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How to Mitigate Co-employment Risks When Using a Staffing Agency


When an employee has two employers who each have actual or potential legal rights and duties to him or her, that relationship is called co-employment. Co-employment is part and parcel of contracting workers through a staffing firm or agency because both the staffing firm and its client can claim an employer-employee relationship with the worker.

For practical purposes, the staffing agency is called the primary employer. The key issue occurs when the client, or “secondary” employer, oversteps the bounds of the relationship from the client side. In other words, the client controls the worker more than the law allows.

Abiding by a contract that contains the correct wording places the correct parameters on the relationship and protects you, the worker, and the staffing agency from legal issues.

Co-employment Terminology

Co-employment goes by other names:

  • Temporary staffing
  • Employee leasing
  • Contracting

Employees within the co-employment relationship also go by several names:

  • Contractor
  • Contract employee
  • Temp
  • Freelancer
  • Employee
  • Leasing agent
  • W-2 employee of staffing firm on contract
  • W-2 employee of staffing firm on contract-to-hire assignment

Co-employment may also play a role with 1099-contractors depending on how long they work for you and how closely you manage their work.

Responsibilities of the Staffing Agency and the Employer

This table lays out the typical relationship between the employee and the two employers.

Staffing Agency (Primary Employer) Employer

  • Pay wages
  • Supervises and directs daily work
  • Withholds taxes
  • Controls working conditions at the site
  • Has the right to hire and fire
  • Ensures safe work site
  • Provides worker’s compensation
  • Ensures civil rights compliance by employees
  • Provides benefit and pension plans
  • Determines the length of the assignment
  • Ensures civil rights compliance
  • Acts on complaints about working conditions

The following federal agencies have the most impact on and involvement in employee classification.

  • IRS - Internal Revenue Service
  • EEOC - Equal Employment Opportunity Commission (EEOC)
  • DOL - Department of Labor, Wage and Hour Division
  • OSHA - Occupational Safety and Health Administration

The IRS only gets involved if taxes are not properly withheld and paid. They tend to pay close attention to 1099 Contractors working full-time. The Department of Labor has jurisdiction over the implementation of the Fair Labor Standards Act (FLSA) and provides regulations regarding joint employment relationships.

The Risk of Co-employment

The key risk of co-employment occurs when the client of the staffing agency is unaware of the legal principles of a co-employment situation and extends too much control over the contractor. The issue often comes to light through an issue with employee benefits per the Employee Retirement Income Security Act (ERISA).

If you hire contractors through a staffing agency and exert too much control over the contractors’ work behavior and financial compensation,  you take on the role of primary employer as determined by the common law test, also known as the 20 Factor test.

You do not have to meet all 20 factors to be considered a primary employer; the courts take into consideration the extent to which you meet them. If you are judged to be the primary employer, you become responsible for everything the staffing agency has been performing. Depending on the circumstances, both you and the staffing firm can be held equally liable for a variety of problems stemming from the contractor’s employment with you.

An important note: there is a myth that says if a company limits the length of service of the contractor to less than 1,500 hours over 52 weeks, it will keep the company from becoming responsible for benefits coverage for the contractor.

This myth is falseand the practice could violate ERISA if it is construed as an unlawful effort to prevent workers from reaching the hours needed for plan participation.

Best Practices to Manage the Risks of Co-employment

  • Educate yourself and your managers in the legal principles of co-employment, including any and all employment-related laws.
  • Exclude contract workers from company benefit plans with explicit language in the employment contract. Make sure each contractor waives any claims to compensation or benefits from your company.
  • Work with a reputable, solvent staffing agency that understands employment law and appropriate co-employment practices.

Have an attorney review your contracts for independent contractors and staffing agency workers to make sure the employees have waived their rights to benefits from your company. Make the contract very clear regarding the division of responsibility between your company and the staffing agency.

Remember the staffing agency also retains responsibility for labor relations. It is responsible for evaluating employee performance, hearing complaints about working conditions, and payroll. If you intend to hire a large number of contractors for an extended period, it would be a good idea for the staffing agency to have an on-site supervisor to mitigate management over-control issues.

The rise of the “gig economy” along with the increase in contingency workers has provided fertile ground for co-employment issues to grow. By providing the appropriate training to your managers who supervise contractors and pursuing a legal review of the contracts your company uses for staffing agency workers, you can keep you on the right side of employment law and the courts.

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