BILL ANALYSIS                                                                                                                                                                                                    �




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair


          AB 975 (Ma) - Professional employer organizations.
          
          Amended: As Introduced          Policy Vote: L&IR 6-0
          Urgency: No                     Mandate: No
          Hearing Date: August 16, 2012                     Consultant: 
          Bob Franzoia  
          
          SUSPENSE FILE.


          Bill Summary: AB 975 would require professional employer 
          organizations (PEOs) to register with the Employment Development 
          Department.

          Fiscal Impact: Costs in 2012-13 and 2013-14 of $4.9 million to 
          the department from the Unemployment Fund ($2.35 million), 
          General Fund ($2.01 million), Disability Fund ($420,000) and 
          Employment Training Tax ($44,000).
              Annual costs of $9.7 million to the department from the 
              Unemployment Fund ($4.6 million), General Fund ($4.2 
              million), Disability Fund ($850,000) and Employment Training 
              Tax ($90,000).

          Background: As noted by the policy committee, PEOs are companies 
          that provide ongoing human resources, employee benefits, and 
          health insurance related services to small businesses.  PEOs 
          typically enter into contracts with small businesses to assume 
          responsibility for such functions are payroll, payment of 
          payroll related taxes, workers' compensation, unemployment 
          insurance, healthcare coverage, and similar employment benefits. 
           Employees of PEOs often provide these services at the worksite 
          of the contracting employer.  The department indicates there are 
          878 PEOs in the state serving approximately 70,000 clients and 
          978,000 employees.

          The department's activities are funded by both federal and state 
          sources, requiring EDD to use the Tax Sharing Ratio for the 
          implementation and ongoing costs.  An approximation of how the 
          costs would be distributed via the workload based Tax Sharing 
          Ratio is as follows:
          - 47.71 percent unemployment administration.
          - 42.8 percent General Fund.








          AB 975 (Ma)
          Page 1


          - 8.53 percent disability administration.
          - 0.89 percent employment training tax.

          Proposed Law: This bill would require the department to 
          prescribe rules to recognize PEOs as the employing unit of its 
          worksite employees for the purpose of reporting and determining 
          the unemployment experience rating.  This will allow the rules 
          to require each employee of a single client be reported under a 
          separate subaccount of the PEO to reflect the experience of the 
          workplace employees of the client.  PEOs would be required to 
          transmit reporting and payment data collectively as a single 
          electronic filing.

          Labor Code 201.3 and Unemployment Insurance Code 606.5 define 
          PEOs, also known as leasing employers, as employing units that 
          supply workers to perform services for the client, as well as to 
          perform the following functions:

          - Negotiate with clients or customers for such matters as time, 
          place, type of work, working conditions, quality, and price of 
          the services.
          - Determine assignments or reassignments of workers, even though 
          workers retain the right to refuse specific assignments.
          - 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.
          - Assign or reassign the worker to perform services for a client 
          or customer.
          - Set the rate of pay of the worker, whether or not through 
          negotiation.
          - Pay the worker from their own account or accounts.
          - Retain the right to hire and terminate workers.

          Existing law requires that when questions arise as to whether a 
          PEO is an employer, 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.

          Related Legislation: AB 2571 (Ma) 2010 proposed permitting a PEO 
          as an employing unit for covered employees under a professional 
          employer agreement and required the department to administer 
          those provisions.  The bill authorizes an annual assessment set 








          AB 975 (Ma)
          Page 2


          by the department in order to pay for the entire costs of 
          enforcing and administering the program, as well as issuing the 
          necessary registration. That bill was held on the Suspense File.

          Staff Comments: While this bill authorizes the department to 
          prescribe rules establishing the method of reporting quarterly 
          wages and contributions, it is silent on the department's 
          administrative obligations.  It appears reasonable that the 
          department may assess fees on PEOs to cover its administrative 
          costs.  Given the cost of this program, the size of the fees may 
          discourage PEO participation, resulting in a revenue shortfall 
          and additional General Fund cost pressure.