Reference
What should you look for in a PEO client service agreement?
The short answer
Federal tax law sets a short list of what a certified PEO’s written contract must provide, and it applies only if the PEO is a certified professional employer organization (CPEO), which is voluntary. Everything else in a PEO client service agreement is commercial and negotiated: term and renewal, termination and notice, fees, who carries workers’ compensation and unemployment tax, liability and indemnity, data return on exit, and who files what. We found no primary source that says what a typical agreement contains, so this page gives the questions to put to the agreement and to an attorney, not a description of market norms.
General information, not legal, tax or accounting advice. Have an employment or commercial attorney review any PEO agreement before you sign it. This page does not provide contract language. BRG is a broker and advisor paid by the provider selected in a competitive process; clients are not invoiced. That is a conflict worth knowing about when you read our view on any provider terms.
Start with one question: is the PEO a CPEO?
Certification is voluntary. The IRS announcement of the first certifications (retrieved 15 Oct 2026) says the IRS “established a voluntary certification program for professional employer organizations (PEOs)” and that “a CPEO is generally treated as the employer of any individual performing services for a client of the CPEO,” but “only for wages and other compensation paid to the individual by the CPEO.” The page is marked historical, so check the IRS’s current public listing of CPEOs rather than relying on it. A PEO that is not certified is outside the rules below, and its agreement should be read with that in mind.
What the tax code says a CPEO contract must contain
Under 26 U.S.C. 7705(e)(2) (retrieved 15 Oct 2026), a contract for a CPEO work site employee must be in writing and provide that the CPEO shall assume responsibility for payment of wages, for reporting, withholding and paying the applicable employment taxes, and for any employee benefits the service contract requires it to provide, in each case “without regard to the receipt or adequacy of payment from the customer.” It must also provide that the CPEO assumes responsibility for recruiting, hiring and firing in addition to the customer’s, maintains the employee records, and agrees to be treated as a CPEO for section 3511 purposes.
The regulation at 26 CFR 31.3511-1(g)(5) (retrieved 15 Oct 2026) adds contract content: the agreement must contain the name and EIN of the CPEO reporting, withholding and paying the federal employment taxes, require the CPEO to give the customer the notices and information in paragraph (g)(4), and require the CPEO to notify the customer that it may also be liable for federal employment taxes. Those notices include the information the customer needs to claim certain credits, and a warning where covered employees are not, or stop being, work site employees.
What the CPEO regime means for who is the employer for tax purposes
Per 26 CFR 31.3511-1, a CPEO is treated as the employer of a covered employee for the remuneration it remits, and for a work site employee no person other than the CPEO is treated as the employer with respect to the customer for federal employment taxes on that remuneration. For a covered employee who is not a work site employee, the customer can also be treated as an employer if it would be one without this section. Wage base limits are applied separately per customer, and on starting or ending a CPEO contract the CPEO and customer are treated as successor and predecessor employers for wage base purposes. Credits for a work site employee generally apply to the customer.
This describes federal employment tax treatment only. It does not decide who is the employer for workers’ compensation, unemployment insurance, wage-and-hour or discrimination law, which are separate bodies of law. The text we read does not address those, and we do not state a conclusion on them. See co-employment liability and co-employment explained for how BRG frames that split.
What certification itself requires of the PEO
The certification rules at 26 CFR 301.7705-2 (retrieved 15 Oct 2026) include audited annual financial statements with a working capital statement, a quarterly signed assertion that federal employment taxes were withheld and deposited, backed by a CPA attestation, and a bond from a qualified surety, set at the greater of 5 percent of the prior year’s section 3511 liability (capped at $1,000,000) or $50,000. A revoked CPEO cannot reapply for one year, and customers must be notified of a suspension or revocation. Ask which of these a PEO can show you, and how the agreement tells you if its status changes.
Clauses to ask about, and why each matters
The table below lists topics, not recommended terms. We have no primary source on what typical PEO agreements say, so we make no claim about market norms. The right answer to each is a legal and commercial judgment for you and your attorney.
Exit is where the agreement is tested
Most of the cost of a PEO relationship that has stopped working shows up at exit: the notice period, what happens to benefit plans and workers’ compensation mid-year, the return of payroll history needed for the next provider, and the wage base reset described above. BRG’s own view of that sequence is on exiting a PEO, and renewal terms are covered in PEO renewal review. Read the termination and data clauses before the price.
If the PEO is in Florida
Florida regulates PEOs as employee leasing companies under Chapter 468, Part XI, with licensing by the Board of Employee Leasing Companies at DBPR; see How are PEOs regulated in Florida? for the DBPR pages we read. Check the license in DBPR’s public search and ask for the current workers’ compensation certificate. The section title “Licensee’s insurance; employment tax; benefit plans” (s. 468.529) appears in the Senate’s table of contents for Part XI, but we could not load the section text, so we do not describe what it requires.
What we could not confirm
We could not load the text of Florida Statutes Chapter 468, Part XI, or Florida DBPR’s pages on 15 October 2026, so we state nothing about what a Florida license requires in a client contract. We did not find a public NAPEO model contract or any primary source on typical term, renewal, markup, indemnity or limitation-of-liability language in PEO agreements, so we make no market-norm claims. We did not read the IRS’s current CPEO customer page; the IRS announcement we read is marked historical. We read the regulation text through an extraction that may omit subparagraphs, so quote the regulation itself, not this page, in any dispute. We did not review any provider’s actual agreement, and nothing here applies to your contract without an attorney reading it.
| Topic | Question to put to the agreement | What supports asking it |
|---|---|---|
| Term and renewal | How long is the initial term, and does it renew automatically? What notice stops a renewal? | Commercial practice question; no primary source |
| Termination and notice | Who can end it, with how much notice, and for what causes? Is there any charge on exit? | Commercial practice question; wage base reset on exit is in 31.3511-1 |
| Fees and markups | Which fees are fixed, which are percentages, which pass through at cost, and can any change mid-term? | Commercial practice question; no primary source |
| Federal employment taxes | Does the contract name the entity and EIN reporting and paying them? Is the CPEO status stated? | 7705(e)(2); 31.3511-1(g)(5) |
| Workers’ compensation and unemployment tax | Whose policy and whose state account covers your staff, and what happens to experience history on exit? | Not addressed in the text we read; ask counsel |
| Liability and indemnity | Who bears the cost if the PEO fails to pay a tax or benefit, or if a claim arises from your decisions? | Customer may remain liable for federal tax under the (g)(4) notice; allocation otherwise a legal question |
| Benefits | Who is responsible for plan obligations, and what happens to coverage at termination? | 7705(e)(2)(C); detail is contract-specific |
| Data and transition assistance | What payroll, tax and benefit records are returned, in what format, by when, and at what cost? | Records duty in 7705(e)(2)(E); return terms are contract-specific |
| Who files what | Which returns, notices and employee forms does the PEO file, and which remain with you? | 31.3511-1(g) reporting duties apply to a CPEO only |
Before you sign or renew
Use these to make sure the agreement answers the questions that matter. A gap is a reason to ask, not proof of a problem.
| Question | Why it matters | What to keep |
|---|---|---|
| Is the PEO listed as a certified PEO by the IRS today? | Federal employer treatment and contract content rules apply only to CPEOs | Dated copy of the IRS public listing entry |
| Does the agreement name the reporting entity and EIN? | This is a required contract element for a CPEO | The signed agreement and schedule |
| Do you know the notice period and renewal mechanics? | An automatic renewal missed by a date can lock in another term | A calendar entry for the notice deadline |
| What will you receive, and when, if you leave? | The next provider needs your payroll and tax history | The data return clause and its fees |
| Has an attorney read the liability, indemnity and termination clauses? | These allocate risk and are legal, not commercial, judgments | Attorney’s written comments |
Sources and methodology
Every figure on this page is taken from the source named beside it. Each source is labelled by type, because a government statistic, a trade-association study and a provider’s own filing carry different incentives.
- 26 U.S.C. 7705, Certified professional employer organizationsRetrieved 15 Oct 2026 · Statute · used for: CPEO definition; required written-contract provisions in (e)(2)
- 26 CFR 31.3511-1, Certified professional employer organizationRetrieved 15 Oct 2026 · Regulation · used for: Employer treatment, wage base, credits, customer notices, contract content in (g)(5)
- 26 CFR 301.7705-2, Certification requirementsRetrieved 15 Oct 2026 · Regulation · used for: Audited financials, quarterly assertion, bond, suspension and revocation
- IRS, first group of certified professional employer organizations approved (historical page)Retrieved 15 Oct 2026 · Government · used for: Voluntary program; CPEO treated as employer for wages it pays
- BRG Advisory Group, How are PEOs regulated in Florida?Retrieved 15 Oct 2026 · BRG practice experience · used for: Florida licensing framework and the DBPR pages read
General information, not legal, tax or accounting advice; have an attorney review any PEO agreement. Based on federal statute and regulation text read on 15 October 2026. It offers no contract language and makes no claim about typical commercial terms. BRG is a broker and advisor paid by the provider selected in a competitive process; clients are not invoiced.
Common questions
What must a certified PEO’s contract say under federal law?
Who is the employer for tax purposes when a CPEO is used?
Is every PEO a certified PEO?
Can I get sample PEO contract clauses from this page?
Does a CPEO relieve the customer of all employment tax liability?
Where this sits
This page supports PEO / ASO Advisory — the practice that does this work.
