More than 175,000 small- and mid-size businesses across the U.S. utilize Professional Employer Organizations (PEOs) in some form or another. So, PEO agreements are quite common. There are PEOs in all 50 states and they are a practical resource for companies across industries.
Just one call to NetPEO at (678) 841-7195 can connect you with a highly skilled, qualified dream team to handle nearly any variety of human resources, benefits, and finance tasks. For 20 years, NetPEO has been a leading authority on PEOs. And we’re always happy to share our knowledge with anyone considering partnering with a PEO.
The PEO Agreement
PEO agreements are also known as PEO client service agreements. This is a legal document that details the nature of your partnership with your chosen PEO. It breaks down the co-employer arrangement and the responsibilities of each party. The agreement also lays out which employees are included.
One of the things that makes PEOs unique is the co-employment relationship. As co-employer, the PEO shares responsibilities with their client company and assumes risks, rights, and responsibilities of an employer.
This means a PEO pays employment taxes and wages of each agreed-upon employee from its accounts. The PEO also accepts responsibility for collecting, depositing, and reporting state and federal employment taxes.
An Overview of the PEO Agreement
Your PEO arrangement should clearly set out your expectations of the PEO as the client company. It should also address what the PEO will need from you and what they can and cannot do as a co-employer on behalf of your company.
Your PEO agreement will describe in detail the services provided to your company.
These can include:
- Performance management
- Employee administration
- Employee benefits
- 401(k) plans
- Payroll processing
- Workers’ compensation
- Tax administration
- Human resources technologies
As an employer, you are responsible for tax payment and withholding for employees and for filing required paperwork and returns. When you enter into a co-employer relationship with a PEO, there are specific laws and rules, as laid out by the Internal Revenue Service (IRS). Some tax-specific provisions may be laid out in your PEO agreement.
As co-employers, PEOs may be funding your payroll or other financial obligations. As such, they may require proof of financial solvency or run a credit check.
Your PEO agreement will also dictate how you will pay your PEO for premiums, fees, payroll, taxes, and other expenses. Typically payments are made via ACH (bank-to-bank), but wiring of funds may also be required.
As a PEO agreement is a legal document, every part of it is important. However, the section that lays out costs/fees and pricing is particularly critical and of interest.
Some PEOs will charge a flat rate per employee per month or as a percent of payroll. PEOs may charge additional fees for employee termination, payroll delivery, set-up of 401k accounts, international services, or other related expenses.
If your PEO is ever intending on increasing fees, they will outline the process in your PEO agreement. Generally this will include the amount of notice they will give you if they’re going to raise fees and how much they can raise them.
If any of your former employees obtain COBRA coverage, your PEO may charge a fee for continuation of those former employees on the policy.
As a PEO client, you will be required to maintain Employment Practices Liability Insurance (EPLI) in the event an employee files a lawsuit.
Hiring, Reassigning, and Termination
As a co-employer, you will grant your PEO the right to hire, reassign, and/or terminate covered employees in accordance with federal and state employment law.
Often, PEOs will include standardized “drug-free workplace” requirements that allow them to test employees for drug use if they’ve filed a worker’s compensation claim.
Reduction in Force
If your company is forced to conduct significant layoffs or you experience a large workforce reduction, your PEO may require additional fees. Your pricing agreement is based largely on the number of employees, so a considerable reduction in force can expose the PEO to financial and legal liability.
Severing the Relationship
If, for whatever reason, your relationship with your PEO is not working for you, you can leave at any point in time. However, you will be required to give minimum notice as laid out in the PEO agreement.
A PEO may sever their relationship with your company for any number of reasons, but the most common is due to insufficient funds in your accounts when it’s time for payroll or to pay taxes or other expenses.
Why Working with a PEO Is Worth It
While your PEO agreement might feel overwhelming or complicated, outsourcing functions like payroll, human resources, and finance tasks can pay off and considerably benefit businesses, according to the U.S. Small Business Administration (SBA).
- Access to better employee benefits at a cost that fits your budget
- Reduction in payroll and accounting costs
- Compliance with local, state, and federal laws, rules, and regulations
- Reliable management of workers’ compensation
- Recruiting and screening highly qualified employee candidates
- Risk management and reduction
- Compliance with the Affordable Care Act (ACA)
All that, plus you gain back your time and ability to focus exactly where you need to — on growing your business.
Talk with NetPEO Today
If you are considering working with a PEO, call NetPEO at (678) 841-7195 or fill out the form. We can answer any of your questions, address any concerns, and learn about your business goals to customize a package to meet your exact needs.
We can explain the PEO relationship and how we match you with a PEO in your area that is the best fit for your business size, industry, and specific outsourcing needs.