BILL ANALYSIS �
AB 975
Page 1
Date of Hearing: April 13, 2011
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
Sandre Swanson, Chair
AB 975 (Ma) - As Introduced: February 18, 2011
SUBJECT : Professional employer organizations: regulation.
SUMMARY : Establishes specified regulatory requirements for
professional employer organizations (PEOs). Specifically, this
bill :
1 Provides that a person or entity shall not provide, advertise
or otherwise hold itself out as providing professional
employer services unless that entity or person is registered
as a PEO with the Employment Development Department (EDD).
2)Requires the Director of EDD to prescribe rules establishing
the method for PEOs to report quarterly wages and
contributions for worksite employees and states the following:
a) The rules shall recognize the PEO as the employing unit
of its worksite employees for reporting purposes but may
require that each worksite employee of a single client by
reported under a separate and unique EDD subaccount of the
PEO to reflect the experience f the worksite employees for
a client.
b) Any EDD subaccount shall be used solely to determine
experience rates for that individual subaccount on an
annual basis.
c) Any rule promulgated shall also include administrative
requirements that permit a PEO to transmit the reporting
and payment date required collectively as a single
electronic filing with EDD.
FISCAL EFFECT : Unknown
COMMENTS : This bill represents the latest in a series of bills
sponsored by the PEO industry seeking to amend California law to
adequately reflect and regulate the PEO industry.
According to the industry, PEOs are companies that allow their
small business clients to cost-effectively outsource the
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management of human resources, employee benefits and health
insurance. In a PEO arrangement, the employer's (or client's)
responsibilities for its worksite employees are expressly
allocated or shared pursuant to a written agreement between the
client and the PEO. In such arrangements, the PEO typically
assumes responsibility for such things as payroll, payment of
payroll-related taxes, workers' compensation, unemployment
insurance, healthcare coverage and similar employment benefits.
According to the industry, such arrangements allow the business
owner to concentrate on managing their business, while
contracting out their human resources department. They also
contend that PEOs implement efficiencies to lower employment
costs. In many arrangements, economies of scale allowing the
PEO to act as a large purchaser can provide employees with an
expanded benefits package including life insurance, 401(k)
plans, disability insurance, discount plans, flexible spending
plans and more.
However, for several years the industry has argued that a
regulatory vacuum exists in California law with respect to PEOs.
Under existing law, Unemployment Insurance Code section 606.5
defines a "temporary services employer" and a "leasing employer"
as an employing unit that contracts with clients or customers to
supply workers and performs all of the following functions:
(1) Negotiates with clients or customers for such matters
as time, place, type of work, working conditions, quality,
and price of the services.
(2) Determines assignments or reassignments of workers,
even though workers retain the right to refuse specific
assignments.
(3) Retains the authority to assign or reassign a worker to
other clients or customers when a worker is determined
unacceptable by a specific client or customer.
(4) Assigns or reassigns the worker to perform services for
a client or customer.
(5) Sets the rate of pay of the worker, whether or not
through negotiation.
(6) Pays the worker from its own account or accounts.
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(7) Retains the right to hire and terminate workers.
According to the industry, PEOs have historically been
recognized by EDD as a "leasing employer" as defined under
Unemployment Insurance Code section 606.5. However, they
contend that both the PEO industry and EDD have recognized for
some time that the statutory definition of a PEO as a leasing
employer does not accurately reflect the business model of the
industry or the exposure to the state under the Unemployment
Insurance Code. The industry states that it has been working
with EDD for several years to discuss ways to better clarify
PEOs under the current unemployment insurance statutory model to
address both of these issues. These discussions have focused on
ensuring that the code evolves in a positive way to adequately
protect workers in the state and strengthen the integrity and
solvency of the unemployment insurance system.
In recent years, the industry has also discussed these issues
with representatives of organized labor, who have expressed a
number of concerns about the business model. However, those
discussions have not yet resulted in a legislative agreement.
Most recently, the industry has approached EDD and had
discussions about developing a process for PEOs to report
unemployment insurance contributions on a subaccount level. The
industry contends that this approach would address concerns
raised in the past about employers entering PEO arrangements in
order to reduce or "wash" their unemployment insurance
experience rating.
The industry indicates that they would like for this bill to
move forward as those discussions continue with EDD and as they
engage in further discussions with other interested
stakeholders, including organized labor.
ARGUMENTS IN SUPPORT :
Supporters argue that this bill provides a necessary regulatory
framework for PEOs operating in California by providing clear
and transparent guidelines for both operators, and importantly,
for those small businesses that partner with PEOs for payroll,
human resource and benefit purposes.
They state that PEOs specialize in managing benefits, payroll
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and human resources, allowing their small business clients to
focus on their real business priorities to grow their bottom
line and succeed.
Supporters state that they have worked with the Employment
Development Department and other interested parties for more
than five years to craft legislation that provides appropriate
protections for small businesses and employees as well as the
state while also bolstering the statutory guidelines for PEOs.
They believe this legislation will greatly improve transparency
with the state in addition to providing one set of standards by
which all PEOs must abide by in the state of California. They
conclude that with the enactment of this bill, California will
join more than 37 states that have specific statutory provisions
addressing the statutory requirements of the PEO-small business
relationship.
PRIOR LEGISLATION :
The introduced version of AB 2570 (Ma) from 2010 was identical
to this bill. AB 2570 was subsequently amended in the Senate
with more substantive provisions related to the regulations of
PEOs. However, AB 2570 was ultimately held in the Senate
Committee on Appropriations.
AB 1560 (Committee on Labor and Employment) from 2009 provided
that an entity providing or advertising professional employer
services be registered with EDD. The bill was moved forward as
a vehicle for discussion but was held in the Assembly
Appropriations Committee.
AB 2975 (Keene) from 2008 stated the intent of the Legislature
that PEOs be regulated with respect to unemployment insurance
obligations, as specified. The bill was moved forward as a
vehicle for discussion but was held in the Assembly
Appropriations Committee.
AB 2891 (Frommer) from 2004 stated the intent of the Legislature
that PEOs be properly recognized and regulated. The bill was
moved forward as a vehicle for discussions to take place with
representatives of organized labor and the Department of
Industrial Relations, but these provisions were subsequently
amended out of the bill.
REGISTERED SUPPORT / OPPOSITION :
AB 975
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Support
ADP TotalSource
National Association of Professional Employer Organizations
TriNet
Opposition
None on file.
Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091