BILL ANALYSIS �
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: July 3, 2012 2011-2012 Regular
Session
Consultant: Gideon L. Baum Fiscal:Yes
Urgency: No
Bill No: AB 975
Author: Ma
As Introduced/Amended: February 18, 2011
SUBJECT
Professional employer organizations.
KEY ISSUE
Should the Legislature specifically recognize and regulate
Professional Employer Organizations (PEOs)?
PURPOSE
To allow for a vehicle for further discussions on how to
recognize and regulate Professional Employer Organizations for
the purposes of the remittance of payroll taxes, workers'
compensation coverage requirements, and compliance with
California Labor Law, including wage and hour issues and safety
and health requirements at the worksite.
ANALYSIS
Existing law defines "leasing employers", also known as
Professional Employer Organizations (PEOs), as employing units
that supply workers to perform services for the client, as well
as to perform the following functions:
a) Negotiate with clients or customers for such matters as
time, place, type of work, working conditions, quality, and
price of the services;
b) Determine assignments or reassignments of workers, even
though workers retain the right to refuse specific
assignments;
c) Retain 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;
d) Assign or reassign the worker to perform services for a
client or customer;
e) Set the rate of pay of the worker, whether or not
through negotiation;
f) Pay the worker from their own account or accounts;
g) Retain the right to hire and terminate workers.
(Labor Code �201.3/Unemployment Insurance Code �606.5)
Existing law requires that when questions arise on if a PEO is
an employer or not, those questions must be determined under
common law rules applicable in determining the employer-employee
relationship unless the entity performs all of the above
functions. If the PEO does not perform all of the above
functions, the client is the employer .
This bill would provide a vehicle for future discussions on how
to recognize and regulate Professional Employer Organizations.
COMMENTS
1. What are Professional Employer Organizations?
The concept of the leasing employer, or Professional Employer
Organization (PEO), first developed in the 1970s. As
originally developed, the PEO business model involved a client
terminating its entire workforce, a leasing company employing
that workforce, and then the leasing company providing that
same workforce back to the client as leased employees. With
AB 975, the goal would be to provide a vehicle for discussions
on the possibility of creating a regulatory framework that
recognizes PEOs would regulate the bifurcation of employer
responsibilities between the business employer and the PEO.
The idea behind the PEO model is that the client is freed from
the day-today responsibilities of running a business, while
Hearing Date: July 3, 2012 AB 975
Consultant: Gideon L. Baum Page 2
Senate Committee on Labor and Industrial Relations
the PEO is able to provide services to the client and the
covered employee through economies of scale. Unlike
traditional temporary service employers, the use of a PEO and
covered employees was not temporary or seasonal, but rather
the PEO would be a permanent third party in the operation of
the business.
This model has historically been problematic. As the 2002
National Association of Insurance Administrators (NAIA) -
International Association of Industrial Accident Boards and
Commissions (IAIABC) report stated:
There are many reasons for entering into employment
services outsourcing agreements. Many businesses become
employment services outsourcing clients because they find
it to be an efficient way to obtain high quality
administrative services?. However, other employment
services outsourcing arrangements have been motivated by
factors ranging from exploitation of loopholes in rating
rules to outright fraud.
According to the Employment Development Department (EDD),
there are currently 1,200 to 1,800 PEOs operating in
California.
2. How Does California Currently Define the Employer-Employee
Relationship?
Generally, California utilizes a common law definition for
enforcement issues surrounding employer-employee
relationships, which defines someone as an employer if he or
she can control what will be done and how it will be done.
This includes wages, hours, and working conditions. The
individual who is under the employer's control is the
employee. While for the purposes of leasing employer
enforcement common law was explicitly applied in 1986, the use
of common law in employment in American goes back to the
colonial era. Both federally and in California, the common
Hearing Date: July 3, 2012 AB 975
Consultant: Gideon L. Baum Page 3
Senate Committee on Labor and Industrial Relations
law employer-employee relationship is the norm.
3. AB 975 and Professional Employer Organizations:
In 2010, AB 2570 (Ma) sought to regulate Professional Employer
Organizations by recognizing, for the purposes of the
remittance of payroll taxes, a 'co-employment' contractual
relationship between a Professional Employer Organization and
a business employer. Due to fiscal concerns on enforcing and
regulating the provisions of the bill, AB 2570 was held in the
Senate Appropriations Committee.
AB 975 serves as a vehicle to address the issues that arose in
AB 2570, but still provide a regulatory framework for
recognizing Professional Employer Organizations and ensuring
that they comply with all relevant California Labor Law. At
this time, the sponsor and author's office continue to work
with stakeholders on codifying the specifics, but will be
unable to do so prior to the July 6 fiscal deadline.
In conversations with staff, the author's office has committed
to working with the Committee to ensure that, should a final
agreement be reached, AB 975 will be re-heard and the
components of the final agreement discussed before the
Committee.
4. Proponent Arguments :
The author's office argues that this bill provides a vehicle
to create 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. The author also notes that PEOs
specialize in managing benefits, payroll and human resources,
allowing their small business clients to focus on their real
business priorities to grow their bottom line and succeed.
The author's office states that she has worked with the
Employment Development Department and other interested parties
for several years to craft legislation that provides
appropriate protections for small businesses and employees as
Hearing Date: July 3, 2012 AB 975
Consultant: Gideon L. Baum Page 4
Senate Committee on Labor and Industrial Relations
well as the state while also bolstering the statutory
guidelines for PEOs. The author believes 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. The author concludes 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.
5. Prior Legislation :
AB 2570 (Ma) would have created a unique co-employment
statutory structure to allow Professional Employer
Organizations to contract with employers and provide specific
employment services.
SUPPORT
None on file.
OPPOSITION
None on file.
Hearing Date: July 3, 2012 AB 975
Consultant: Gideon L. Baum Page 5
Senate Committee on Labor and Industrial Relations