How to minimize co-employment risk with contingent workers.

The quest for a flexible and agile workforce has led many companies to embrace contingent talent, including freelancers and independent contractors. This approach, which is undoubtedly part of every complex workforce strategy, introduces the concept of co-employment. In a co-employment scenario, risks can arise when a client company and staffing firm share responsibility for the same employee. However, prioritizing employment equity and proper oversight reduces these risks. When managed well, the blend of traditional employees with contingent talent in the same workplace can create a harmonious balance for the company, the staffing firm, and the talent alike.

What is co-employment?

Co-employment is a legal situation where a company utilizes resources that aren't on their direct payroll but are instead employed by a staffing firm or other intermediary. This can lead to both firms being viewed as employers of that individual. Think of it this way: a freelance copywriter is on a staffing company’s payroll but receives direction on their deliverables from a large tech firm's marketing department. The staffing company handles the employment, but the tech firm directs the work. That creates risk because both firms can be viewed as the employer of that particular individual. 

Co-employment risks to be aware of

At its core, the risks of co-employment stem from the gap in treatment, benefits, and overall employment experience between traditional employees and contingent workers. That’s because there could be a disparity between the full-time worker benefits of the company and the benefits provided through the staffing firm. 

These risks can manifest in several ways: 

• Legal risks: Contingent workers who feel they're being treated unfairly may pursue legal action, claiming they are entitled to the same benefits as regular employees. 
• PR crises: Negative publicity can arise if contingent workers feel exploited or mistreated. This can damage a company's reputation and erode public trust.
• Reputational damage: Co-employment issues can tarnish a company's image, making it harder to attract and retain top talent—both full time and contingent.
• Operational inefficiencies: If contingent workers feel undervalued or excluded, their productivity may suffer. If they are locked out of valuable information that they need to do their job well, for instance, it would hinder overall team performance.  

Generally, the most significant risk is the potential disparity in workplace requirements (such as hours and on-site requirements) and compensation. This discrepancy can lead to consequences such as difficulty with talent attraction and retention. With that comes the cost of turnover (a need to fill the same position multiple times over) and the loss of institutional memory—the collective knowledge and experience that contribute to both organizational efficiency and a strong cultural foundation.

Mitigating co-employment risks 

The good news is that these risks can be significantly mitigated by focusing on employment equity—treating all workers fairly and respectfully, regardless of their employment status as permanent W2 workers or freelancers. This requires a collaborative effort between the staffing firm (acting as the Employer of Record, or EOR) and the client company.

How a staffing firm can limit co-employment risk

Staffing firms play a crucial role in mitigating co-employment risks. Here are some key responsibilities:  

• Proper classification: Accurate worker classification (W2 vs. 1099) is paramount. Staffing firms can consult with clients on the legal distinctions between independent contractors and W2 employees. It's crucial that workers are classified appropriately based on the nature of their work and the level of control exerted by the client company.
• Outstanding employee experience: Offering competitive benefits packages is essential as a method of bridging the gap between traditional workers and independent resources. Comprehensive benefits, including health insurance, PTO, sick time, and 401(k) matching, help level the playing field and reduce the disparity that fuels co-employment risk. This goes a long way to making the contingent worker feel valued and well-compensated.
• Education and consultation: Staffing firms should act as trusted advisors, educating clients about co-employment risks and providing guidance on best practices. This includes helping clients understand the legal implications of their actions and developing strategies for the equitable treatment of all workers.
• Performance management: A staffing agency can act as an EOR, meaning it should provide performance reviews, raises, and career conversations for its employees. This demonstrates a commitment to their growth and development.
• Record-keeping and compliance: Meticulous record-keeping, contracts, and adherence to all relevant regulations are essential for mitigating legal risks. This is another task the staffing firm can take on for the client company in an EOR scenario.  

How a company can reduce co-employment risk

While the staffing firm handles the formal employment relationship, the company is responsible for creating a fair and inclusive work environment for all workers. This includes:  

• Clear expectations: Clear communication of roles, responsibilities, and project expectations is essential for workers to understand their contributions.  
• Equitable treatment: This is where the “intangibles” come into play. Treating contingent workers with respect, including them in relevant communications and meetings, and providing them with the resources they need to succeed are crucial. If contingent workers can't get the free soda at that office, but the full-time associates can, the perceived disparity is hugely detrimental.
• Work location policies: Return-to-office (RTO) policies should be applied equitably to all workers, regardless of employment status. Disparities in RTO requirements can create resentment and exacerbate co-employment risk. Companies must reflect on how they want to build their own work location policy based on their stated goals. While RTO may not apply to some freelancers, the nature of the work may require them to mirror the in-office schedules of the company's full-time workers. 

Achieving employment equity is a win-win solution

Co-employment is a complex issue, but it doesn't have to be a source of anxiety. The most important action is prioritizing employment equity by guaranteeing fair compensation, comprehensive benefits, and respectful treatment for all workers. 

In this way, companies can minimize the risks associated with contingent staffing and create a more inclusive, productive, and legally sound work environment. Partnering with a reputable staffing firm that acts as a responsible EOR is essential for navigating the co-employment maze and achieving a successful outcome for everyone involved.

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