Co-Employment: Definition, Risks, and How It Differs from an EOR

Co-employment is one of the most popular staffing models today. It allows you to offload complex, time-consuming HR administration and compliance to specialists while retaining control over day‑to‑day management of your workforce. However, it doesn’t completely shield you from compliance risk. 

This guide explains the co-employment scope, risks and Employer of Record (EOR) as an alternative structure. 

What is Co-employment?

Co-employment describes an arrangement where a third party and a company both hold employer responsibilities for the same worker. The third party handles payroll, tax filings, and often benefits administration. Meanwhile, you keep control over hiring decisions, daily supervision, pay rates, and employee termination.

For example, you want to hire a virtual assistant in the Philippines. To do so, you can partner with an external company to handle all the HR administration to onboard a VA for your team. This structure is possible with a third-party staffing agency or a Professional Employer Organization (PEO). 

However, they will only be responsible for the scope it is contractually obligated to do. It will not shield you from compliance risk involving discrimination claims, workplace safety violations, labor law, or benefits fiduciary duty. 

Co-employment Responsibilities

Because you are co-employing your staff, both you and your partner share responsibilities:

Notice how the functions that create the most legal exposure, safety, discipline, and benefits fiduciary duty, stay split rather than fully handed off. That's the gap between what a third party administers and what they actually own.

The Risks of Co-employment

Co-employment allows you to offload HR burdens or scale your workforce quickly. However, it carries distinct legal, financial, and operational risk due to unclear boundaries between you and the provider. 

Here are co-employment risks that you should be aware of:

1. Shared Legal Liability & "Joint Employer" Status

Outsourcing HR tasks does not fully shield your company from legal exposure. Under labor frameworks (like the Fair Labor Standards Act or National Labor Relations Act in the U.S.), regulatory bodies look at actual control over the worker. When an employee sues over wrongful termination or discrimination, courts and regulators can name both the client and your partner as co-defendants.

This isn't unique to the U.S. In 2024, the Federal Court of Australia found BHP Mitsubishi Alliance liable under the Fair Work Act for adverse action against labour hire workers. Even though BHP had no direct employment contract, the court’s reasoning turned on how much practical control they had with the workers involved. 

That's the same test regulators around the world tend to apply once a dispute lands in front of them.

2. Employee Misclassification

Co-employment issues often intersect with worker misclassification. For instance, if a company treats temporary or agency workers like permanent, direct employees, courts or tax authorities may reclassify them as formal employees. This exposes the business to retroactive liabilities, including back taxes, interest, unpaid benefits, and statutory fines.

For example, under IRC Section 3509 in the U.S., an employer that unintentionally misclassifies a worker but filed the required 1099 still owes the following: 

• 1.5% of that worker's wages for income tax withholding
• 20% percent of the employee's share of FICA taxes 
• Full 100 percent of the employer's FICA match

For more information about worker misclassification, we have created an article comparing EOR vs Hiring Contractors in Malaysia. We focused on how employers can often misclassify an employee unintentionally. 

3. Pooled insurance can raise your premiums

Many third-party providers combine the injury claims from all their clients into one shared insurance calculation to set everyone's premium. This calculation (called an experience modification factor or "mod") is administered in the U.S. by the National Council on Compensation Insurance. 

It compares a company's actual claims against the expected claims for its industry. The average mod is 1.00 and most businesses fall somewhere between 0.75 and 1.50. If other companies on the same provider have a rough safety record, your premium can rise too. This is because your worksite's own claims are only part of what shapes the pooled number.

Coverage can also get harder to track when your employees work in a different region than where your partner's policy is based. This is because it's not always clear which party should handle the claim.

4. Loss of Control Over HR Processes

HR processes are crucial administrative tasks. Partnering with a company that is less experienced or handles these tasks poorly, it can result in reputational damage and productivity loss. 

For instance, a legal battle between Microsoft and temporary agency employees resulted in the company paying USD 96.885 million in settlements. The employees claimed that they were entitled to the same stock purchase and savings plan benefits as direct staff. This kind of ambiguity can lead to huge losses for the company over matters of HR processes. 

5. You Need a Legal Entity to Co-employ

Because co-employment is a shared liability structure, your company remains the primary legal employer on paper. You must have a registered legal entity in every jurisdiction where your co-employed workers reside. 

This means, you cannot use a standard co-employment arrangement in a country where your business does not already have an established legal entity. This is probably the biggest setback for many companies who want to hire remote workers globally.

Co-employment vs Employer of Record

In the international hiring context, the most popular alternative to co-employment is Employer of Record service. Instead of co-employing with a third-party, you are completely handing off the legal employment side to your EOR partner.. 

Here is a comparison between Co-employment and Employer of Record:

Co-employment makes sense once you already have an entity and want help running HR and payroll for staff you've already committed to hiring there. But if you don’t have an entity just yet but want to hire globally, you can engage with an EOR instead. 

How RecruitGo Removes Uncertainty in Co-employment

RecruitGo offers EOR services, helping international companies hire remote employees compliantly in 40+ countries. 

As the sole legal employer, we sign the employment contract with your remote employees under our local entity, and manage everything from social contributions and taxes to running payroll with statutory benefits included.

Onboarding typically takes 3-5 business days in most markets through our own local entities which is how we keep compliance consistent.

Reach out to our local compliance experts to know how EOR fits into your overall global expansion.