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Summary: A Professional Employer Organization (PEO) agreement is the contract between a client company and the professional co-employer (PEO) that supports them with HR and payroll tasks.
PEO Agreement
A PEO agreement is a legally binding contract between a client business and a Professional Employer Organization (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. Where dealing with an Employer of Record (EOR) these are known as EOR contracts.Â
Why does a PEO agreement matter?
A PEO becomes the administrative co-employer of a client’s workforce. This means that they are responsible for the administration of benefits and insurance and reporting and, often, the 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 record- 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.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
