two business men at tug of war in a board room

Sometimes, what saves your bacon can also toss it in the fire. Take freelancers and other contingent workers, such as employees of staffing agencies, for example. Nearly half of companies utilize flexible workers. But the regulations behind classifying independent contractors (ICs) remain fuzzy at times, and employment regulations are complex for staffing agency employees and others who do not qualify as ICs. Without having the right compliance measures in place, companies can unknowingly fall into a risky co-employment situation. If not handled correctly, the outside talent you rely on to remain competitive may also put your company at risk.

What is co-employment?

To understand your risks better, let’s clarify what co-employment is. Co-employment, sometimes referred to as joint employment, is an arrangement where two or more companies are involved with a worker and both may meet the statutory or common law definition of an employer for the same worker. In other words, when two or more companies exercise real or potential control over how a person works and what they do, both companies can be considered employers for legal and compliance purposes.

Co-employment can occur in several different ways.

A common scenario is when your company contracts a professional employer organization (PEO) to handle HR tasks. The PEO may handle personnel-related functions like hiring, benefits, and payroll. But if your company controls any essential terms and conditions of the work for individual workers, such as hours of work, assignment of tasks or the like, you may be viewed as an employer too.

Another common way co-employment can occur is when you use staffing agencies. The staffing agency may hire the person for their clients and be responsible for the HR functions, such as tracking time and paying wages. But if you, the client, control the day-to-day details of the work, you can also be viewed as an employer.

Common co-employment myths

A lot of confusion and fear surrounds co-employment. Most of it is unnecessary. Let’s start by dispelling a few common myths.

Myth 1: Co-employment is a bad thing
There’s nothing wrong with co-employment by itself, and it’s not something you commit. There’s no issue with being a co-employer of another company’s employees so long as each company complies with all employment law requirements. Just make sure you partner with a company that knows the rules and work together to ensure appropriate decision-making and conduct.

Myth 2: Using independent contractors puts you at co-employment risk
Utilizing freelancers or other ICs doesn’t create co-employment if they are properly classified. Properly classified ICs have no employer or co-employer.

Myth 3: Staffing agencies protect you from co-employment risk
As you learned from the co-employment scenarios above, staffing firms do not always protect you from risk. If you use a staffing agency that does not comply with employment law requirements, the liability for any violations may also be yours.

4 ways to avoid co-employment risk

Do you see a common theme yet? Co-employment determination depends largely on how much you control the workers in question. Here are four ways to avoid co-employment risk:

1. Get classification right
Co-employment aside, worker classification is the most important step anytime you engage contingent workers. Because getting classification wrong can result in significant penalties and fines. If you engage freelancers or other ICs regularly, it’s often more cost-effective to use a reputable classification service. Choose one that classifies the talent for every project. If you have wide-ranging needs, consider a service that classifies in every location where you may engage ICs.

Below is a quick-glance chart showing the general differences between an independent contractor and an employee in the U.S. Note that factors can vary since the tests are balancing tests:

Comparison table outlining the differences between Independent Contractors versus Employees (W2)

2. Treat independent contractors like businesses
Independent contractors work as their own businesses. An IC works on a project-by-project basis, determines their own rates and how they’ll get the work done. This can include contracting parts of the project out to other ICs. You never control when, where, or how the work is done. You simply tell ICs what you need done (e.g., create a mobile app with specific functionality), agree to a price and deadline, then step aside and wait for the deliverables.

3. Make sure staffing agencies comply with employment laws
If you use a staffing agency, make sure they are responsible for and have the resources to comply with all applicable employment laws. Because when an employee of a staffing agency works closely with you, co-employment status may apply. Even if you treat that worker properly, your company and the staffing agency can both be liable if the staffing agency commits violations.

4. If you need more protection, get the right partner
If you need more protection from co-employment risks, get help. Partner with someone like the Upwork Enterprise Compliance Solution who classifies contingent workers as either ICs or employees for every project and offers indemnification from risk. The process can be faster than what you’re using now. Upwork classifies 95% of engagements within three days.

For workers classified as employees, consider using an outside service. Upwork Payroll services provide you access to vetted staffing providers that handle all the paperwork. Most of the risk and headaches are handled as everything from employment agreements, wage payment, and benefits compliance are taken care of for you.

Fuzzy laws make co-employment risk tricky to tackle alone

The bottomline is that companies must engage different types of outside talent in order to remain competitive. But this can involve compliance challenges as IC classification involves balancing numerous tests and analysis of U.S. and global laws. Adding to the challenge, many regulations apply to workers who do not qualify as ICs.

Disclaimer: THIS ARTICLE PROVIDES GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. NO STATEMENT SHOULD BE CONSTRUED OR RELIED ON AS LEGAL OR TAX ADVICE. EVERY SITUATION VARIES, AND READERS SHOULD SEEK ADVICE ABOUT THEIR PARTICULAR CIRCUMSTANCES FROM THEIR OWN ADVISORS.