The team formally announced the move Thursday. Terms were not disclosed.
"We are happy that Peyton decided to join us," coach Romeo Crennel said. "Peyton is a big, strong, physical back with a lot of talent and he should fit into our system well. We are looking forward to working with him and adding him into our offense."
Kansas City could serve as a fresh start for Hillis, who had a drama- and injury-filled second season in Cleveland after rushing for 1,177 yards in 2010. Hillis won a nationwide fan vote to be the cover figure for "Madden NFL 12" last offseason, but then rushed for just 587 yards.
He sat out last Sept. 25 against Miami with a bout of strep throat, an incident that didn't sit well with some teammates. He also missed a treatment for his ailing hamstring when he left during a work week to get married. Hillis also has changed agents multiple times in the last year.
"Things didn't work in my favor this year," Hillis said in December. "There's a few things that happened this year that made me believe in curses. Ain't no doubt about it."
With the Chiefs, Hillis will be reunited with Brian Daboll, his former offensive coordinator in Cleveland who is now in the same position in Kansas City.
Hillis, a bruiser at 6-2, 250 pounds, has played fullback and tailback during his career, the type of versatility that made him attractive to the Chiefs. His bulldozing style also will help complement Charles and the speedy Dexter McCluster in the backfield.
Hillis also could carry the load as the lead rusher if Charles isn't fully recovered from a knee injury that sidelined him for the season after Week 2.
Kansas City needed to sign another rusher after allowing running backs Thomas Jones and Jackie Battle, and fullback Le'Ron McClain to become free agents this week.
"Peyton was a player we planned to target when free agency began," Chiefs general manager Scott Pioli said. "One of our goals going into free agency this year was to build depth at the running back position and we are pleased to add a talented player like Peyton to the mix."
Hillis, a seventh-round pick out of Arkansas in 2008, also played two seasons with Denver. He originally started at fullback, but became the No. 1 ballcarrier — and a fan favorite — as a rookie when several of the Broncos' running backs landed on injured reserve.
After not being used much by then-Broncos coach Josh McDaniels in 2009, Hillis was traded to Cleveland for two draft picks and quarterback Brady Quinn. He was slated to be the Browns' starting fullback, but again took over the featured role because of injuries and ran for 1,000 yards for the first time.
Hillis has rushed for 2,161 yards and 20 touchdowns in four seasons, and has caught 101 passes for 805 yards and three scores.