Co-employment

Co-employment is a legal setup where two parties, usually a client company and a professional employer organization (PEO), share employer duties for the same workers. The PEO acts as a co-employer, taking on specific HR, payroll, and compliance tasks. Meanwhile, the client company manages the employees’ daily activities and operations.

This model is gaining traction among small and mid-sized businesses. They aim to outsource complex employment duties, cut HR-related risks, and simplify workforce management.

How Does Co-Employment Work

The foundation of co-employment is a formal Client Service Agreement (CSA) between the PEO and the client business. This contract outlines each party's responsibilities and defines their roles as co-employers.

Under the CSA, the PEO is the “employer of record.” This means they handle tasks like payroll processing, employee benefits, tax filings, and regulatory compliance. The client company, however, is the “worksite employer.” They keep control over workplace operations, management decisions, job descriptions, performance evaluations, and disciplinary procedures.

This dual-role relationship needs careful coordination and trust. Both parties must ensure legal compliance, operational alignment, and employee satisfaction.

Division of Responsibilities in Co-Employment

The co-employment model does not give the PEO control of the workforce. Instead, it serves as a strategic HR partner. This setup lets the client company delegate certain administrative tasks while keeping control over business results.

The PEO typically handles:

• Payroll administration, including wage calculation, paycheck distribution, and filing of payroll taxes

• Benefits administration, offering access to health plans, 401(k) options, vision and dental coverage, and more

• Regulatory compliance, including labor law monitoring, workplace safety programs, and anti-discrimination enforcement

• Workers’ compensation insurance management and claims handling

• Unemployment insurance administration

• Employee onboarding documentation, including Form I-9 and W-4 filings

• Assistance with disciplinary action procedures, workplace investigations, and risk management

The client company retains responsibility for:

• Hiring and interviewing candidates (with or without PEO guidance)

• Supervising daily work, projects, and performance

• Setting job duties and schedules

• Managing employee productivity, engagement, and organizational culture

• Providing safe and compliant working conditions under OSHA standards

This division of labour lets each side work in their strengths. The client handles business tasks, while the PEO provides the legal and admin support necessary to employ staff properly.

Key Advantages of Co-Employment

The co-employment model has major benefits for companies, especially those without dedicated HR teams or legal help.

First, it lightens the administrative load on internal staff. By outsourcing tasks like payroll, employee benefits, and compliance, companies can focus on their main business activities. PEOs often use advanced cloud-based HR software to automate and centralise documents, boosting efficiency and access.

Second, co-employment can improve a company’s ability to attract and keep talent. PEOs usually offer access to large-group health insurance and retirement plans, which are often too expensive for small businesses. These perks can give a company an edge in the job market.

Third, co-employment helps reduce compliance risks. With fast-changing labor laws, local regulations, and more scrutiny on employee classification, PEOs act as compliance partners. They help lower the chances of legal penalties and fines.

Fourth, it ensures uniformity in employee classification, employment agreements, and tax records. PEOs often provide legal templates and audit support, helping companies with IRS and Department of Labor questions.

Legal Distinctions: Co-Employment vs. Joint Employment

It is important to distinguish co-employment from joint employment and employee leasing. In joint employment, two separate employers control the same workforce. This often happens without formal coordination, leading to legal issues in wage and hour compliance. Such situations are common in subcontracting and franchise relationships.

Co-employment, however, is a planned and contract-based setup that outlines the roles of each party. Employee leasing involves a staffing agency temporarily assigning workers to a client business. This arrangement lacks the long-term HR integration found in co-employment.

Another related concept is the employer of record (EOR). EORs manage payroll, benefits, and compliance. They uniquely support international hiring by acting as the legal employer in foreign locations. PEOs usually operate within national borders, but some firms provide global PEO or hybrid EOR services.

Risks and Compliance Considerations in Co-Employment

Co-employment has benefits, but it also comes with risks. Misunderstandings about employer roles can lead to liability if employment laws are not followed. For instance, if a client company fires an employee without proper anti-discrimination procedures from the PEO, both may face a wrongful termination claim.

Incorrect employee classification is another issue. Mislabeling an employee as a contractor can lead to IRS audits and fines. To reduce these risks, companies should select certified PEOs (CPEOs) registered with the IRS. They should also keep clear documentation of responsibilities in the CSA.

Tax errors pose additional risks. The PEO files taxes under its Employer Identification Number (EIN). Mistakes in wage reporting can cause discrepancies that affect employee Social Security earnings or tax refunds. Employers must regularly check tax records and confirm filings.

Strategic Use Cases for Co-Employment

Startups and small businesses like co-employment. It gives them full-service HR support without needing an in-house team. They can scale their workforce quickly while keeping costs predictable.

Mid-sized companies in M&A or expanding into new states benefit from PEO expertise. They can manage payroll across different regions and follow compliance rules.

High-risk industries, like construction, healthcare, or manufacturing, often use co-employment. This helps them ensure workplace safety compliance and manage workers' compensation insurance better.

Co-Employment in the Remote Work Era

The rise of remote work has sparked interest in flexible HR service models like co-employment. PEOs can effectively support a remote-first company. They offer centralized documentation, digital onboarding, multi-state compliance, and virtual HR tools.

But companies with remote workers in other countries may need more than what domestic PEOs offer. In such cases, an EOR or global PEO might be a better choice. These options provide entity-free employment, local tax withholding, and visa compliance in countries where the business is not legally established.

Conclusion

Co-employment is a smart and cost-effective way for companies to simplify workforce management, access better benefits, and ensure legal compliance. By partnering with a professional employer organization (PEO),, companies can share employment duties while keeping control over their teams.

This model provides great value, especially for startups and growing businesses. However, it needs careful vendor selection, legal checks, and clear agreements on roles. Knowing the difference between co-employment and similar setups is essential to avoid misclassification risks, tax problems, or legal issues.

As work trends move towards hybrid teams, cross-border hiring, and flexible HR solutions, co-employment will remain crucial in how companies manage their workforce.

For definitions of key HR and employment terms, visit the Rivermate Glossary.