What is co-employment? Insights and considerations

Simply, co-employment is a relationship between two entities sharing responsibility for an employee.

In the U.S., co-employment is commonly seen in partnerships with professional employer organizations (PEOs), where the PEO handles HR and payroll matters, and the client company manages the employee’s day-to-day work. Specifics may vary, but many arrangements may also be considered joint employment, where the PEO and client organization share employment liability.

Because of the prevalence of PEOs in the U.S., many providers have taken the concept abroad, offering so-called international PEO, or global PEO.

International PEO: Your worker is co-employed by you and the PEO

• You must have a registered business entity in the country where you’re hiring employees
• You’re liable for the employee, and you may need to source additional insurances for full protection
• Co-employment is considered illegal in some countries

Although they call themselves PEOs, the service that many international providers actually offer is an employer of record, or EOR. Unlike with a PEO, when a company enters a partnership with an employer of record, the EOR becomes the legal employer responsible for all HR, payroll and tax withholding requirements and compliance. The client company is solely responsible for managing the employee’s day-to-day contributions.

The employee is paid by one entity and managed by another, so there is only one true—and legal—employer: the EOR. Under an employer of record arrangement, the worker is in a sense shared, but because of the single legal employer, the arrangement is not considered to be co-employment in the same way as provided by a PEO.

Employer of record: Your worker reports to you while legally employed by the employer of record

• You don’t need a legal entity in the countries where you seek to hire employees
• You don’t have to worry about supporting HR and payroll needs in an unfamiliar country
• You have reduced liability for all employment requirements

There are several reasons why an organization looking to hire workers internationally should be wary of any employment partnership that includes co-employment.

Compliance and liability

Although co-employment is commonplace in the U.S., many countries around the world don’t recognize this model, and engaging in it could be a compliance risk. Some countries, such as in France and South Africa, have strict regulations around co-employment, and it can even be considered illegal.

Additionally, because of the shared legal employment, you could be liable if your employment partner fails to comply with local HR, payroll or tax withholding requirements. If there’s a breach of the employment contract between the provider and the worker, as a legal co-employer, you’d also be liable.

Entity requirement

By definition, co-employment is a relationship of two entities. So, in order to participate in a co-employment arrangement for hiring purposes in another country, you must first already have a legal business entity.

But when you’re looking to hire internationally, perhaps in new markets or as part of a remote-first strategy, you may not already have an entity in the country where your target talent lives­—nor do you have plans to establish one. After all, setting up an entity in a new country is a substantial investment in time and money, and if you have very specific hiring needs, or you’re only testing a market, an entity might not make sense for your organization.

Determining co-employment risk with a new provider

It’s important to find out whether an employment provider’s contract subjects you to co-employment and the associated risks. As you weigh your global hiring options, here are some questions to ask potential employment partners:

• Are you an employer of record or a PEO?
• Do you have an in-country entity, and what is your entity requirement for clients?
• What is your employee insurance and liability offering?
• How do you ensure compliant local employment contracts?
• What level of in-country HR support an assurances do you provide?

When hiring internationally, especially in countries where you may be unfamiliar with the local labor regulations and customs, having an employment partner you can trust—one who won’t expose you to unnecessary co-employment liability or require costly entity registration—is critical. An employer of record, particularly one that’s established in the local market and has in- country HR expertise, is often the smartest option for organizations looking to hire internationally and protect themselves from risk.

Learn more about how an employer of record service can help your organization compliantly hire workers in 179+ international markets—often in as little as two weeks—by speaking with a global solutions advisor today.