Hawaii human resource firms say they're perplexed by proposed legislation that would impose tens of thousands of dollars in added operating costs and require companies be backed by a bond of up to $1 million in an effort to regulate the local industry.
Some say the proposed rules are so onerous, they may be forced to shut down.
The measure awaits approval from Gov. Neil Abercrombie, who has until June 24 to sign or veto bills passed by lawmakers this session.
Employers Options President Jennifer Brittin expresses her frustration with pending state legislation that may put her and others out of business. She was speaking in her Kahului office.
The Maui News / MATTHEW THAYER photo
"This feels like a blatant attack on small businesses," Jennifer Brittin, president of Kahului-based Employers Options, said of Senate Bill 2424. "How can they, in one day, pass a law that can put you out of business? I'm still analyzing the costs to see if I can stay in business."
The bill was introduced by state Sen. Roz Baker, who represents South and West Maui, and co-sponsored by nine other state senators, as a follow-up to a 2010 law that aimed to regulate Hawaii's so-called professional employer organizations, or PEOs, through registration and compliance rules.
Thirty-eight other states regulate these businesses through licensing and/or registration programs, according to the Virginia-based National Association of Professional Employer Organizations.
"We saw that we were one of a handful of states that didn't have any regulation of this industry, and it's important from a consumer protection standpoint that the industry be regulated," said Baker, chairwoman of the Senate Committee on Commerce and Consumer Protection.
Professional employer organizations, sometimes referred to as employee leasing firms, act as an outsourced human resources department for businesses and perform such functions as payroll, collecting and paying various payroll taxes and administering benefits for employees.
The state estimates there are about 30 to 40 companies statewide that fall under the rules. Baker said the state Department of Labor and Industrial Relations requested this year's legislation to help the department enforce the two-year-old law.
"I know some of the PEOs are not happy, and they're blaming us, but the law's been on the books since 2010, and with the change in the administration, the Labor Department did not implement it right away," Baker said. "I'm not unsympathetic, but it'll be the governor's decision now."
Donalyn Dela Cruz, spokeswoman for Abercrombie, said Friday that there's "no decision yet" on the bill.
The 2010 law requires these businesses to register with the state and post a $250,000 bond to operate. The bond requirement is to ensure that the payrolls of client companies can be covered if the PEO skips town.
Only two companies have registered so far, said Bill Kunstman, spokesman for the Hawaii Department of Labor and Industrial Relations.
Under Senate Bill 2424, starting July 1, companies would be required to pay registration fees, produce audited financial statements and obtain larger bond amounts to do business in the state. They'd also face penalty fees called for in the bill for failure to register and comply with the rules.
The measure would establish a $100 initial registration fee for professional employer organizations and renewal fees of between $2,500 and $10,000 every two years, depending on the number of employees covered. The fees would be used to pay for enforcement personnel at the Labor Department.
"I don't know any PEOs covering under 100 employees (the $2,500 fee), so for the majority of us, we'll have to pay $10,000 just to be able to be in business," Matthew Delaney, president and CEO of Hawaii Human Resources, said of the registration fees.
Delaney's Honolulu-based company has about 300 business clients that represent more than 5,000 client employees. The company opened a Lahaina office last year and plans to open a Kahului office by year's end, he said. Maui clients represent about 20 percent of Hawaii Human Resources' business.
Brittin said that the annual financial audit requirement would cost her company up to $30,000 based on recent quotes.
Smaller businesses still would be required to post a $250,000 bond if they cover fewer than 100 full- or part-time employees. (An earlier version of the bill would have increased the amount to $500,000.) Larger PEOs would need to post bonds of between $500,000 and $1 million, naming the state Labor Department director as the obligee.
"Regardless of this measure, the $250,000 bond is pre-existing law," said Kunstman. He noted that the existing law refers to the requirement as a "performance or financial guaranty type bond," which is less complex than the language proposed in this year's measure.
Both Brittin and Delaney say numerous Hawaii insurance companies have told them that they won't issue bonds at the levels proposed in Senate Bill 2424. "In order to get the bond, you'd have to put up a dollar-for-dollar collateral," Delaney said.
Even at the $250,000 level, Hawaii's bonding requirements would be the highest in the nation for PEOs, according to the National Association of Professional Employer Organizations.
"California's bonding requirement is $200,000. Why is Hawaii four to five times the risk of any other state?" Delaney said. "I could understand if there was abuse and complaints of companies skipping town and not paying their obligations to the state and the insurance providers and IRS."
Anela Sanchez, CEO of Aloha International Employment, which has offices in Kahului and Honolulu, said the bond requirement would be taxing on smaller firms.
"Even if this bond amount doesn't shut a small PEO down, it will increase the cost of doing business," Sanchez recently wrote in a letter to Abercrombie, asking the governor to veto the measure. "It is a huge disadvantage and unfair to smaller, yet continuous law-abiding PEOs. . . . Current regulations that apply to all operating companies in Hawaii are already in place to keep businesses in compliance with state and federal laws."
The Human Resources Administration of Hawaii, a Kailua-Kona-based PEO, says the bill "over regulates" the industry and will force smaller PEOs out of business and prevent new companies from entering the market.
"The bonding requirement will result in a large drain in working capital for the smaller PEOs as they will be required by bonding companies or banks to put up large amounts of cash to qualify for the bond," the company's president, William Wong, also wrote in a letter asking Abercrombie to veto the bill.
Wong estimates the bill will create up to $40,000 in additional overhead costs for smaller PEOs like his business, resulting in as much as $400 in added costs per employee for companies that represent 100 employees. The costs to larger PEOs will be proportionately smaller, only $5,000 more in total than smaller companies.
"This means that, when spread over 10,000 employees, they result in only minimal per employee costs of $3.50 to $4 per employee," he said.
The state's two largest PEOs - Altres and ProService - are seen by many of the state's smaller outfits as benefiting from the requirements in Senate Bill 2424. Some have accused Altres of pushing the bill at the Legislature.
Altres has about 1,000 clients, representing a total of 10,000 employees. (The company completed a merger with Pukalani-based Kilakila Employer Services in January.) ProService Hawaii has more than 1,000 clients, representing about 13,000 employees.
Altres President Barron Guss testified in support of Senate Bill 2424, while
ProService testified that the company supported the intent of the measure. Altres denied any bad-faith maneuvering at the state Capitol.
"The intent has never been about competition or trying to affect smaller businesses," David Bower, director of business development for Altres, said of the company's support of regulation. "This is a very serious business that we're in because you're taking on the responsibility of huge amounts of payroll and helping companies stay on top of the latest changes to employment laws. That takes a certain amount of resources and commitment."
Baker agreed, saying companies in the industry need to demonstrate "financial wherewithal."
"There was no intent - never - to favor one PEO over another or to put any company out of business," Baker said. "We want to make sure folks doing this business have the financial wherewithal to do what they say they will do."
* Final version of Senate Bill 2424, www.capitol.hawaii.gov/measure_indiv.aspx?billtype=SB&billnumber=2424
* Nanea Kalani can be reached at email@example.com.