Co-Employment Law: The Complete Guide

What Does Co-Employment Mean?

Co-Employment is generally defined as a situation in which two separate entities have the legal right to control the individual and/or the work being performed for them. As stated by the DOL, the traditional employer-employee relationship is created by an agreement between the parties and arises when the person over whom the employer exercises control can be identified. Depending on the circumstances, an employer may not be the primary employer despite its control. A co-employer relationship, therefore, can exist when the employer shares responsibility with an outside business for the employee’s terms and conditions of employment and rights under the FLSA.
As the workforce continues to diversify, and it is becoming increasing costly and cumbersome for businesses to independently hire and maintain employees, co-employment agreements are being used more frequently. Business to Business Co-employment agreements , which occur when businesses enter into separate contracts for services with separate entities, are becoming more common, especially in the Health care Industry, where businesses utilize a higher number of professional and administrative workers.
Leasing Agreements are used by many businesses, as leasing agencies are trained to conduct detailed background checks on workers, administer paychecks, collect taxes, and pay unemployment, disability and healthcare costs. An employee leasing company essentially acts as an intermediary, acting as the employee’s employer, while the host company remains the "day-to-day" employer. Because this relationship is based on a written contract with limited mutual decision making about company and individual employee matters, the parties likely do not qualify as "joint employers" pursuant to the FLSA.

Legal Considerations of Co-Employment

Companies who deal with various staffing arrangements understand that co-employment comes with its own set of legal risks. At its core, the employer-employee relationship comes with legal protections and responsibilities under both federal and state laws. Not only do both the employers (the one with whom the employee has a direct employment relationship and the one that actually pays its wages) have responsibilities, but so too do the employees in some circumstances.
Co-Employment Drives Responsibilities
With specific reference to both OSHA and TEFLA, sometimes it is the responsibility of the "actual employer" (not the contracting company) to pay for injuries or illnesses sustained by a temporary employee, and to maintain records of these injuries/illnesses. Workers’ compensation insurance between the two employers cannot be duplicated. By this, it is meant the upfront payment of compensation is not borne fully by the actual employer, employee and contracting company must share in the financial burden of an injury or illness.
The managerial relationship that exists between the employer and employee applies equally to employees under co-employment agreements. With the exception of Chapter 19 of the Texas Business and Commercial Code, all of the employer’s rights and duties terminate upon an employee’s termination. Accordingly, if an employee quits instead of being fired, a pre-termination hearing is unnecessary.
At common law, this is so because the employee has finished his or her relationship with the employer. As such, the employee is no longer entitled to notice and a hearing, because the employer is under no obligation to rehire a former employee. The Texas Supreme Court has held that Chapter 21 of the Texas Labor Code provides a claim for wrongful termination, and that employees no longer have a property interest in continued employment. In such cases of wrongful termination, even if a claim were to exist under Chapter 21 or under any other available statute, the continuing employer may be liable for any damages hereunder.
Legal Liability Still Exists
Legally, Co-employment does not prevent the employer from leaving the temporary agency employee off of the payroll, and paying instead directly to the employee the amount that the temporary agency would have paid, or the portion that exceeds what would have been paid to the temporary employment agency.
Again, the employer is responsible for whatever obligations are undertaken by the temporary employment agency, and usually ends up being the party that ends up in a legal trap. An agency’s administrators, decision-makers, and employees may all find themselves under unnecessary investigation or litigation.

Pros and Cons of Co-Employment

Co-employment arrangements are not without their benefits. Some of the advantages include: 1) recruitment flexibility; 2) employer-focused strategic planning; and 3) human resources outsourcing. Conversely, co-employment arrangements also present employers with challenges. Some of the associated challenges include: 1) shared accountability; 2) risk management; and 3) legal compliance. These different elements are discussed in more detail below.
Recruitment flexibility
The ability of companies to outsource its human resources allows for the outsourcing company to recruit the best possible talent. Additionally, for the company that is outsourcing its human resources, outsourcing gives it a competitive edge when recruiting candidates. Companies that outsource their human resources can offer the outsourced employee greater opportunities than could be provided by a company that does not outsource its human resource department. Furthermore, the outsourced employees may prove to be more flexible than company employees. Outsourced employees can provide a company with flexibility during seasonal hiring periods or when business grows unexpectedly.
Employer-focused strategic planning
Having an employer-focused strategic plan helps a company evaluate its human resources needs and better facilitates its growth. A good plan helps implement staffing requirements and protects the company’s interests. A strategic plan also enables a company to address its declining areas by identifying its challenges and working to overcome the identified challenges.
Human resources outsourcing
Outsourcing human resources functions frees the company to provide better service and reduce costs. By outsourcing this function, an organization can be more effective in its core business operations. A payroll processing firm, for example, will process payroll more efficiently than an organization. Human resources outsourcing minimizes the likelihood of human error and the expense associated with such errors.
Shared accountability
In co-employment arrangement, employers share responsibility for the accuracy of required benefit and other information that is provided to employees. For example, under a mandatory furlough program, both the employer and its employer of record (EOR) will be responsible for providing its employees with the required wage information.
Risk management
The risk to a company from co-employment arises from wage and hour claims including independent contractor misclassification disputes. There is an abundance of case law holding employers liable for the wage and hour conduct of an EOR whose employees are considered joint employees of the EOR and the customer employer.
Legal compliance
A company that provides a co-employment arrangement must comply with all federal and state laws. Compliance with the various federal and state laws will prevent claims against the outsourcing company for statutory violations.

When Co-Employment is Preferred

Co-employment arrangements are important to understand in many industries that are rapidly growing. These are organizations looking to provide their employees with benefits while attempting to save money. The industries that most utilize co-employment are:
Technology
Technology businesses are clamoring for employees—particularly tech-savvy ones—and are seeking co-employment for reasons including looking to save significant money on benefits while providing high quality benefits to employees and not getting into the volatile business of hiring. The tech sector is a huge employer, accounting for around 6% of the workforce in the United States.
Hospitality
Traditionally, restaurants, hotels, and like businesses have engaged in co-employment arrangements. Particularly given the high turnover rate of these businesses, they do not have the ability to conduct thorough background checks of the potential hires. Co-employment is appealing to these businesses, which don’t have the capability of conducting background checks because the business acting as the employer-of-record has access to the related information. This is the area that has the highest risk, however, as a bad background check can cause the client-business to lose business from other business partners.
Education & Childcare
Private schools and childcare facilities are appealing to co-employment companies because they want to be able to hire top quality employees but cannot afford to pay for them. The companies who provide co-employment services are able to provide them with benefits at the level that they want, and the quality.
Construction
This industry has grown as companies in this sector look to capitalize on the rest of the economy and focus on profits, rather than just providing jobs. They are looking for a way to maximize their income, without investing their time into hiring full-time workers. Common co-employment arrangements are particularly practical in this industry due to the need for flexibility as workers are often needed on a project-by-project basis. Co-employment provides the flexibility that owners and recruiters need.
Accounting
Accounting companies are leveraging co-employment you provide temp services to companies, and unlike in instances where you are merely temping out employees as a staffing company, here companies are actually using co-employment arrangements. The co-employment arrangement allows accountants to provide not only bookkeeping services, but also "high level" accountants that providers can offer to their clients while categorizing the employees as contractors. This way, the accountants do not have to pay payroll taxes, while avoiding the independent contractor classification risks, provided they make reasonable efforts to make sure that the relationship is respected and characterized accurately.

Co-Employment Agreements

Co-employment contracts contain several fundamental elements that employers and employees should both carefully consider. The employment relationship between the staffing agency and the employer, for example, typically includes the following clauses: Indemnification, Termination of Agreement, and Assignment of Rights.
In the event of an indemnification clause, the staffing agency typically agrees to provide defense and/or indemnity to the employer for any claims brought against the employer by the placed employee. This can be a beneficial clause for employers even when the staffing agency is responsible for co-employment liability (as we discussed in the Scope of Co-Employment Liability section). However, the staffing agency may agree to indemnify the employer, but in turn place this expense on the employee. In this manner, the employee not only serves as the contractor of the staffing agency, but they also pay for their right to do so through indemnifications and administration fees. Therefore, the compensation of the employee may be reduced or withheld altogether. As such, it is vital to have these clauses vetted prior to employment with a company and contracting for services with a staffing agency; what may seem like a great opportunity may be anything but.
Terminated co-employment agreements deserve special consideration. Contracts can terminate under a number of conditions, including: expiration of a specified period of time, agreement by the parties, occurrence of a certain event, insolvency of a party, bankruptcy, etc. Additionally, many co-employment agreements lack a cap on the number of hours an employee can work each week. Without a cap in place, a staffing agency (that bills the client based on employee hours) could ask an employee to work hundreds of hours in a week. This unpaid overtime can force an employee toward bankruptcy, debt, and default. This can result in not only wasted money and time, but reputational damage, emotional harm, and even death. A quick overview of California law will help incorporate safe provisions into a co-employment contract.
Finally, many co-employment agreements include an assignment of rights clause, which may appear with any number of monikers (i.e. agency, responsibility, etc.). This is one of the most important clauses in the contract, as it establishes all of the fundamental rights and responsibilities of the parties. While an employer may still face liability for the acts of a staffing agency as a general matter, a breach of an agreed-upon contractual clause can lead to an added layer of complexity, increased liability, and reputational damage. Perhaps one of the most problematic areas of a co-employment contract is the assignment of rights clause. This is because it is the main portion of the contract that dictates employer responsibilities. It also usually lacks careful specificity. As such, this clause can be easily misread or misinterpreted. What may look like an indemnification clause may actually be an admission of guilt, or what appears to be a termination clause may actually be a way to extend the contract. This is why it is vital to have a thorough understanding of your co-employment contract before you begin working for a company and become subject to their co-employment arrangements.

The Role of PEOs

Professional employer organizations (PEOs) have grown in popularity as businesses look for ways to outsource their HR administrative needs and focus on their core business objectives. For existing relationships or for employers just getting started with a PEO, it is important to understand how the PEO will seek to limit or eliminate its liability to employees through the co-employment relationship, various indemnification provisions and the allocation of risk though the PEO and client service agreement (which you should review with your employment counsel).
Section 3(e)(1) of the National Labor Relations Act defines an "employer" broadly to include those exercising control over the employees "directly or indirectly, or whose actions indirectly control such employees, or whose acts in the matter of conduct and supervision of such employees will result in control over the employees, or determination of their rates of pay, or other conditions of work…".
In most PEO arrangements, the PEO is a "client company" and the PEO is the "employee leasing company." The employee leasing company will typically be named the employer in any employment-related agreements, including the employee handbook which has been prepared by the PEO . Additionally, the client company/employer seeks to limit its liability in the PEO/employee lease agreement, by way of broad indemnification and liability provisions.
Although a client company can play a significant role in determining how the relationship with its outsourced employees will function, it always is impacted by the employer-employee relationship created by the PEO’s "management rights." For instance, the client company is bound to follow the PEO’s HR policies and procedures with respect to employees, as outlined in the PEO’s employee handbook, which may be very different from the client company’s usual practices.
Contested issues that arise easier for the PEO arise from the lack of direct control over employees. For example, uman resources priorities may not include termination decisions, workplace investigations, or discipline because the PEO administers related policies. As with any employment-related lawsuit, the applicable statute of limitations may operate to bar claims for actions that occurred years before the lawsuit was initiated, based on the date the cause of action arose. Accordingly, courts might not permit claims such as misclassification of employees or failures to provide reasonable accommodations under the Americans with Disabilities Act if these decisions were made years before the claims were asserted.

Best Practices for Co-Employment

In practice, many employers, whether knowingly or not, have co-employment relationships. Oftentimes, a staffing agency will employ temporary employees who work at companies that hire the staffing agency, either on a full-time or part-time basis. Other times, an employer may employ a person through a separate company that the employer owns or controls, or through a joint venture or a partner. Still, other employers employ independent contractors, consultants, interns and the like. These types of co-employment relationships are subject to the same scrutiny as those relationships whereby two different entities directly employ the employee.
Best practices for employers for ensuring that co-employment is appropriate and in compliance with the law:
Employers should exercise caution it entering into co-employment relationships.

While employers can mitigate the risk inherent in using co-employees by using several of the strategies listed above, they cannot fully eliminate the risk. Because co-employment law is constantly evolving, employers should check with legal counsel when structuring co-employment relationships and when implementing best practices.

Common Co-Employment Myths

Co-employment, also known as "joint employment," is often marked by such misunderstandings that the practice has become something of a black box for employers. As an employer, you’re likely to begin arguing co-employment when you’re concerned about liability issues, but you probably have at least some misconceptions about how the practice works. Read on to learn the truth about co-employment and how it can affect your business.
One of the most pervasive myths about co-employment is that employing an employee through a staffing agency automatically makes you and the staffing agency jointly liable for that employee. In fact, courts typically look at an array of factors when determining whether to fulfill a co-employment obligation, including whether you share or co-direct the ability to exercise control over important aspects of an employee’s position. If you can demonstrate that you do not have control of the employee in question, the court is unlikely to find that you are jointly liable for that employee’s actions.
Many employers fear that using a staffing company makes them jointly liable for any employee recruited through that agency, meaning you could face legal liability for your staffing agency’s actions. Although surveys indicate that employees are more likely to believe that they are employed by both their staffing company and their actual employer, they are unlikely to try to sue both parties if the arrangement goes south. Even if one of your joint employees does attempt to bring litigation against you both, courts are unlikely to find that you share liability with your staffing company unless you have significant control over how the agency manages its employees.
Well-meaning employers who are proactive about addressing instances of co-employment run the risk of falling prey to the co-employment mistake. In their zeal to take responsibility for their hired employees’ actions, employers frequently sign "share liability" agreements with their staffing agencies, thinking that doing so helps to protect them. However, no matter how much you and your staffing agency agree to share liability, courts make the ultimate decision about whom to hold liable for the actions of a co-employee. In other words, because co-employment is based on the exercise of joint control, which is inherently situational, it doesn’t matter how you codify your arrangements with your staffing agency to share control. The court will make the decision on liability based on whatever evidence of control it can recognize at the time of your litigation.

The Future of Co-Employment

As companies continue to strive for efficiency and cost-effectiveness, the trends toward co-employment, outsourcing, gig work, the sharing economy and other economically driven models are likely to increase. The more employers are able to utilize such models to reduce payroll overhead, such as employment taxes, health insurance and other mandatory benefits, the more likely employers will seek to utilize these models. Customer service industries, such as call centers and delivery services, employ a large number of individuals outside the traditional employer-employee relationship. Moreover, the growth of various technology-centric models, including the use of large pools of free agents available through the Internet, suggests that this method of outsourcing work to a reduced number of individuals likely will persist.
One matter to keep in mind is the prior and continuing development of California and federal cases finding various forms of co-employment . In light of the increased focus upon the use of co-employment, the number of lawsuits dealing with this issue also is likely to increase with them. While co-employment most commonly concerns independent contractors (such as call centers and janitorial services), it also may apply to employee leasing companies and temporary agencies. The U.S. Equal Employment Opportunity Commission has resisted recruiting sources whose workers are unlikely to be treated as employees for its purposes, in recognition of the growing use of co-employment and the difficulty in assessing co-employment relationships. While it is impossible to predict the future, the least costly and most effective method of predicting the future is to analyze the past, while keeping up with what is happening now. However, there appeared to be no end to the growth of staffing companies, even as the innovative industries competed for the lowest headcount possible and contracted out more work while trying to retain those individuals they did hire.