Entering into a co-employment relationship with a PEO has several advantages. Notably, small business owners can benefit from such a relationship and avoid wearing many hats while running their business.
Business owners can focus on revenue-generating activities by offloading HR responsibilities and reducing their risks and liabilities concerning employment.
This is why understanding the structure and terms of a PEO agreement is crucial. While entering into a co-employment relationship, business owners must know what responsibilities they outsource and acknowledge the roles and liabilities they are subjected to.
Read this article before signing a client service agreement with a PEO for seamless functioning of your business.
What is a PEO Agreement?
A PEO client service agreement or a PEO agreement is a legally binding document that enforces all the terms and conditions of co-employment with a PEO company.
The contract marks the beginning of a relationship between the client and the PEO defining and allocating responsibilities and liabilities between the parties. The agreement entails terms and conditions concerning fees and payment terms, a schedule of employee benefit plans, and in the case of countries like USA, India and China, state-specific provisions.
Benefits of Signing a PEO Agreement
As a co-employer, a PEO agreement endows several benefits that improve your confidence and make your collaboration more seamless and safe.
Sets the right expectations
A PEO contract will help you understand the scope of the responsibilities your PEO will take. A compliantly and correctly drafted PEO agreement will clearly state the PEO’s duties and liabilities and offload responsibilities off your shoulders.
States the correct scope of employment
Co-employment can create some lack of clarity on who is the primary employer and the extent of your control. This can hamper employee morale and create dissatisfaction. For example, with an incorrect understanding of who is responsible for payments, paying an employee’s salary may get delayed.
A PEO service agreement has clauses that mention the scope of employment responsibilities the PEO will cover.
Gives clarity of risks and liabilities
One of the benefits of partnering with a PEO is offsetting a fair share of employment risks. PEOs help you stay compliant by taking care of your HR activities by adhering to local laws concerning payroll and taxes.
By doing so, they not only share responsibilities associated with managing the employee. They also take a fair share of their risks on their proverbial plate.
Since a PEO agreement explicitly mentions the scope of employment responsibilities it will carry out, then you get a fair understanding of compliance risks.
Provides more transparency
A PEO agreement will clearly outline its terms and conditions, processes, point of contact, and pricing. It is good to be aware of terms concerning fee increases, payments, and severing the relationship, so there are no surprises later in the collaboration.
For example, let’s consider a scenario where you are in a co-employment relationship and have to lay off most of your employees. This exposes your PEO partner to financial and legal liabilities.
In such circumstances, you may incur additional charges from your PEO for the latter to manage the sudden bulk exit of employees since the PEO bills you on a per-employee basis.
Transparency in these aspects makes you more confident without worrying about hidden costs, compliance with the PEO’s processes, and the likes.
Provides clarity on termination
Termination is not a tricky affair but can cost employers heavily when wronged. When entering a co-employment relationship with a PEO, the latter also takes care of termination.
A PEO client service agreement must contain clauses detailing the SOP for an employee’s exit. This ensures the termination is managed by settling all final dues and is compliant with local laws.
Risks you can avoid by signing a PEO Agreement
A PEO agreement endows clarity and reduces the onus on liabilities on you, the primary employer.
The contract saves you from:
- Compliance risks
- Payroll inaccuracies
- Termination risks
- Employee dissatisfaction
Specific PEO Agreement Terms You Need to Check
Now that we have established what a PEO contract will look like, here’s what you need to check in a PEO agreement.
The PEO’s right to hire and terminate employees
Before accepting the terms of a PEO agreement, you must clearly understand the rights of the PEO concerning the hiring and termination of employees. The agreement must clearly articulate these terms, and you must ensure they comply with local employment laws (both federal and state laws).
Terms concerning a reduction in workforce
In cases of a mass layoff, the PEO may face employment-related lawsuits and exposes itself to financial exposure. Thus, the PEO will include terms and conditions to protect and finance liabilities in such cases. Employers must be aware of these terms before agreeing to the PEO contract.
The client service agreement must indicate when the PEO will change the unemployment tax rate.
Many PEOs intend to ensure a drug-free workplace. Thus, they include terms in the PEO contract that entitle them to test employees for drug consumption once they file a worker’s compensation claim.
However, if this doesn’t fit your company’s tenets, you could negotiate with the PEO to remove this clause.
What Does a PEO Agreement Contain?
A comprehensive and compliant PEO agreement must elucidate all aspects concerning:
- Enforcement of terms and conditions
- Workers Compensation
- Liability insurance
- Benefits plans
- Limitation of services
- Legal actions & inquiries
They are classified into different sections in a PEO contract. Here’s an overview of what you can expect in each section.
1. Term of agreement
The term of agreement section contains terms surrounding the beginning of the co-employment relationship. PEOs also reveal information on the duration of the contract and contract renewal cycles.
The section also states the nature of the relationship if the client layoffs employees under unforeseen circumstances.
Under the service section, the PEO describes its scope of services.
The section also dictates terms and conditions for any employees the PEO leases. For example, the services section guarantees the client that the PEO wouldn’t interfere with the daily affairs of the leased employee while retaining control of the employee’s hiring, termination, reallocation, etc.
3. Workers compensation
PEOs also manage an employee’s worker compensation coverage adhering to local employment laws. The workers’ compensation section acknowledges that the PEO will be responsible for managing workers’ compensation claims, claims filings, and related procedures for its leased employees for services.
4. Employee practices liability insurance (EPLI)
This section encompasses all clients need to know about the EPLI the PEO secures for its employees.
5. Benefit plans
One of the significant advantages of partnering with a PEO is to secure benefits on par with Fortune 500 companies. PEO contracts include a section that details benefits plans offered to employees. In this section, the client acknowledges that its partner offers employee benefits and that they can provide additional benefits if needed – this shall be done at the client’s sole discretion.
The section also has terms and conditions surrounding any changes the PEO makes to its benefits plans during co-employment with the client.
In the USA, this section of the PEO agreement also explains who is assuming responsibility for the client’s Consolidated Omnibus Budget Reconciliation Act (COBRA) health insurance.
6. Service fees
This section usually covers all payment details for the services rendered to the client. The service fees section includes payment modes, time of payment, penalties for delayed payments, ineffective checks, and pending payments.
PEO agreements also encompass terms and conditions around Financial Guarantee. The Financial Guarantee provides financial assurance as an irrevocable letter of credit, a deposit (held in a non-interest-bearing account by the PEO), or a bond. If the client fails to pay when due, the PEO may apply the financial assurance to the pending amount.
If the PEO, in its sole discretion, determines that a change has occurred in the client’s financial condition or observes an increase in the client’s average payroll, then the PEO can put the bond into effect.
7. Limit of services
A PEO client service agreement also reveals the services it does not offer. This is to ensure that no uncertainties exist as a result of a co-employment relationship.
In this section, the PEO contract informs the client that the former shall not provide any other services apart from those mentioned above, which will affect the strategic, operational, and other business-related decisions concerning the client’s business.
8. Legal inquiries
An agreement with a PEO also involves terms and conditions concerning situations when the client gets embroiled with any government investigation or inquiry or private adversary action, which could in any manner impact upon the types of duties contemplated by the PEO Agreement.
This section explicitly states the PEO’s right to terminate the co-employment relationship with the client for reasons including but not limited to:
- Non-payment of dues
- Violate terms of the agreement
- Adverse financial conditions of the client
We Might be the PEO Company You’re Looking for
Multiplier’s SaaS-based PEO platform enables employers to efficiently onboard, manage and pay their international employees and independent contractors. No matter how many countries you want to look for to locate and hire talents, you don’t have to spend time and money expanding your HR operations there. With our local experts and local entities, scale up your international team anywhere you want.
Additionally, you would now understand the importance of complying with the laws of the country you hire. Multiplier assures 100% statutory compliance no matter the number of locations involved.
You get end-to-end transparency into HR management via actionable insights. This also means you do not have to bear hidden charges with us by your side.
Want to simplify your HR management like never before? Feel free to get in touch with us at Multiplier.