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3 min read

What Does a PEO Contract or Service Agreement Look Like?

What Does a PEO Contract or Service Agreement Look Like?

Professional Employee Organizations (PEOs) specialize in providing HR services and benefits packages to client businesses. Following signing a PEO agreement (or a PEO contract), the PEO becomes the ’employer of record’ for the staff covered under the agreement. The client business is known as the “worksite employer”; together, the PEO and the client are “co-employers,” and the staff is known as “co-employees.” The PEO and the client become partners under the PEO contract, so businesses need to anticipate precisely what can and should be included in the agreement before joining the partnership.

What is a PEO agreement?

A PEO agreement is a legally binding contract between a client business and a PEO. It states the duration of the contract, the terms for both parties, the services to be rendered by the PEO, and the payment to be owed by the client.

Why does a PEO agreement matter?

Because the PEO stands as the employer of record, they assume liability for the co-employees; they are also responsible for the administration of benefits and insurance and reporting and payment of employee taxes. These responsibilities must be spelled out explicitly in the PEO agreement, and it should be clear what employees the contract applies to. For instance, if certain employees continue to be paid directly by the business and the PEO contract does not cover their job functions, the PEO will not be liable for those employees. Suppose the business does not cover those non-PEO employees with separate workers’ compensation insurance and does not process their tax information, mistakenly assuming that the PEO is handling them. In that case, the business will be in breach of the law.

The PEO agreement also matters because it spells out precisely what the PEO provides and the costs of those services. The terms should be simple and straightforward so that there is no cause for disagreement in the future or unpleasant surprises when billing comes.

Your potential PEO partner may have a PEO agreement template available for review before you sign on final terms.

What should a PEO agreement contain?

The PEO contract should list each party’s responsibilities, the contract’s length, conditions for renewal, and conditions for cancellation.

It should have a section enumerating the services provided by the PEO. This will most likely include workers’ compensation insurance, health insurance, unemployment insurance, payroll processing, tax administration, and records keeping. There may be additional services depending on the package agreed upon.

The contract should list the policies of the PEO regarding client access to co-employee personnel records, hiring and firing practices, reporting by the PEO to the client, and a guarantee of correct payroll processing and meeting of local tax and regulatory compliance.

The contract should also list payments expected for all services rendered, penalties for late payments, and avenues for restitution available for each party in case of a breach.

Finally, the PEO agreement must also contain details of the benefits plans provided and of the specific state regulations that must be met to ensure compliance.

The Securities and Exchange Commission (SEC) has provided a PEO contract sample here.

FAQ

PEOs will differ in their pricing and services, all of these should be understood and agreed upon before signing the contract and written out just as agreed upon. Pricing for PEO services varies by services rendered, but typically runs from 2-12% of the gross monthly payroll.

The co-employees insurer will (in most cases) be a third-party provider, not the PEO itself. The terms and benefits of the insurance coverage should be included in the contract, as well as insurance administration services provided by the PEO.

Travis is a global business development advisor. He has spent the last 14 years supporting business establishment and development in North America, Southeast Asia, and throughout the world. With multiple degrees from the University of Oregon, Travis currently splits his time between the US, and Bali, Indonesia. At RemotePad, Travis writes about remote work, hiring internationally and PEO/EOR business models.

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