If you’re a business owner dealing with payroll, compliance, and employee benefits, chances are you’ve thought about hiring a Professional Employer Organization (PEO) as a partner. The promise is straightforward: let the PEO handle the HR so you can concentrate on running and expanding your company. But before leaping in, there’s one document that requires your attention: the PEO agreement.
This agreement defines the co-employment relationship between your company and the PEO. It lays out exactly who is responsible for payroll, benefits, compliance, and fees, while also addressing what happens if the partnership doesn’t go as planned. In today’s fast-changing regulatory environment, knowing these details is essential.
Imagine the PEO agreement as your safety net and your rulebook. Well-executed, it guards your company, saves you money, and keeps you in compliance. Poorly executed, it becomes an expensive surprise. For this reason, we are dissecting what a PEO agreement actually is, why it’s important, and the essential pieces that need to be incorporated before signing.
A PEO agreement (Professional Employer Organization agreement) is simply a legal contract that defines your co-employment arrangement with a PEO company. It is similar to the rulebook of how you and your PEO will collaborate to take care of your employees. Based on current industry statistics in 2025, businesses that team up with PEOs experience a mean profit growth of 27%.
What is a PEO relationship? In simple terms, it’s when a PEO is your co-employer, sharing some of the employer burdens while you keep control over your business operations and employee management. The PEO takes care of the HR administration, payroll processing, benefits, workers’ comp, and compliance with state and federal laws.
Here’s why this topic is especially relevant now:
Before we jump into the fine print, let’s touch on why a well-drafted PEO contract is such a game-changer for business owners:
Without these protections in writing, you’re flying blind—and that’s when disputes happen.
Now let’s get to the heart of it. Here are the nine sections every PEO agreement should include—and what you should look for in each.
Your agreement must explicitly define when the relationship starts, its duration, and how renewals happen. Some PEOs have month-to-month flexibility, but others commit you to one year or more.
Be aware of early termination fees. In 2025, some PEOs were identified in DOL audits with contracts that charged high fees if companies attempted to cancel before a 12-month period. Always look at the exit terms from the get-go.
This section explicitly outlines specifically what services the PEO offers—payroll processing, tax reporting, benefits administration, HR technology, compliance assistance, workers’ comp, and so forth.
It ought to make it clear, too, what isn’t included in the PEO. For instance, most won’t assist in the direct management of your staff or make key business decisions on your behalf.
A vague PEO contract that says “general HR support” isn’t enough. Demand specifics.
PEOs generally cover workers’ comp under their master policy. The contract should state who is liable for claims, filings, and coverage insurance.
This is important because workers’ compensation laws are state-by-state, and one wrong move can invoke penalties. As of 2025, there was a 16% increase in workers’ comp claims reported by Connecticut businesses, making clear language in a contract more crucial than ever.
Check for an employment practices liability insurance (EPLI) section. This will cover you and the PEO in case an employee sues for discrimination, wrongful termination, or harassment.
If the PEO contract does not include EPLI coverage, inquire about it. Without it, your business might carry the full brunt of suit costs.
One of the biggest reasons businesses sign with PEOs is access to better benefits. Your agreement should detail:
With healthcare costs up 8.7% year-over-year in 2025, clarity here can save you from financial shocks later.
Transparency around pricing is non-negotiable. The PEO contract should state whether fees are charged as:
It should also state how frequently fees can rise and under what notice you will receive. Some PEOs attempt to sneak mid-year increases. Refuse to sign until you get an itemized breakdown.
This clause safeguards you and the PEO. It states what they won’t do—like making hiring decisions, disciplining employees, or setting business strategy.
It feels limiting, but it’s beneficial. It avoids confusion and makes you not think the PEO is dealing with areas they are not allowed to by law.
Your PEO contract should include what happens in case of a government audit, lawsuit, or regulatory investigation against your company. Who answers questions? Who supplies documents?
In 2024 alone, the IRS conducted over 5,200 small business payroll audits, many involving PEO clients. Knowing your responsibilities in advance is key.
Finally, make sure the contract covers how the relationship can end. Look for:
A poorly written termination clause can trap you in a costly situation. A fair one gives you flexibility if your needs change.
When these nine areas are covered, you avoid some of the most common pitfalls small businesses face with PEOs:
In short, a well-written PEO agreement gives you clarity and confidence.
Before you put pen to paper, ask these five questions:
Working with a PEO can be one of the best decisions you ever make as a business owner. It liberates you from HR hassles, provides your employees with improved benefits, and lowers your compliance exposure. But all of those benefits depend on one thing: the quality of your PEO agreement.
That’s where OEM America steps in. Our professionals guide Connecticut companies through the maze of fine print, side-by-side comparisons, and agreements that really benefit them. Rather than fretting about compliance or surprise fees, you can proceed with certainty, knowing that your HR and benefits are in capable hands.