What is co-employment in the context of an employer of record?
Co-employment in the context of an employer of record is a legal arrangement in which two organisations share employer responsibilities over the same worker. The EoR holds formal legal employment status, managing payroll, contracts, tax compliance, and statutory obligations, while the client company directs the worker’s daily tasks and performance. This structure allows businesses to hire talent in jurisdictions where they have no legal entity, without taking on the full administrative and legal burden of direct employment. The sections below unpack how the arrangement works, where the legal lines fall, and when it makes strategic sense to use one.
How does co-employment actually work with an employer of record?
In an EoR co-employment arrangement, the employer of record becomes the worker’s legal employer on paper and in law, while the client company functions as the day-to-day employer in practice. The EoR issues the employment contract, processes payroll, withholds taxes, administers benefits, and ensures compliance with local labour law. The client company assigns work, sets objectives, manages performance, and controls the worker’s output.
The division is deliberate. It allows an international business to place talent in a new market quickly, without forming a local entity or building an in-house HR and legal function from scratch. In the Netherlands, for example, an EoR must comply with Dutch labour law, which includes strict rules around employment contracts, notice periods, holiday entitlements, and social premiums. The EoR absorbs that compliance burden entirely.
From the worker’s perspective, the co-employment relationship is largely transparent. They report to the client company for their work but receive their salary, payslips, and employment documentation from the EoR. In practice, this means the worker is legally protected under the laws of the country where the EoR operates, regardless of where the client company is headquartered.
What are the legal responsibilities in a co-employment arrangement?
In a co-employment relationship, legal responsibilities are divided between the EoR and the client company according to the nature of the obligation. The EoR carries all formal employment liabilities: payroll accuracy, tax withholding, social security contributions, statutory leave entitlements, pension enrolment where applicable, and compliance with local employment legislation. The client company retains responsibility for the work environment, task assignment, performance management, and any obligations that arise from how the worker is directed on a daily basis.
This split matters because it defines who is accountable when something goes wrong. If payroll is processed incorrectly or a statutory benefit is missed, the EoR bears that liability. If a worker is subjected to unsafe working conditions or discriminatory treatment in the client’s workplace, the client company carries that responsibility.
In the Netherlands, the legal framework governing this arrangement is particularly detailed. Dutch employment law imposes obligations on the formal employer, which in an EoR structure is the EoR itself. This includes compliance with the Working Conditions Act, correct application of collective labour agreements where relevant, and adherence to GDPR when handling employee data. Businesses using an employer of record in the Netherlands should ensure the EoR they select holds relevant certifications, such as NEN 4400-1, which signals regular independent auditing of payroll and employment practices.
What is the difference between co-employment and a PEO?
The key distinction between a Professional Employer Organisation (PEO) and an employer of record lies in whether the client company has its own legal entity in the country of employment. A PEO operates as a co-employer alongside a client that already has a registered business entity in that jurisdiction. An EoR, by contrast, acts as the sole legal employer and is specifically designed for clients that do not have a local entity at all.
With a PEO, both the PEO and the client company share formal employer status. The client retains its own legal standing in the country and uses the PEO to consolidate HR administration, payroll, and benefits. This model works well for businesses that are already established locally but want to outsource employment administration.
An EoR removes the requirement for the client to have any local legal presence. The EoR is the employer of record in every legal sense, and the client operates through a commercial agreement rather than a co-employer structure in the strict PEO sense. For international companies entering a new market, the EoR model is typically faster and lower risk, since it eliminates the cost and complexity of entity formation while still providing fully compliant local employment.
In practical terms, the PEO vs employer of record question often comes down to market entry stage. Companies already operating in a country may find a PEO arrangement useful. Companies testing a new market, hiring a single local representative, or expanding internationally without a permanent footprint are better served by an EoR.
What co-employment risks should businesses be aware of?
The primary co-employment risks fall into three categories: worker misclassification, loss of operational control, and liability exposure from unclear contractual boundaries. Understanding each helps businesses structure the arrangement correctly from the outset.
Misclassification risk arises when a worker engaged through an EoR is treated so similarly to a direct employee that regulators begin to question the legitimacy of the arrangement. In the Netherlands, this is a live concern following stricter enforcement of bogus self-employment rules in 2025. If the EoR structure is used improperly, for example to disguise what is functionally a permanent direct employment relationship, both the client company and the worker may face tax and legal consequences.
Operational control risk is less commonly discussed but equally important. Because the EoR is the legal employer, the client company cannot unilaterally terminate a worker’s contract or alter employment terms without the EoR’s involvement. Businesses that expect the same level of direct control they would have with their own employees may find this constraining if the working relationship is not structured clearly from the start.
Contractual ambiguity creates exposure when the service agreement between the client and the EoR does not clearly define which party is responsible for which obligations. A well-drafted tri-party framework, covering the EoR, the client, and the worker, eliminates most of this risk. Selecting an EoR that is NEN 4400-1-certified and GDPR-compliant provides an additional layer of assurance that the employment relationship is being managed to a documented and audited standard.
When should a company use an employer of record instead of hiring directly?
A company should use an employer of record when it wants to hire talent in a country where it has no legal entity, when it needs to onboard workers quickly without going through entity formation, or when it wants to test a new market before committing to a permanent local structure. Direct hiring requires a registered business entity, local payroll infrastructure, and in-house knowledge of local employment law. An EoR removes all three requirements.
Specific scenarios where an EoR is the more practical choice include:
- An international company hiring a local sales representative or market researcher before deciding whether to establish a Dutch entity
- A startup that lacks the infrastructure to sponsor work permits or comply with Dutch labour law independently
- A company relocating a key employee to the Netherlands before its local office is formally established
- A business that wants to engage a freelancer compliantly, avoiding the risk of bogus self-employment classification
- An organisation that needs flexible, short-term, project-based hires without the overhead of permanent employment contracts
Direct hiring remains the right choice when a company is already established in the target market, has sufficient HR and legal capacity to manage local employment obligations, and is hiring at a scale that justifies that infrastructure. For companies at an earlier stage of market entry, or those hiring selectively in a new geography, the EoR model typically offers a faster, lower-risk, and more cost-efficient path.
How does co-employment affect workers’ rights and benefits?
Workers employed through an EoR co-employment arrangement retain the same statutory rights and benefits as any directly employed worker in the same country. The EoR’s legal employer status means the worker is entitled to all protections under local employment law, including minimum wage, holiday entitlements, sick leave, pension contributions where applicable, and protection against unfair dismissal. The fact that a third-party company directs their daily work does not reduce those entitlements.
In the Netherlands, this is particularly significant. Dutch employment law provides strong worker protections, and an EoR operating in the Netherlands must apply those protections in full. This includes compliance with the Dutch Civil Code on employment contracts, adherence to any applicable collective labour agreements, and correct calculation and payment of social premiums.
For workers who are non-EU nationals, an EoR can also manage work permit and visa sponsorship obligations, provided the EoR holds the relevant IND recognition as a sponsor. This means a worker hired through an EoR in the Netherlands can access the same legal employment status, social benefits, and residency rights as a locally hired employee, even if their ultimate employer is headquartered in another country.
From a practical standpoint, workers in a co-employment arrangement typically receive their employment documentation, payslips, and HR support from the EoR, while their day-to-day experience, performance reviews, and work assignments are managed by the client company. When the arrangement is structured correctly, the worker’s experience is largely seamless.
How Blue Lynx supports co-employment arrangements in the Netherlands
Blue Lynx operates as a fully compliant employer of record in the Netherlands, managing the legal employment relationship so that client companies can focus on running their business. The service covers:
- Employment contracts drafted in English and Dutch, compliant with Dutch labour law
- Full payroll processing, tax withholding, and social premium administration
- Work permit and visa sponsorship for non-EU nationals, backed by IND recognition
- GDPR-compliant data handling and NEN 4400-1-certified employment practices
- HR administration, leave management, and dedicated account management
- Optional recruitment support through a network of over 40,000 active candidates
With over 37 years of experience in Dutch and international recruitment, Blue Lynx brings the legal knowledge, operational infrastructure, and sector expertise to make co-employment arrangements work cleanly and compliantly. Whether you are entering the Dutch market for the first time or need a compliant framework for an existing worker, contact Blue Lynx to discuss the right structure for your situation.