Co-employment compliance: tips for mitigating risks and achieving success

What is co-employment?

Amanda Khatri

Editorial Manager

Co-employment compliance: tips for mitigating risks and achieving success  

In a culture driven by a grind mentality, the pressure to generate revenue is constant. Working long hours, having lunch at your desks, and going the extra mile have contributed to this mindset of relentless work. And it is no different for firms. As businesses expand, the idea of co-employment is becoming more appealing as it potentially offers a way to reduce costs, streamline administrative tasks and save time.  

Co-employment allows companies to tap into the expertise of independent contractors for greater flexibility and scalability and offers cheaper costs by decreasing the administrative burden – all helping to improve operational efficiency. However, there are risks associated with co-employment, such as the challenge of navigating the complex web of co-employment regulations: failure to comply can result in legal issues, financial penalties, and reputational damage.  

What is co-employment?  

Co-employment refers to a contractual agreement between two companies, often established through a client service agreement or a business and independent contractor arrangement. It involves sharing employment responsibilities to decrease costs and liability associated with being a sole employer. For example, when staffing agencies use contractors for their clients, the staffing firm is responsible for recruiting, hiring and payroll. Whereas the other company handles the work agreement – both the staffing agency and client have obligations to the contractor, and both can be depicted as the employer.  

Co-employment can sometimes lead to confusion regarding how businesses can engage with these independent professionals while maintaining compliance with employment regulations. Both companies involved in the co-employment relationship have rights and obligations as an employer, which need to be clearly defined and understood. 

Key benefits of co-employment 

  1. Decreases the amount of administrative tasks needed to hire people.  
  2. Allows for the opportunity to scale up a business, especially if seasonal work is required.  
  3. Saves time and costs for advertising, screening, and interviewing for full-time staff as well as avoiding having to deal with personal issues such as tax or payments.  
  4. Temporary work needs are fulfilled.  
  5. Firms can benefit from a variety of expertise.  

        Risks to be aware of  

        • Contractors can take legal action if they are being treated as an employee.  
        • Businesses may have to pay damages or face a lawsuit if during an audit they are found to be treating independent contractors as employees.  
        • There could be penalties for misclassification as the business may have violated employment laws. These penalties include additional taxes, an IRS audit, prison time and a potential $500,000 fine if the misclassification was found to be intentional.  
        • Failure to meet any legal requirements could result in potential liability for both parties.  

        5 ways to avoid co-employment non-compliance 

        1. Classify your contractors appropriately

        Ensure that any contractors are properly vetted, and they understand and abide by laws. Use experienced firms for co-employment, with a good reputation. By preparing a questionnaire at the beginning of the contract, both parties involved can establish clear roles and responsibilities and reduce the risks of being penalised. Questions could include:

        • Expectations as an independent contractor  
        • Method of payment 
        • Preferred communication methods  
        • Roles and responsibilities 
        • Policies and procedures 

        2. Do not treat your contractors like your employees

        Ensure that contractors and employees are separated by not allowing them to work in a team or have the same hours and functions. Contractors can choose when, where and how the work is completed. A further example of ensuring differentiation is that contractors can’t be given bonuses, these are for employees only. Just remember that there is no permanent relationship and contractors are hired to do specific tasks for your firm. 

        3. Build and implement a programme specifically for contractors

        This demonstrates your firm’s aim to differentiate between contractors and employees to regulators, plus contractors will know and understand what is expected of them.  

        4. Understand co-employment laws and regulations

        Claws may vary significantly in different areas and it’s important to understand which regulations apply to your firm and contractor. To ease the burden of scouring regulatory body websites manually, use CUBE’s AI-powered compliance solution which tracks, analyses, and monitors regulations in every jurisdiction and in every published language. Filter out all the noise and gain access to the regulations that matter to your business.  

        5. Stay abreast of changing co-employment regulations

        Laws are constantly changing, giving compliance, legal and risk professionals a headache. CUBE’s purpose-built AI engine includes horizon-scanning capabilities which are tailored to each firm’s profile, ensuring an update is never missed!  

        CUBE comment 

        Co-employment compliance requires a proactive and vigilant approach. By understanding the laws, establishing clear roles, selecting reliable co-employers, fostering effective communication, and implementing robust record-keeping practices, organisations can mitigate risks and achieve success in co-employment arrangements.  

        Staying informed of regulatory changes and conducting internal audits or policy reviews are also essential components of a strong compliance strategy. 

        CUBE’s regulatory change management software makes compliance easy. Once your firm has its own personalised regulatory platform set up, consisting of only those relevant regulations across every jurisdiction that your firm operates in, any changes in co-employment laws will be alerted to you.  

        By prioritising compliance and implementing these tips, firms can navigate the challenges of co-employment while safeguarding their reputation, minimising legal risks, and fostering successful co-employment relationships. 

        Find out more about CUBE by contacting us below.

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