to manage local hiring regulations effectively.
• Look for transparent pricing, strong HR support, and compliance expertise when selecting an EoR.