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

Staffing agencies play an important role in helping businesses scale quickly, fill temporary gaps, and access specialized talent. For many companies, this model creates flexibility without the long-term commitments tied to traditional hiring.

However, these arrangements come with legal complexity. When a worker is placed through a staffing agency, there is often more than one party involved in the employment relationship. This shared structure is known as co-employment.

Co-employment is not inherently a problem. In fact, it is a recognized and common framework. The issue arises when the boundaries between the staffing agency and the client company become unclear. When that happens, legal responsibilities can shift in ways that increase risk.

Understanding how co-employment works and how to manage it effectively is essential for any business that relies on contract or temporary labor.

What Is Co-Employment?

Co-employment exists when two entities share responsibilities for the same worker. In most staffing arrangements, the staffing agency acts as the primary employer, while the client company functions as the secondary employer.

The staffing agency typically handles administrative responsibilities such as payroll, tax withholding, and benefits. The client company, on the other hand, oversees the day-to-day work performed by the individual.

This division may seem straightforward, but in practice, the line between these roles can blur. When the client company begins to exert too much control over how the worker performs their job, the relationship may begin to resemble direct employment.

That shift is where legal exposure often begins.

Understanding Co-Employment Terminology

Co-employment relationships are described in a variety of ways depending on the context. Businesses may refer to these arrangements as temporary staffing, employee leasing, or contract labor.

Workers themselves may be labeled differently as well. They may be called contractors, temporary employees, freelancers, or W-2 employees of the staffing agency assigned to a client.

These labels can create confusion, especially when combined with different tax classifications such as 1099 contractors. The terminology alone does not determine the legal relationship. Instead, courts and regulatory agencies look at how the work is structured and managed.

As a result, businesses should focus less on labels and more on the substance of the relationship.

How Responsibilities Are Typically Divided

Although every arrangement is slightly different, most co-employment relationships follow a general division of responsibilities between the staffing agency and the client company.

Staffing Agency Responsibilities:

• Paying wages and handling payroll administration 
• Withholding and remitting taxes 
• Managing employee benefits and compensation structures 
• Maintaining workers’ compensation coverage 
• Addressing employment-related issues such as hiring and termination 

Client Company Responsibilities:

• Directing daily work activities 
• Managing the work environment and conditions 
• Overseeing productivity and performance in a limited capacity 
• Coordinating schedules and project expectations 
• Maintaining a safe worksite 

This division works when both sides stay within their respective roles. Problems arise when those boundaries are not respected.

What Creates Co-Employment Risk?

The central issue in co-employment risk is control. When a client company begins to act like the primary employer, legal responsibility can shift accordingly.

This often happens gradually. Managers may start giving detailed instructions, setting strict schedules, or becoming involved in compensation discussions. Over time, the relationship begins to resemble direct employment rather than a staffing arrangement.

Courts and agencies use various tests to evaluate these situations. One commonly referenced approach is the common law test, sometimes described as the 20-factor test. This framework examines the degree of control exercised over the worker.

A business does not need to meet every factor to be considered the primary employer. Instead, the overall level of control is evaluated. If that level is significant, liability may follow.

Legal and Regulatory Oversight

Several federal agencies are involved in regulating employment relationships and may become relevant in co-employment situations.

• The Internal Revenue Service focuses on tax classification and proper withholding 
• The Department of Labor oversees wage and hour laws under the Fair Labor Standards Act 
• The Equal Employment Opportunity Commission addresses discrimination and workplace rights 
• The Occupational Safety and Health Administration monitors workplace safety 

Each of these agencies evaluates different aspects of the employment relationship. When co-employment issues arise, more than one agency may be involved depending on the nature of the problem.

Common Misconceptions About Co-Employment

One of the most persistent misconceptions is that limiting the length of a contractor’s assignment reduces legal risk. Some businesses believe that keeping workers below a certain number of hours prevents them from qualifying for benefits or employee status.

This assumption is not reliable. Courts and regulators focus on the nature of the relationship rather than a strict time threshold. In some cases, limiting hours for the purpose of avoiding benefits may raise additional concerns under laws such as ERISA.

Another misconception is that contract language alone determines the relationship. While contracts are important, they must reflect how the relationship actually operates. If day-to-day practices contradict the agreement, the written terms may carry less weight.

Best Practices to Reduce Co-Employment Risk

Managing co-employment risk requires a combination of clear agreements and consistent internal practices. From our experience, the most effective approach includes both legal structure and operational awareness.

• Train managers on the limits of their authority when working with contract labor 
• Maintain clear separation between company employees and staffing agency workers 
• Avoid direct involvement in compensation, benefits, or disciplinary decisions 
• Use contracts that clearly define the division of responsibilities 
• Work with staffing agencies that understand employment law and maintain proper practices 

These steps help reinforce the intended structure of the relationship and reduce the likelihood of unintended liability.

The Role of Contracts in Co-Employment

Contracts play a central role in defining how responsibilities are allocated. A well-drafted agreement outlines who is responsible for wages, benefits, supervision, and compliance with employment laws.

However, the contract must be consistent with actual behavior. If the client company operates outside the agreed framework, the contract alone will not prevent liability.

This is why legal review is an important step. Agreements should be tailored to the specific arrangement and aligned with how the business intends to manage contract workers.

At Vethan Law Firm, P.C., we work with businesses to evaluate both the language of their agreements and the way those agreements are implemented in practice.

Why Co-Employment Matters More Today

The modern workforce has shifted significantly. The rise of the gig economy, remote work, and project-based hiring has increased reliance on non-traditional employment models.

As businesses turn more frequently to staffing agencies and contract workers, the potential for co-employment issues grows. What may have once been an occasional arrangement is now a regular part of operations for many companies.

With that shift comes greater scrutiny from regulators and courts. Businesses that understand these risks and adjust their practices accordingly are better positioned to operate without disruption.