In a weak economy, one of the engines for recovery is the entrepreneur, someone willing to take a risk on a new idea and create a startup company whose success will mean jobs for more people. Many, if not most, need the service of what is known as a professional employee organization (PEO), an agency for hire that will handle payroll and other complex chores that usually go to the human resources office in a more mature firm.
The PEO sector in Hawaii has started to grow, with a significant cash flow being handled by such companies. Two years ago the state rightly wanted to make sure there was some sensible regulation in place and passed what’s now called Act 129.
In the last session, lawmakers moved to make some consolidations and other refinements through Senate Bill 2424, which now sits before Gov. Neil Abercrombie.
The measure fulfills some important functions, particularly in providing the resources for the state Department of Labor and Industrial Relations to handle the registration of the PEOs.
But it remains a flawed bill the governor should veto so the state can be sure it does not make Hawaii’s marketplace needlessly uncompetitive.
The two industry leaders here, ProService Hawaii and Altres Inc., are in the forefront among supporters of SB 2424 — which, they have testified, will raise standards and increase assurances for the protection of the client businesses.
David Bower, director of business development at Altres, said there have been "bad apples" in the sector, especially in the unregulated "cowboy days" of the 1980s when the sector was new. Protecting client businesses and their employees from default is the necessary goal.
Perhaps the most controversial provision in the bill is the bonding requirement. The bill would raise the minimum for the performance bond from $250,000 — already a high bar, compared to other states — to an amount between $500,000 and $1 million. Steeper bond coverage is part of what is needed for a PEO to be accredited by the Employer Services Assurance Corp., Bower said, adding that while accreditation is entirely voluntary, assurance is what is needed as the industry grows.
However, some representatives of smaller companies say raising the bonding requirement to this point effectively pushes out recent entrants into the marketplace. It’s a concern that deserves further discussion.
Some allowance has been made to accommodate newer companies. The final draft of the bill provided that a PEO with an insufficient operating history for required audited financial statements could qualify instead with a certified public accountant’s review, performed within three months of registration and attesting that the company has $150,000 in working capital.
However, that may not be enough flexibility. Critics charge that surety companies may not issue the required bond to a new company; more testimony is needed from the surety field before the state’s law is made more restrictive. To that point, the House Minority Caucus issued a statement on Wednesday pointing out that smaller PEOs were left out of the legislative debate and cite some of its provisions as onerous.
The state DLIR is busy formulating registration procedures and other tasks in preparation for full implementation of Act 129. It can continue with that work in the interim.
And then the Legislature should come back into regular session and make sure that further regulations they put in place enable a reliable service but also allow for competition to make it more affordable. Instead of enacting this bill and going back to tweak it later, as has been suggested, let’s get it right from the start.
