It has been said that the most valuable assets of a business entity are its people. Employees, workforce, human capital––whatever the preferred term, the entity's employment of a labor force – its status as an employer – carries with it a myriad of benefits, tax, and labor law compliance obligations. The complexity and nuance of remaining in compliance with employment-related laws, regulations, and internal policies sometimes warrant time or expertise that is simply lacking within the business entity or unable to be allocated to the compliance obligations at hand. Within this compliance space, the relationship between a legal entity, employer of record, co-employer, and joint employer becomes apparent.
In such cases, a legal entity may decide to contract out some administrative components of its employment-related compliance obligations to third-party entities such as an Employer of Record entity or a Professional Employer Organization. Some considerations of outsourcing employer compliance obligations are whether the employer contracting for services (the “client-entity") needs to be formed/registered in the jurisdiction in which the employee performs the work, what compliance obligations are outsourced, and which one (or both) of the contracting parties is considered the employer for purposes of risks and liabilities associated with the status of the employer.
Employer Compliance Obligations
A legal entity can be defined as a company, organization, or institution – be it in the form of a limited liability company, corporation, limited partnership, general partnership, or business trust – that has legal obligations and rights. The compliance obligations include those concerning entity formation, registration, regulatory filings, reporting, and remitting of payments. For example, some entities are required to have registered agents, file annual reports, and file transactional reports at the time of formation, merger, or dissolution. Business entities may also be subject to industry-specific compliance obligations such as those in insurance, banking, healthcare, and pharmaceutical industries.
A legal entity may or may not be an employer. Whatever the definition of the employment relationship as given by a particular statute, regulation, or case law, as an employer, the entity is accountable for compliance obligations arising out of its status. For example, US-based employers are required to calculate and withhold federal income tax, social security tax, state income tax, and other taxes from employees’ wages, remit the withholdings to the appropriate tax agency and file quarterly reports. Employers may also have compliance obligations stemming from the retirement and health-related benefits it offers employees, such as disclosure, recordkeeping, and/or reporting under the Employment Retirement Income Security Act (ERISA) or the Affordable Care Act (ACA). An employer’s employment practices such as employment verification and pre-employment background checks can give rise to compliance obligations, for example, under the Fair Credit Reporting Act (FCRA) or separations of employment giving rise to compliance obligations under unemployment insurance laws. Lastly, employers can have compliance obligations around workplace facilities and conditions such as those imposed by workers’ compensation and the Occupational Safety & Health Act (OSHA).
The Employer of Record
An employer of record contracts with a client-entity to assume certain compliance obligations the client-entity has with respect to its status as an employer. The employer of record serves in an administrative capacity, distinct from the day-to-day, onsite operations over which the client entity maintains control and direction. With this contractual division of administrative and operational oversight, the employer of record becomes the direct employer of the client-entity’s employee(s), assuming the risks and liabilities associated with the contracted-for services. These services can include pre-employment screening, entering and managing employment contracts with employees, visa applications and immigration compliance, collecting and tracking hours worked, payroll processing and tax withholding, benefits administration, workers’ compensation and unemployment administration, and severance arrangements, all administered in a manner compliant with the benefits, tax, and labor laws of the country and locale in or from which the employee works.
Employer of record arrangements are routinely used in the global and domestic employment mobility contexts and may offer several benefits to a legal entity that wants to establish a presence in a different state or country than the jurisdiction in which it is formed/registered.
Co-employment and Joint Employment
In addition to engaging an employer of record wherein the employer of record takes on specified liabilities and risks as the employer, a client entity can also contract out its employment-related compliance obligations by entering a co-employment relationship with a professional employer organization (PEO). In a co-employment relationship, the client-entity shares employment status with the PEO. In other words, unlike with an Employer of Record entity which is considered the employer, both the PEO and the client entity are considered employers but have contractually agreed which party will assume primary responsibility (and shared liability/risk) for compliance obligations. For example, if the PEO failed to remit payroll taxes or workers' compensation insurance premiums as its contract with the client entity required, the client entity could be held financially liable by the applicable government agencies.
Furthermore, unlike partnering with an employer of record entity which does not (initially) require the client-entity to have a registered or formed legal entity in the jurisdiction in or from which the employee performs work, when engaging with a PEO, the client-entity has a registered legal entity in the jurisdiction where it co-employs employees. The relationship between the PEO and the client-entity is intended as an ongoing relationship and not as a temporary relationship as with an employee leasing arrangement for staffing projects and tasks that have a start and end date.
As mentioned above, whether an entity is considered an employer can revolve around whether that entity controls and directs the day-to-day operations of employees (as distinct from the entity performing only employment-related administrative tasks). Whereas co-employment focuses on contractually agreed upon administrative services (and sometimes strategic services or business advising), a joint employer relationship is focused on the element of control and which entities benefit from the employee’s work. Joint employment can be seen in employee leasing or temporary staffing situations where the staffing agency is the primary employer, and the client-entity becomes the secondary employer through its control and direction of the workforce. The status of a joint employer can become important for determining whether the client-entity will be subject to liability and risk for, for example, certain wage and hour employment practices regulated by such statutes as the Fair Labor Standards Act and labor practices as regulated by the National Labor Relations Act.
In summary, legal entities have options when it comes to contracting out employment-related compliance obligations. The contracting process allows a client entity to unshoulder the administrative challenges that come with being a compliant employer by shifting its employer status to a third party in an employer of record, co-employment, or joint employment relationship.