How Signing 'Standard' Agreements Can Bankrupt Your Small Business

How Signing 'Standard' Agreements Can Bankrupt Your Small Business I am often asked by friends who know my background as a lawyer to review "standard" agreements for their small business. I've learned a lot from these experiences.

The agreements in question are typically drafted by high-powered lawyers for large companies. They're one-sided and intended to protect those companies' interests, while reducing or eliminating your legal rights altogether. These lawyers know that most people just sign on the dotted line, without reading or understanding the ramifications of an agreement.

To illustrate the problem, let's consider the agreement I was asked to review recently by a friend who runs a dental practice. My dentist friend was considering signing up with a professional employer organization. PEOs permit companies of all sizes to outsource their human resource, employee benefits, payroll and workers' compensation responsibilities. The PEO establishes a "co-employer" relationship with the employees of the client company, and contractually assumes certain employer rights, responsibilities and risks. The arrangement is typically known as "employee leasing."

There are pros and cons of this business model. I didn't weigh in on the merits (although I had many concerns). My role was simply to review the proposed agreement with the PEO.

It was quite a shocker. Here were some of the most onerous provisions:

1. The agreement automatically renewed from year to year unless the dentist gave notice within a set time prior to the end of the year. Most small offices are not set up to provide a notice of non-renewal, so they would be stuck for another year whether they wanted to renew or not.

2. The fees could be changed at will by the PEO, if its "overall cost of business" increased. This provision would permit an arbitrary increase in fees at any time at the whim of the provider.

3. The dentist was required to "indemnify" the PEO against any lawsuits relating to the agreement, even if the lawsuit was caused by the negligence of the PEO. "Indemnification" means the dentist would be responsible not just for any judgment, but also for the legal fees incurred by the PEO. In my view, no one who understood this clause would agree to it.

The dentist waived all rights to recover for "consequential" damages (those that were a consequence of the misconduct of the PEO), but there was no similar limitation on the amount of damages the PEO could recover.

5. The PEO could assign the agreement to any other company of its choosing, but the dentist could not re-assign it to anyone without the consent of the PEO.

6. If there was a dispute between the PEO and the dentist, the dentist would be required to go to the state where the PEO was based, and would have to pay the PEO's legal fees if the claims asserted by the dentist did not prevail.

7. The dentist was required to sign the agreement "under penalty of perjury." The PEO was not. This requirement could expose the dentist to criminal liability.

I explained to my friend that, whatever benefit she thought she was getting from the business arrangement with the PEO, it was more than offset by the additional liability imposed by this agreement. She agreed and entered into an arrangement with another human resources outsourcing firm (not a PEO) that required no written agreement.

You need to understand you are often better off with no agreement rather than an agreement of this type. If a "standard" agreement is imposed on you, it's worth the expense to have an attorney review it. Some of the liabilities hidden within these "standard" agreements can bankrupt you.

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Daniel - I appreciate your article. I have worked for a PEO for over 15 years, and while a few of the items above are standard in PEO agreements, most are not.

For example, our contract also automatically renews year to year. A PEO is not just a payroll vendor - it is an end-to-end HR department providing everything from payroll and workers' comp to employee benefits and compliance. This cannot be easily turned off and on. Most of our clients have been with us 5+ years, some over 20! With that said, many allow 30 day notice of cancellation.

Other standard language is the ability to raise fees - since the PEO manages taxes, insurance policies and other variables beyond its control, it may be necessary to increase fees as these outside factors fluctuate.

But with that said, there is no excuse for a client to indemnify the PEO for the PEO's mistake! Or waive certain rights. I agree that such an agreement should never be signed.

To investigate a quality PEO, in business for close to 30 years, I invite you

Ari Rosenstein

March 15 2011 at 10:43 AM Report abuse rate up rate down Reply

This sounds like most credit-card agreements

March 10 2011 at 2:19 PM Report abuse +2 rate up rate down Reply