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How to mitigate co-employment risk when engaging contingent workers

How to mitigate co-employment risk when engaging contingent workers

 

Author: Enterprise Solutions at Hays | Updated: June 2026

Summary: As organisations increasingly rely on contingent workers to access specialist skills and deliver projects, co-employment risk is becoming more complex. In many cases, organisations lack full visibility of their extended workforce, making it difficult to consistently apply governance and best practice.
 
Although co-employment risk cannot be removed, it can be mitigated through clear governance, correct worker classification, consistent hiring controls and active workforce oversight.
 
This blog is for HR and Procurement leaders who engage contractors, consultants, freelancers and other contingent workers. Its purpose is to explain what co-employment risk is, why it matters - and what practical steps organisations can take to manage it more effectively.
 
We explore:
  • What co-employment risk means in practice.
  • Why contingent workforce arrangements can create exposure.
  • The most common financial, operational and reputational risks.
  • Where solutions such as Managed Service Programmes (MSPs) and Contractor Management Outsourcing (CMOs) can help.

 

Introduction: Many companies ask “Can I contract out co-employment risk?
 
This is a common question when any company develop their contingent workforce programme. Unfortunately, it’s near impossible to escape co-employment risk entirely. However, there are ways to mitigate and minimise the risk to your business.
 
Please note before you read on: The information and opinions contained on this website has been prepared by Hays for general information purposes only. The information does not constitute legal advice and should not be relied on or treated as legal advice. It is important to obtain your own independent legal advice. 
 

What is co-employment risk?

Co-employment risk is inherently part of any working relationship where a non-employee worker is engaged and performing work for a manager or organisation. 

It can be challenging to establish and enable best practices with in-house contingent worker management solutions. The legislative landscape continues to shift and evolve, the composition of our workforce changes at pace, and we are faced with an increasingly unpredictable economic environment. 

Engaging a capable and experienced workforce solutions provider can support co-employment risk mitigation. An external partner can also provide organisations with access to highly skilled, top talent. 

Common risks associated with co-employment

We often see organisations hit a pain point – they need access to the right talent at the right time for a fair price – including the growing contingent worker population. However, a lack of processes for engaging contingent workers can leave HR and Procurement teams completely overwhelmed.  

To combat this issue, it’s common to see teams completely prohibit the use of independent contractors. But banning subcontractor-like relationships often leads to the loss of highly valuable talent. 

Ironically, we have seen many examples of co-employment when independent contracts are banned. Misclassified workers might be paid through various loopholes in an organisation. For example, they might: 

  • Pay off an invoice.
  • Produce a Statement of Work.
  • Outline time and materials needed in the Statement of Work. 

 

This kind of inconsistent engagement increases exposure to misclassification, particularly where there is limited visibility over how contractors are engaged, managed and paid across the organisation.  

Other co-employment risks include independent contractor misclassification, exemption status and other regulations.  

Without clear oversight, these exposures tend to compound. And while co-employment risk is often viewed through a compliance lens, in reality, it presents a broader business challenge that can affect financial control, operational resilience and organisational reputation.

Financial: This category of risk often rears its head in unapproved spend, initially. This can range from a hiring manager going outside of a defined process and engaging suppliers with a budget or headcount they don’t have approval for.

More commonly, the manager may have gained initial approval for a contractor for a specific time period or budget, but that approval has since lapsed without any formal extension. Suddenly, a contractor has remained on assignment for an extra six months and you’re $40k over budget.

The onboarding process, or lack thereof, can generate additional forms of financial risk.

Key considerations:

  • Do you have a comprehensive process in place to capture onboarding documentation?
  • Do you have agreements in place for Intellectual Property protection and proper insurance?
  • Do you track what equipment is provided at the time of onboarding for all contractors?

 

Reputational: This category of risk is difficult to quantify, but easy to identify. Consider the type of press your organisation would want to receive (and the type it would want to avoid) from an employment, governance and business perspective.

A lack of control over contractor access can quickly become a reputational issue, particularly where sensitive systems, confidential information or physical premises are involved. Organisations should ask:

  • Do you have a defined process in place that tracks what systems contractors have access to?
  • How do you monitor that activity in systems with confidential or sensitive information?
  • Do you have a process to shut down system access when it’s no longer required, or a project has ended?

 

This challenge becomes even more acute in the event of sudden disruption or emergency. If you do not have a clear view of your non-employee workforce, your ability to respond quickly is limited.

  • Do you have a way to quickly and accurately identify all of your non-employee workforce?
  • Do you know which workers are active, which suppliers deployed them, what projects and departments do they work with?
  • Can you effectively communicate with them about abrupt and hugely important changes?

 

Contractual: This category becomes critically important when you begin looking at the type of work that your contractors are performing. If your contingent workers are operating across project that would affect client contracts or regulations like GDPR (General Data Protection Regulation) or PII (Personal Identification Information), then it’s imperative that any agreements and regulations that you need to maintain are also upheld by your contractors.

This category also includes how contractors are classified. If you’re engaging independent contractors or self-employed workers, it’s vital that you have a process in place to validate the work and worker, to ensure they are properly classified.

  • Are you building audit defence files, updating them, and keeping them for the appropriate amount of time?

 

Mitigate co-employment risk by choosing the right provider

The first step to mitigating risk is to choose a progressive Managed Service Programme (MSP) service provider. Partners such as Enterprise Solutions at Hays play the role of ‘middleware’ between an organisation and all of its non-employee workers.
 
Experienced MSP partners help to:
 
  • Share broad industry experience and best practices.
  • Reduce rogue spend.
  • Provide compliance.
  • Increase visibility across the workforce.
 
This shifts contingent workforce management from a fragmented, reactive process to a more controlled and strategic capability. Some MSP providers also offer oversight of workers who they sourced from online staffing solutions, marketplaces and direct sourcing channels. 
 

Invest in Contractor Management Office services

Contractor Management Outsourcing (or CMO) is an important component of a contingent workforce programme and often integrated into an MSP contract. This additional support includes the ability to classify and engage non-agency sourced workers, as well as payroll support. 

For second and third generation programmes, CMO can also include vendor qualification and sub-vendor engagement services. Learn more about Contractor Management Outsourcing services.
 

Reduce co-employment risk by categorising employees

To mitigate risk in a contingent management programme, you need to define a clear separation between your full-time employees, and the non-employee workers who are completing projects for the organisation. 

Partnering with a contingent workforce management provider can mitigate risk. They’ll ensure that:
 
  • Policies are in place, tracked and mandated.
  • All non-employee workers are engaged compliantly. This may be as qualified independent contractors or a payrolled worker through a supplier.
  • All suppliers and companies can focus on their day-to-day operations.

 

Without this level of structure, it becomes difficult to maintain consistent engagement practices across teams, increasing the likelihood of misclassification and non-compliance. 

Make no mistake, contracting a supplier to offer payroll services does not eliminate worker classification or co-employment risk. Risk still applies to anything the supplier may be doing incorrectly. This is why there is such importance placed on having a capable and experienced partner. 

Eliminate co-employment risk

Co-employment risk cannot be eliminated entirely. But with the right structure and visibility, it can be more actively controlled.  

An effective partner will help to minimise co-employment risk, creating an effective and enabling environment in which you measure supplier partners for being compliant and delivering the best talent. The organisations that do this well do not just reduce exposure – they place themselves in a stronger position to realise the full value of their contingent workforce. 

Get in touch with Enterprise Solutions at Hays today, to find out more. You may also be interested to read our guidance on offboarding contractors.
 

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FAQs: Co-employment risk  

Q: Can co-employment risk be eliminated completely? 

No. In practice, co-employment risk can be controlled, but not removed entirely. The aim is to create a workforce model in which engagement type, contract structure, management behaviour and governance controls all align as closely as possible. 

Q: Does engaging an MSP provider remove co-employment risk? 

No. An MSP can improve visibility, encourage consistency and ensure good governance, but it does not remove the organisation’s responsibility for proper worker engagement and management. 

Q: Who should own co-employment risk internally? 

Ownership should be clearly defined across functions, with visible governance across HR, procurement, legal and the wider business. The exact operating model may differ by organisation, but unclear ownership almost always makes risk harder to control. 

Q: When should an organisation review a contingent worker arrangement? 

An organisation should review a contingent worker arrangement whenever there is a change in how the work is structured, managed, or relied upon.  

Common triggers include when the assignment is extended, when the scope of work changes, when management or supervision patterns shift, when the worker becomes embedded in ongoing operations, or when teams begin to rely on informal or alternative engagement routes.