As businesses look for more flexibility and efficiency when it comes to their employer responsibilities, many have turned to third-party Staffing firms, Professional Employer Organizations (PEOs), Recruiting Outsourced Solution Providers, or Managed Service Providers (MSPs) to handle certain elements of their recruiting, payroll and HR administrative responsibilities. They do this believing that another entity can handle this work more efficiently or accurately than they can do on their own. They also are looking for ways to streamline their internal operations to focus on the employee issues most linked to productivity.

The outsourced solution often brings up a new set of regulatory requirements that need to be considered in order to make the solution work as intended. Whenever there is more than one entity involved in the employee/employer relationship, CO-EMPLOYMENT becomes a legal and operational element of the service arrangement that requires special attention. 

What is CO-EMPLOYMENT?

The term, CO-EMPLOYMENT, refers to scenarios where two companies have simultaneous and ongoing obligations to the same employee. Typically in most two party service arrangements either the worksite employer (you) or your staffing or service partner is tasked with 1) finding/dispatching/hiring the worker, 2) controlling their status – discipline, firing, etc. 3) processing their pay (or paying them directly), 4) administering their benefits,  and/or 5) managing their work on a daily basis.

How these main responsibilities are organized matters!

Done right, a third-party partnership can divvy up these responsibilities in ways that will streamline your operations and reduce your employer liability. Done wrong, it can expose both parties to fines, lawsuits, and back-pay claims.

What you need to pay attention to whenever you are involved in a CO-EMPLOYER relationship…..

Who controls what?

In any co-employer relationship, the first step is to always clarify the line between your organization’s authority and the delegations you’ve made to your third-party staffing agency/service provider. If the employee is provided by the staffing agency and the employee remains their employee even while doing work for you, they are responsible to handle pay, benefits, and HR compliance, while you direct day-to-day work. Blurring those boundaries — like disciplining or terminating someone who’s technically the staffing firm’s employee — can trigger a shared liability.

Worker Classification and Pay

This is one area where you, as a co-employer have an obligation to ensure all workers doing work on your behalf are properly classified (exempt vs. non-exempt, W2 employee vs. 1099 independent contractor) and paid correctly under wage and hour laws. Even if the staffing firm cuts the checks, you can still be held liable if a misclassification is uncovered by the IRS or a state taxing agency.

Benefits Eligibility

Co-employed workers can complicate benefit plans. Your benefit plans need to be clear about who is responsible for providing what benefits, who is or is not eligible to receive benefits that you administrate, and what policies are disclosed in communications to employees. Ambiguity can cause ERISA and ACA compliance headaches.

Safety and Training

If workers are on your site, you share responsibility for maintaining a safe environment and ensuring proper training. OSHA can (and does) cite both co-employers if something goes wrong.

Termination and Legal Claims

In harassment, discrimination, or retaliation cases, both you and your third-party staffing partner may be named as defendants. Keep documentation clear, ensure your culture and the staffing firms align, and coordinate any disciplinary actions carefully.

Allocating Risk

In very co-employer relationship, both entities share certain risks. Courts and regulatory agencies often look at who controls the work to determine liability. If the client company directs daily tasks, manages schedules, or sets workplace rules, it may be viewed as a joint employer for specific legal purposes which include a shared responsibility for…

• Discrimination or harassment claims
• Workplace injuries or OSHA violations
• Wage and hour compliance (especially for overtime or misclassification)

The following are risk management basics for any co-employer relationship…

• Make sure there is a contract that defines who does what… Spell out who handles each employment function — payroll, supervision, discipline, and compliance — in the service agreement. Ambiguity invites risk.

• Vet Your Co Employer Carefully… Ensure any employer you partner with has a strong compliance infrastructure, robust insurance coverage, and experience in your industry or geographic region.

• Maintain Consistent Documentation… Align employee records, pay structures, and reporting. Inconsistent documentation between your co-employer and yourself can undermine compliance defenses.

• Coordinate Communication… Establish a clear process for handling employee issues, complaints, or leave requests so nothing falls through An Employer of Record arrangement can dramatically simplify global hiring, contingent workforce management, and HR compliance.

EMPLOYER OF RECORD Services: A unique version of CO- EMPLOYMENT   

A fast-growing staffing strategy that has pushed the box on CO-EMPLOYER staffing models is the Employer of Record (EOR) service model. It is a model used by both large and small employers to streamline the hiring, compliance, and pay and benefit administrative components of the employer responsibility. It outsources one or more of the administrative components of the employer obligation to a third party partner, leaving the client only responsible for the employee’s day to day performance and work product.

EoR services are particularly popular with smaller employers because of their convenience. They are also popular with larger employers who have a component of their workforce engaging in flexible or ad hoc work arrangements that don’t always fit neatly into any of its employee classification buckets. 

Employer of Record services are the most complex of all the service arrangements when it comes to CO-EMPLOYMENT, particularly in Washington State who treats this service arrangement differently with respect to the application of sales tax and the calculation of the EoR service provider’s B&O tax.   

What is an Employer of Record (EoR)?

An Employer of Record is a third-party entity that legally employs workers on behalf of a client organization. PACE, for example, is the EoR for the employees we recruit, hire and dispatch to a client’s workplace for an interim or temporary role.

When our client sources the candidate they want assigned to work for them, and simply asks us to administrate their employment, we become an EoR on our client’s behalf.

As an EoR we are responsible to track the employee’s hours of work, pay them, calculate and pay all payroll taxes, administer the required and requested employee benefits, and manage all the compliance elements of the employer-employee relationship.

It has been relatively easy for most temporary staffing companies to move into a role as an EMPLOYER OF RECORD service provider for those clients who are recruiting their own interim employees but don’t want the burden of managing their administrative requirements. PACE, for example, is the EoR for a couple of large clients who regularly assign trainers to ad hoc training projects on an as needed basis. We track their hours of work, get them paid and provide our clients with a summary of what training projects they worked on facilitating their billings to their customers.

In all EoR service arrangements, the Client company has complete responsibility to manage the workers’ day-to-day activities and job performance. They select the employees, establish their terms of employment etc. and then rely on PACE (their EoR partner) to make sure the administrative components of the employer relationship is managed on their behalf.

In practice, this means the employee reports to the client company, but from a legal and administrative standpoint, we handle the administrative side of their employment.

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In the state of Washington, there are a few administrative requirements established by the Department of Revenue that must be met in order for a service relationship to be considered an EoR arrangement for tax purposes:

• The employee must receive written information attesting to the different roles of the Employer of Record employer and their worksite employer
• The Employer or Record must have a written contract outlining who does what
• The Employer of Record needs to make it clear that they are processing the administrative components of the employer obligations on their client’s exclusive behalf – that they play no role in establishing hours of work or rate of pay except as dictated by their client 

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Typical Division of Work Between the EoR Employer and Their Client

A successful EoR arrangement depends on a clear understanding of who is responsible for what. The table below summarizes what we typically set up with our clients as the typical division of labor:

Employment Function	Employer of Record (EOR)	Client Company
Hiring and Onboarding Documentation	Manages employment contracts, tax forms, background checks, and new-hire reporting.	Defines role requirements, interviews, and final hiring decisions.
Payroll and Tax Compliance	Processes payroll; withholds and remits taxes; issues W-2s or local equivalents.	Approves hours worked and compensation rates.
Employee Benefits	Administers health insurance, retirement plans, and other benefits as required by law or contract.	Determines eligibility requirements or supplemental benefits (if any).
Employment Law Compliance	Ensures compliance with labor laws, wage and hour regulations, and local employment requirements.	Complies with workplace policies, anti-discrimination laws, and fair labor practices.
Worksite Safety and Supervision	Provides general compliance guidance but does not control worksite conditions.	Directly responsible for training, supervision, and maintaining a safe workplace.
Disciplinary Action and Termination	Oversights all disciplinary action including termination paperwork, final pay, and legal compliance steps.	Initiates and documents performance issues or misconduct leading to termination.

The Bottom Line on CO-EMPLOYMENT

Co-employment isn’t a problem — it’s a shared responsibility. The key is transparency, solid contracts, and proactive management. Choose your third-party staffing partners carefully, making sure they know the compliance landscape and are knowledgeable enough about your business needs to define each of your respective roles clearly. Even in Employer of Record service agreements, delegating employment administration does not eliminate accountability. When both sides understand their lanes, co-employment becomes less of a legal minefield and more of a strategic advantage.