PEO Agreement

In a recent survey, only 55% of small businesses reported using an external firm or a third-party software to handle payroll services. This means that around 45% of companies are taking on an unnecessary risk by handling these complex calculations and compliance obligations internally. 

A Professional Employer Organization (PEO) helps to fill this gap. In a PEO agreement, the PEO provider sets out its obligations and responsibilities to your business. Thanks to the PEO’s benefits and services, you can improve your company’s legal compliance, boost your scalability, simplify payroll processing, and get much-needed support with HR tasks.

Once you find the right provider, you’ll sign a PEO agreement that delineates which party is responsible for different tasks, how dispute resolution works, cancellation fees, and payment details. The contract will state the duration of the agreement between your company and the PEO. Because the PEO agreement is legally binding, there may be penalties and other consequences if you violate the contract.

PEO Contract Example Sections

In a typical PEO contract, you’ll likely see the following sections and topics.

In a PEO agreement, you and the PEO are agreeing to serve as co-employers. This means that you share in liabilities and responsibilities. Because of this, it’s extremely important to review your contract to fully understand the rights and responsibilities of both parties.

The Importance of the PEO Agreement

Your PEO agreement matters because it specifically spells out what you and the PEO are required to do. Because you are co-employers, you share in the duties and responsibilities of being an employer. These duties will be detailed in the agreement, so you understand what your obligations are.

For example, the agreement will state if the PEO is responsible for workers’ compensation or health insurance. If the PEO isn’t responsible for these services, then you’ll need to make sure your company fulfills its obligations under the Affordable Care Act (ACA) and state laws.

What Your PEO Agreement Should Contain

Your PEO agreement should include the rights and obligations of every party involved in the contract. It should include a client service agreement, which details exactly what services the PEO will provide to your company. As a part of the contract, there will be specific terms and conditions so that everyone knows exactly what their expectations are.

Often, these agreements are divided into Part A and Part B. Part A of the contract will typically center solely around the client service agreement. In Part B, you’ll find the terms and conditions, state-specific provisions, the schedule of employee benefits, fees, and payment terms.

Although different PEO contracts have unique differences, there are a few PEO contract terms to look out for. By analyzing these sections of the contract, you can gain a better understanding of the costs and benefits of signing the agreement. 

• Data Ownership and Access: As the co-employer, the PEO has a right to store and use employee data. The contract will specify what type of data the PEO must share with you and what happens to the data after the contract has been terminated. 
• Drug-Free Workplaces: Often, PEO contracts include provisions for drug-free workplaces or drug testing. However, some states now have laws about who can be drug tested and in what circumstances. If you can’t have a drug-free policy or simply don’t want one, you’ll need to negotiate changing this term with the PEO.
• Funding and Credit Approval: In many cases, the PEO will conduct credit checks before signing the agreement. This is done to ensure that your company is financially stable.
• Hiring and Termination: The PEO should detail what their rights are in regard to hiring and firing workers. You should also double-check to make sure that these terms are legal in the states you will be operating in.
• Reduction in Workforces: Look for terms related to a reduction in your workforce. If you suddenly have to lay off many people, the PEO may become the focus of employment lawsuits. How it handles this financial exposure should be addressed in your contract.
• Termination Clause: The termination clause includes the costs and circumstances underwhich you’re allowed to terminate the contract. Often, there is a 30-, 60-, or 90-day notice period that you must fulfill before you can effectively terminate the contract.
• Unemployment Taxes: The PEO contract should detail how the PEO handles unemployment taxes and makes adjustments based on state-based changes.

Does the PEO Agreement Provide Insurance Coverage?

Many PEO agreements include insurance coverage. However, the type of coverage and the extent of the coverage can vary. Depending on your agreement, you may have coverage for workers’ compensation, employment practices liability insurance (EPLI), and general liability insurance.

Besides coverage for the employer and PEO, there are also insurance options available for your employees. Most PEOs allow you to opt into health insurance and dental insurance. Depending on the PEO, you can also find wellness programs, retirement benefits, vision insurance, pet insurance, disability insurance, and life insurance.

What Are the Downsides of a PEO?

Although there are many advantages to working with a PEO, there are also some drawbacks. Because using a PEO means you inherently lose some control over the HR practices, it can lead to employee dissatisfaction if there is a culture mismatch. Your employees will generally have to turn to the PEO with their payroll-related questions, so it’s incredibly important to find a PEO that has fast, responsive customer service.

Depending on the PEO provider, there may also be issues with pricing transparency, hidden fees, and data privacy. PEOs offer specific payroll, benefits, and HR services, so the options you get will vary significantly from one provider to another. Before you sign a contract with a PEO, you should always make sure that they have all of the current and future services that your company may want.

What Are the PEO Pricing Options?

The typical PEO cost is generally between 2% to 12% of wages. How the fee structure is set up can vary from one PEO to another. While some PEOs use per-employee per-month (PEPM) pricing plans, other PEOs charge a percentage of the payroll processed. In addition, many PEOs offer tiered or customized plans for their enterprise clients.

What Are the Advantages of Working With a PEO?

A PEO can help you reduce the burden of being an employer. The PEO can manage your HR tasks, payroll duties, tax obligations, benefits administration, and legal compliance. As a result, you can spend more time and energy on your company’s core mission.

For small and medium businesses, this type of tool is especially useful. It’s costly to staff a full payroll and HR department when your company is fairly small. Additionally, it’s hard to scale your business when you have to hire more payroll and HR specialists before you can grow. By partnering with a PEO, you can enjoy fast, easy scalability. As you grow into new states and countries, the PEO can also help you achieve a high level of legal compliance.

How Is a PEO Different From Employee Leasing?

While the terms PEO and employee leasing were used interchangeably for many years, they are fundamentally different concepts. A PEO is a co-employer, so it has a shared responsibility for employer duties. You handle the operational duties. If you fire the worker, then you and the PEO no longer employ them. 

With employee leasing, you are simply leasing the employee from the staffing agency. This means all of the employee’s benefits, payroll, and HR support are managed through the employee leasing company. Even if you fire the employee, the employee leasing agency will just hire them out to a different company because the agency is fully responsible for their employment.

PEOs can differ radically in their contractual terms, from hidden terms, to contract lengths and attribution of liability. To check you are getting the best PEO deal, run your PEO agreement by one of Employsome’s PEO specialists.