Co-Employment: What Every Business Owner Needs to Know

You’ve probably heard the term “co-employment” thrown around in HR circles. It’s a concept that can seem complicated but is actually straightforward once you break it down.

Understanding co-employment can help you make better decisions for your business. It’s all about sharing responsibilities and liabilities between two companies for the same employee. For a busy business owner juggling multiple tasks, this can be a game-changer.

Let’s dive into what co-employment really means and how it works.

What is Co-Employment?

Co-employment is a legal arrangement where two companies share certain employer responsibilities for the same employee. Typically, this involves a staffing agency and a client company. 

Imagine you’re overwhelmed with HR tasks like payroll and benefits management. Co-employment can lift that burden off your shoulders.

Example of Co-Employment

A staffing agency hires an employee and assigns them to work at a client company. The staffing agency handles payroll, taxes, and benefits, while the client company directs the employee’s day-to-day activities. Both companies share certain employer responsibilities and liabilities.

Types of Co-Employment Arrangements

When you’re running a growing business, the last thing you need is more paperwork. Here’s how different co-employment arrangements can streamline your operations.

Professional Employer Organization (PEO)

A Professional Employer Organization (PEO) steps in to handle HR tasks and shares employment responsibilities with your company. The PEO manages payroll, benefits, and compliance, allowing you to focus on core business activities. 

This arrangement provides a streamlined approach to managing employees, reducing administrative burdens while ensuring compliance with employment laws. The PEO acts as a co-employer, meaning both you and the PEO have certain legal responsibilities towards the employees.

TIP: Learn more about employment contracts to ensure clear agreements with your PEO.

Temporary Staffing

Temporary staffing involves a staffing agency hiring workers and assigning them to your company for short-term needs. This arrangement is ideal when you need extra hands for seasonal work, special projects, or to cover for permanent employees on leave. 

The staffing agency takes care of hiring, payroll, and benefits, while you direct the day-to-day tasks of the temporary workers. This setup offers flexibility, allowing you to scale your workforce up or down based on demand without long-term commitments.

TIP: Check out the best recruitment software to streamline your hiring process.

Leased Employees

Leased employees are hired by a leasing company and then leased to your business. This arrangement is similar to temporary staffing but often involves longer-term assignments. The leasing company handles all HR-related tasks, including payroll, benefits, and compliance, while you manage the employees’ daily work activities. 

This model can be beneficial for businesses looking to maintain a flexible workforce without the administrative overhead of direct employment. Leased employees can seamlessly integrate into your team, providing the skills and support needed for your operations.

TIP: Discover HR tools for small businesses to manage your leased employees efficiently.

Benefits of Co-Employment

Feeling swamped by HR tasks and compliance issues? Here’s why co-employment might be your new best friend.

Access to Benefits

Employees gain access to benefits through the staffing agency or PEO. This can include health insurance, retirement plans, and other perks that might be challenging for smaller companies to offer on their own. The staffing agency or PEO pools resources from multiple client companies, allowing them to negotiate better rates and more comprehensive packages. 

This not only helps attract top talent but also ensures that employees feel valued and secure in their roles. Access to such benefits can lead to higher employee satisfaction and retention, which is beneficial for your business.

TIP: Explore how health spending accounts can help in recruiting and retaining talent.

Reduced HR Workload

Co-employment significantly reduces the HR workload for your company. The staffing agency or PEO takes over many administrative tasks, such as payroll processing, tax filing, and compliance management. 

This allows your internal team to focus on strategic initiatives and core business activities rather than getting bogged down by routine HR tasks. With the staffing agency or PEO handling these responsibilities, you can ensure that all HR processes are managed efficiently and in compliance with relevant laws. This reduction in workload can lead to increased productivity and a more streamlined operation.

TIP: Learn how to streamline staff management with Homebase.


Co-employment offers a high degree of flexibility for your workforce management. You can easily scale your workforce up or down based on current business needs without the long-term commitment of hiring permanent staff. This is particularly useful for businesses with seasonal demands or project-based work. 

The staffing agency or PEO can quickly provide qualified workers when needed and handle the offboarding process when the demand decreases. This flexibility allows you to adapt to market changes and business fluctuations efficiently, ensuring that you always have the right number of employees to meet your operational needs.

TIP: Understand the pros and cons of part-time vs. full-time workers to make informed staffing decisions.

How Does Co-Employment Work?

Wondering how to integrate co-employment into your business without losing control? Here’s the lowdown.

Co-employment involves a staffing agency or Professional Employer Organization (PEO) and a client company sharing responsibilities for the same employee. The staffing agency or PEO hires employees and takes care of payroll, taxes, and benefits. 

This means they handle the administrative side of employment, ensuring that employees get paid on time, taxes are correctly filed, and benefits are managed efficiently. 

On the other hand, the client company directs the employees’ day-to-day work. You manage their tasks, set their schedules, and oversee their performance. This allows you to maintain control over your business operations while offloading the administrative burden to the staffing agency or PEO. 

Both companies share certain employer responsibilities and liabilities. This shared responsibility means that while the staffing agency or PEO handles HR tasks, you still have a say in how employees are managed on a daily basis. 

This arrangement can streamline operations, reduce administrative workload, and provide employees with access to benefits they might not otherwise receive. 

In this setup, clear communication and defined roles are key. The staffing agency or PEO ensures compliance with employment laws and handles the paperwork, while you focus on running your business and managing your team.

TIP: Refer to this guide to employment law to ensure compliance in your co-employment arrangements.

What Are the Risks of Co-Employment?

Feeling a bit anxious about the potential downsides? Here’s what you need to watch out for.


When you enter a co-employment arrangement, you might face liability for the actions of co-employed workers. If a co-employed worker makes a mistake or engages in misconduct, your company could be held responsible. This liability extends to areas such as workplace safety, discrimination, and harassment claims. 

It’s important to understand that even though the staffing agency or PEO handles many HR tasks, your company is not completely shielded from legal repercussions. You need to be prepared to address any issues that arise and ensure that both parties are adhering to legal and ethical standards.

TIP: Use HR metrics to monitor and manage employee performance effectively.

Loss of Control

Co-employment can lead to a loss of control over certain aspects of managing your workforce. While you direct the day-to-day activities of the employees, the staffing agency or PEO handles HR functions like payroll, benefits, and compliance. This division of responsibilities can sometimes create a disconnect. 

For instance, you might find it challenging to enforce your company’s policies or make quick changes to employment terms. The staffing agency or PEO might have their own procedures that don’t align perfectly with your company’s practices, leading to potential conflicts or delays in decision-making.

Compliance Issues

Navigating compliance in a co-employment setup can be complex. Employment laws vary by jurisdiction, and both the client company and the staffing agency or PEO must adhere to these regulations. Missteps in compliance can result in fines, penalties, and legal disputes. 

For example, issues can arise around wage and hour laws, employee classification, and benefits administration. If the staffing agency or PEO fails to comply with these laws, your company could also be held accountable. Ensuring that both parties are on the same page regarding compliance is vital to avoid legal complications and maintain a smooth operation.

How to Manage Co-Employment Risks

Worried about navigating the potential pitfalls? Here’s how to stay on top of co-employment risks.

Clearly Define Roles and Responsibilities

Establish clear agreements outlining each party’s responsibilities. This step ensures both you and the staffing agency or PEO know exactly what to handle. 

For instance, you might manage day-to-day operations, while the staffing agency or PEO handles payroll and benefits. Define these roles in a written agreement to avoid confusion and overlap. 

This clarity helps prevent misunderstandings and ensures smooth operations. Both parties should regularly review and update these agreements to reflect any changes in responsibilities or business needs.

Maintain Separate Policies and Procedures

Your company should maintain its own policies and procedures for co-employed workers. Even though the staffing agency or PEO handles HR tasks, your company’s policies should apply to all employees, including those co-employed. This includes workplace conduct, safety protocols, and performance expectations. 

Having separate policies ensures consistency and helps maintain your company culture. It also provides a clear framework for managing co-employed workers, making it easier to address any issues that arise. Regularly review and update these policies to ensure they remain relevant and effective.

Regularly Communicate and Coordinate

Maintain open communication and coordination with the staffing agency or PEO. Regular meetings and updates help keep everyone on the same page. Discuss any changes in business needs, employee performance, or compliance requirements. Open communication ensures that both parties can quickly address any issues and make necessary adjustments. 

Coordination is key to managing co-employment effectively. It helps ensure that all tasks are completed on time and that both parties fulfill their responsibilities. Regular communication also fosters a strong working relationship, making it easier to collaborate and achieve common goals.

TIP: Regularly review HR and onboarding practices to ensure smooth coordination.

What is the Difference Between Co-Employment and Joint Employment?

Still confused about the nuances between co-employment and joint employment? Let’s break it down.

Co-employment involves a staffing agency or Professional Employer Organization (PEO) and a client company. In this arrangement, the staffing agency or PEO handles HR tasks such as payroll, benefits, and compliance, while the client company directs the employees’ daily work activities. 

Both entities share certain employer responsibilities and liabilities, creating a partnership that allows the client company to focus on its core business functions while the staffing agency or PEO manages administrative duties.

Joint employment, on the other hand, involves two companies that directly employ the same worker. This setup is more common in franchising and subcontracting. 

In joint employment, both companies have direct control over the employee and share responsibilities such as hiring, firing, supervision, and setting work conditions. This means both companies are equally responsible for compliance with labor laws and regulations, and both can be held liable for any violations.

In franchising, for example, a franchisor and a franchisee might both have control over the same employees. The franchisor might set policies and procedures that the franchisee must follow, while the franchisee manages the day-to-day operations and directly supervises the employees. 

Similarly, in subcontracting, a primary contractor and a subcontractor might both oversee the same workers, with the primary contractor setting project guidelines and the subcontractor handling the execution.

Understanding the differences between co-employment and joint employment is important for determining the right arrangement for your business. Co-employment offers a way to offload HR tasks to a staffing agency or PEO, while joint employment involves a more integrated approach where both companies share direct control over the employee. 

Each model has its own set of responsibilities and liabilities, so it’s crucial to choose the one that aligns best with your business needs and operational structure.

TIP: Consult this guide to small business HR services to explore different HR management options.

Is Co-Employment Right for Your Business?

Thinking about whether co-employment suits your business? Start by considering your HR workload and need for flexibility. If managing HR tasks like payroll, benefits, and compliance takes up too much of your time, co-employment can help. 

By sharing these responsibilities with a staffing agency or PEO, you free up time to focus on core business activities. Additionally, if your business experiences seasonal fluctuations or project-based work, co-employment offers the flexibility to scale your workforce up or down as needed.

Next, evaluate potential risks and liabilities. Understand that co-employment involves shared responsibilities, which means both parties could be liable for any issues that arise. 

For instance, if a co-employed worker files a complaint or lawsuit, your business might share the liability with the staffing agency or PEO. Make sure you are comfortable with this shared risk and have measures in place to address any potential problems.

Assess the costs and benefits of co-employment arrangements. Look at the financial implications, including fees paid to the staffing agency or PEO and any potential savings from reduced HR workload. Weigh these costs against the benefits, such as access to better employee benefits, reduced administrative tasks, and increased flexibility. Consider how these factors align with your business goals and budget.

Consult with legal and HR professionals. Before entering a co-employment arrangement, seek advice from experts who can help you navigate the complexities. 

Legal professionals can review contracts and ensure compliance with employment laws, while HR consultants can provide insights into managing co-employed workers effectively. Their guidance can help you make informed decisions and avoid potential pitfalls.


  • What: Co-employment splits employer duties between two companies.
  • So What: It eases HR burdens but shares liabilities and compliance risks.
  • Pros & Cons: Pros: less HR work, better benefits, flexibility; Cons: shared liability, control issues, compliance challenges.
  • Bottom Line: Good for reducing HR tasks and adding flexibility, but know the risks.


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