What Is Co-employment?
Co-employment happens when your company enters into a contract with people who are not your employees. One way to do that is to hire a staffing agency or employee leasing firm. Another way is to use contingent workers: independent contractors (self-employed or through an agency), consultants (sometimes), or gig workers.
What Your Business Is Responsible For
Who is responsible for what depends on the type of organization you contract with. For instance:
- A traditional staffing agency may offer to source and hire a contingent worker for you so your company only needs to manage the contingent worker’s tasks. The staffing agency invoices you for the time and expenses of their employee (your contingent worker) plus their mark up. They retain all the responsibilities of the employer, including unemployment insurance. However, worker’s compensation is likely a shared responsibility.
- At the other end of the spectrum is the PEO, or Professional Employer Organization. A PEO effectively outsources all HR administration, from payroll and taxes to worker’s compensation. They perform all your HR administration through their organization. This requires giving up control that may not be suitable for all companies or cultures.
- Independent contractors own their own business, receive no benefits, and pay both sides of their taxes (employer and employee taxes). They invoice you for hours worked or project deliverables completed and expenses, depending on your contract with them.
What Your Co-Employment Partner Is Responsible For
This depends on the contract, but in short, most or all administration should be managed by the co-employer in exchange for a fee.
In a co-employment relationship, the less your company is responsible for and involved in, the better it is for your risk management. The clearer it is that you are not the primary employer, the less risk you carry of facing the penalties involved in misclassifying a worker as temporary rather than regular (more on that below).
Is Co-employment for You?
There are risks and benefits to weigh when deciding if contingent workers are right for your company and how best to manage them.
Benefits of Co-employment
The benefits of co-employment vary with the type of organization your company partners with and the services they offer, but can include:
- Scaling up. When the job market is tight for employers (either in all jobs or in specific niche areas), contingent workers may be the only kind of workers you can find. There may be a situation where you have to take what you can get, at least for a while. It can also be a useful option if you need to scale up for seasonal work or other needs.
- Saving time. Outsourcing saves you all the time of advertising, recruiting, screening and interviewing.
- Temporary needs. If you have a major project that requires 10 extra workers to meet the delivery deadline to the client, this might be the best option for your company. If you were to hire those 10 workers as full-time, regular employees, would you have work for them to do at the end of the project? Temporary needs can sometimes be best met with temporary measures.
- Expertise. Smaller companies may find it beneficial to let agency professionals manage the most practical HR tasks in order to allow you to focus on the strategic work, and using a PEO may be a cost effective and efficient solution. Additionally, some niche expertise may only be accessible to your company by bringing in a consultant as an independent contractor.
- Costs. While it is expensive to share your workforce, there are cost benefits to doing so as well. If you need a lot of help, PEOs often leverage the scale to negotiate better or cheaper benefits. Further, there is always cost involved with tactical work like compliance or payroll, and outsourcing the research and risks associated with those things may be a cost savings for your company.
Risks to Consider
There are not many risks to co-employment, but they can be weighty.
- Temps aren’t permanent. That seems obvious, but some companies or managers seem surprised when their contingent worker does not want the constraint of being converted to an employee. Contingent workers may not be the best succession plan.
- Culture dilution. Contingent workers are sometimes called external workers. The more external/temporary people you bring into your company, the more it may change the culture you have in place with your regular employees.
- Costs. Temporary workers through staffing agencies may be paid similarly or a little less than your regular hires; independent consultants can charge substantially more than your regular employees. The difference is benefits, taxes, and profit margins.
- A staffing agency bills a higher rate than the temporary worker receives. This covers their administrative costs, profit, employer taxes, and the employer portion of any benefits the worker receives.
- The consultant, on the other hand, pays her own employer taxes and provides their own benefits, from health insurance to vacation.
In either case, the cost of wages for the worker will be higher than wages for your regular employees. If possible, negotiate a deal with the staffing agency that comes equal to or less than the total compensation for your regular employees in the same positions. Sometimes you may just need the help even though it will cost you more.
- Penalties for misclassification. Here’s the real reason people get nervous about the word “co-employment:” if you classify a worker as a contingent worker and it turns out later on that they should have been an employee, then you may have violated many employment laws, including ADA, ACA, overtime regulations, and more. This can be especially troublesome for small companies on the brink of various employment law thresholds (such as having 50 employees). These penalties are in place to discourage employers from knowingly calling an employee a contingent worker to avoid offering benefits and unfairly offloading employer taxes onto the worker. Penalties can include:
- Back taxes for up to 41.5% of the worker’s compensation, going back three years.
- IRS audit.
- If the IRS finds it was intentional misclassification, it could result in up to one year in prison and up to a $500,000 fine.
- Fines and penalties for poor recordkeeping assessed by the Department of Labor.
- DOL may also charge up to three years of back wages.
- State insurance (unemployment or state disability, for example) may exact penalties.
- State labor departments may exact penalties.
- Just one misclassification of a temporary worker could trigger an ACA excise tax penalty based on the size of your entire full-time workforce.
- Workers have been known to successfully sue for back benefits and compensation, such as stock options, on the premise that they were actually employees and should have received what all other employees received.
How to Avoid the Risks of Misclassification
The only way to entirely eradicate the risk is to only hire your own employees and treat them like employees in full. Because you co-employ contingent workers (whether through an agency or their own company), the risks of co-employment are yours to take on. Hiring temps through a staffing agency that employs rather than subcontracts your contingent workers may help mitigate the risk, but will not eliminate it. The government views it as your company’s responsibility to ensure the contingent workers are classified correctly and treated accordingly, or employed by you in full and treated accordingly.
Regardless of the risks, if you have a FMLA leave of 12 weeks that is going to leave a department critically shorthanded, or you have a large project coming up that requires more hands than you might want to keep later, you might find you have a temporary need for additional workers. In that case, hiring full-time regular employees to solve a temporary problem may result in letting people go (or a reduction in force), which is really just trading one set of risks for another and would likely be more expensive.
Keep in mind that your company may not be able to mitigate all of the risks for each contingent worker, and that is okay. Co-employment risks (meaning risks of miscategorizing a worker as contingent that really should have been treated like an employee of your company) are viewed almost as cumulative: the more you treat the person as a regular employee, the more risk you have. Obviously, more mitigation is better than less, but 100% is likely not expected.
This IRS guide gives some simple cues as to what may indicate employee status versus independent contractor status. It categorizes examples under Behavioral Control, Financial Control, and Relationship of the Parties. On this website, the DOL provides a few tests as well.
Here are some methods for minimizing the likelihood of a misclassification.
Method 1: Control of Work
How much control you have over the person’s work is one indicator of whether they should be classified as an employee or a contingent worker. Control of the work is one of the most important variables in determining if a worker is misclassified. Choose the positions you will seek contingent workers for carefully.
Consider two potential temporary worker positions: a warehouse worker who picks, pulls, and packs orders versus a scientist with niche and deep expertise. Which will need more direction of their work to make it mesh with the way the company operates and to complete the necessary work?
One common notion on control of work is that your company will be directing what work gets done, but a contingent worker will define how and when the work gets done.
Work like the example warehouse worker does not leave much room for interpretation of the manner of completing the work or when the work will be completed, so your control of work for this person is high. This means there is a higher risk of the worker being misclassified as a contingent worker when they should be an employee.
Method 2: Benefits
Selecting an employment partner that offers benefits can help make it clear who is responsible for the worker’s employment. This is less applicable with independent contractors, but in those cases, help mitigate the risk of misclassification by making it clear in the contract that your company is not paying employer taxes or providing benefits.
Method 3: Communication
Positive and negative feedback should be provided from your company directly to the staffing agency, not to the temporary worker. This is not your employee to manage.
Take this as a benefit; if someone isn’t working out the way you would like, you don’t have to have the difficult conversation. Call your staffing agency and let them know that the worker is problematic in specific ways and with examples, and they will manage it. Follow this same process if you want to end a temporary worker’s assignment, whether immediately (for cause) or on a scheduled date.
Don’t “fire” your temps “on the spot” for poor performance, although of course, if there is a safety concern or something egregious, you can have them removed from the premises. However, this is not recommended except in those few instances where you would have an employee removed from the premises immediately, too (threat of violence, inebriation, etc.).
All performance management should be done by the partnering company. This is also true if there is wonderful performance exhibited. Note that saying “Thank you!” or “Great job!” is not going to cause you any trouble, but let’s say you want to give the contingent worker a $100 bonus for doing a great job. That is the kind of thing you would do for an employee, so who should be responsible for doing so? Your employment partner, of course! Typically this would be done by providing the feedback to the staffing agency and telling them about your desire to give the worker a $100 bonus. They would most likely tell you they will manage awarding a $100 bonus to their employee’s pay and will invoice you an additional $100.
It should generally work this way for the selection process, too. For selection, you can interview workers who are sourced by the agency, or you can go on their assessment of their workers. Typically the agency will provide resumes. You can even send workers you think you might want to use to the staffing agency and request that they be included in the roster of workers you want to assess. (Note the agency has no obligation to employ someone because you think you might want to use them as a temp.)
If your company is more risk averse, you may instill a simple rule in company policy and/or contract that contingent workers are selected for your company by the employment partner to help clarify who is the primary employer (because you didn’t interview them or even meet them in advance of selection). In other words, you either assess unnamed resumes or ask the agency to send you the type of employee you need for the time and pay level you choose. In this case, the agency makes a selection for you based on your described project needs and cost constraint.
This is very different from what sometimes happens. Let’s say your company needs a summer worker to do data entry work. The Operations Manager’s son is home from college for the summer and looking for work. The son can be advised that they can apply with the specific agency you use and reference the exact position you are looking to fill. Or, you can send the son’s resume to the agency and ask them to consider bringing the son onboard to be considered for your position.
But if you want to mitigate risks more conservatively, you wouldn’t interview the son and tell him to go through the agency to get the job, or call the agency and tell them he is coming, because it increases the amount of involvement you have in the selection process, which implies more of an employer relationship . Note there is nothing wrong with doing this. It is not illegal or frowned upon. It is simply a greater risk of misclassification, and your company may not want to take on that greater risk. Remember, the risks are cumulative and it is up to your company to decide how much risk you want to take on and how you want to mitigate it.
Method 4: Training
Not all training means the same thing in this context. OSHA says you need to provide appropriate safety training to your contingent workers. Some other training may make sense to provide as well, such as anti-harassment training, as your company could be held responsible for harassment committed by your contingent workers and/or suffered by your contingent workers. Additionally, some degree of training on how your company works is likely to be necessary, whether that is proprietary software or security protocols.
With this in mind, it is reasonable and beneficial to provide some kind of onboarding to contingent workers, though only 47% of HR professionals report having a standard onboarding for external workers. It likely won’t be as in-depth as what a regular new hire receives. It generally shouldn’t cover most of the items related to HR, either. But sharing the company values with an external worker to help them understand how the company operates shouldn’t open you to charges of misclassification.
However, sometimes there is a request to send a contingent worker for training that should be evaluated more carefully. Providing training to a contingent worker that they should procure for themselves or through their employer is risky.
A general guideline would be to look at how job-specific the training is. If you bring in an independent contractor to test-audit your company and provide consultation on how to best be prepared for the next real audit, they should come with all the knowledge and experience needed as an auditor. They should not need training on how to audit or how to audit better.
Compare that with an employee of your company. An employee could easily be sent to a class to learn to conduct audits or even to become certified to conduct audits, because this would be part of a career development plan. Mitigate misclassification risks by not creating a development plan, even in rough concept, for a contingent worker.
Method 5: Duration
There is no magic number of days that a contingent worker can work before suddenly becoming a risk. It doesn’t become illegal after a specific number of months. The key to managing risk through the duration of the assignment is to remember you need a temporary worker to solve a temporary problem, so how long is that likely to take?
Mitigate your risk by setting a specific timeline for the assignment with the option to extend. For example, if the project is likely to take four months, start the assignment length at four months. At three months, check in to see how the project completion is going and if an extension is needed. Many companies have internal policies that dictate how long the initial assignment can be, how long an extension can be, and/or the total duration limit. For example, your company may decide that one year is the most they are willing to call the position “temporary,” and thus, you can set an initial assignment end date at a maximum of one year. You may then offer the option to extend the assignment by another six months, but after that, you might be forced to get a different worker if the work still is not completed.
The savvy HR person will be in touch with managers who oversee contingent workers regularly to understand the changing nature of the “temporary problem” that you are trying to help them solve.
Note that in the case of a consultant with specialty expertise, managing the duration might be in the number of hours billed versus a timeline. This is more applicable to the start-and-stop nature of consulting work, and may look something like no more than 1000 hours the first year and no more than 500 hours in any subsequent year. In this way, the amount of time the consultant spends with your company is certainly limited, but the control remains with the consultant (good for risk mitigation and fiscal planning), yet it also affords the opportunity for the consultant to continue their work for your company for many years as a mitigated risk.
Method 6: Assimilation and Engagement
While no one likes to treat contingent workers like second-class citizens, there is good reason to ensure contingent workers don’t forget who actually employs them. There are ways to do this and still keep the “human” in Human Resources, though. Sadly, only 44% of contingent workers report feeling welcomed into the organization. That is indicative of lost productivity due to unnecessarily low engagement.
Consider the value of having contingent workers attend company meetings. Perhaps it includes safety training that is beneficial to all, or helps explain the value of the work in the context of the next phase of the project. Or, perhaps it includes company financials and even forward-looking stock-impacting information that would not be shared outside the company, so external workers should not attend. As with other mitigation techniques, you can mix and match what works best for your company’s risk threshold.
Team-building events are another type of event that should be considered carefully. Can you safely invite your temp to a happy hour Wednesday night if everyone is paying their own way? Most likely there is no issue, as there is no benefit being conveyed and the time is not compensable. However, if your team is going to a cooking class to learn to coordinate and communicate better while building a sense of community, it is happening during the workday, everyone will be paid for the time, and the company is covering the cost of the event, that is a much larger risk to take. Always consider if it makes sense when remembering the worker is contingent and should be there to solve a temporary problem.
While there is no problem sharing the company values so that contingent workers understand how and why the company operates the way it does (after all, this is information that is generally available on the public website), inviting a contingent worker into the company too deeply can cause blurred lines.This doesn’t mean that people can’t be friendly or must ostracize contingent workers. If someone brings in a birthday cake, there is no harm in letting the contingent worker enjoy a few moments with the team, but perhaps it is too large a risk for your company to invite contingent workers and their guests to the company holiday party.
One mitigation that is commonly employed is to designate contingent workers on org charts. These workers may be asterisked, or their box may be a different color. While this may seem rude and rather like a scarlet letter, it may also be prudent, depending on your company’s risk factors and threshold. Note that other countries have different employment laws, and your global organization may have difficulty maintaining such arrangements or getting others outside of the US to understand that it is not only not illegal, it is recommended here.
If you have a large number of workers through a single staffing agency, keep in touch with the agency about ways you can incorporate the contingent staff with their assistance to mitigate risks. For instance, if employees have the opportunity to win prizes at an event, you could talk to your staffing agency about having their representative come to the event, seek out their employees, and share with them how they can enter to win prizes the agency gives out, even though they aren’t eligible for the prizes your company gives out. Note that this isn’t foolproof; there are no methods to completely eradicate risk beyond simply not having any contingent workers ever.
How to Get Started
To get started, you’ll need to review the exact needs of your company to determine what kind of partnership best suits you (PEO, staffing agency, etc.). After that, plan ahead how your company will mitigate risks. Negotiate your contract with those mitigations in mind for the best results.
You want to attract the right people for the right job at your company—before the competition hires the best talent in the field. The hiring process, often involving recruiting, multiple screenings, assessments, and interviews, can take weeks or longer. An inefficient process may cause your company to lose out simply because candidates got another offer sooner. On the other hand, a poor hiring process can result in employees who are a poor fit for the culture or job requirements, causing expensive turnovers.
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